Research from the Institute for Fiscal Studies tells us to tackle rising costs, poverty premiums, and help those in work get out of poverty.
1. Political and social choices can achieve change
The Institute for Fiscal Studies looked back over the last twenty years, after the gap between richest and poorest grew during the 1980s. In the past two decades, the incomes of the top 1% have pulled further away from the rest of society. However inequality has actually fallen across the rest of the population, although poverty rates remain stubbornly high.
This is particularly striking because inequality in men’s earnings has increased – technological change and the ‘hollowing out’ of the labour market has led to a two-speed economy with growth in high and low paying jobs and fewer in the middle. However, in Britain (unlike the US) household income inequality has decreased in spite of this.
Four of the main reasons for this demonstrate the power of policy choices and social change:
- in the boom years, between 1997 and 2004, tax and benefit policies were strongly redistributive, so those at the bottom had a bigger share of national prosperity than would otherwise have been the case
- when the Great Recession started in 2007, earnings took a dive, but tax credits and benefits helped cushion the impact on poorer households
- the position of pensioners has been transformed, through increases in private pensions, earnings and state support. In 1997/8 nearly half of pensioners lived in ‘absolute’ poverty; now it’s around one in seven
- the number of (non-pensioner) workless households fell, especially in the first decade: in 1994/5 nearly one in five lived in a workless household, by 2004/5 it had fallen to nearly one in seven. In particular, many more lone parents were in work – in 1996, less than half of lone parents were in work, by 2016, more than two thirds.
2. But getting a job doesn’t guarantee a decent living standard
Rising employment and falling numbers of workless households have been the UK’s big economic success stories. But it’s left us with ever higher rates of in-work poverty. Low pay is a big driver of this, but it isn’t the only factor.
The Minimum Wage, National Living Wage and the spread of the higher Voluntary Living Wage led to a big fall in extreme low pay: in 1996 nearly a fifth of workers were paid less than 50% of median pay; by 2015 it was less than 2%.
Last year, however, in work poverty reached a record high. Today’s IFS research highlights the importance of the number hours of work people work as well as pay rates. Escaping poverty increasingly requires families to have all adults in work, and at least one person in full time work.
Women are increasingly likely to work, and more are in full time work than ever before. But low paid men are much more likely to work part time than they were. Twenty years ago, only one in twenty low paid men (aged between 25 and 55) worked part time: today it is one in five. One factor may be changes in jobs; the rise of agency work and more people working part time because they can’t find full time jobs. But social change is also important. More men are involved in childcare. Health problems and caring responsibilities restrict the capacity of many low-income families to increase their earnings; half of people in poverty are now disabled or live with someone who is.
3. Rising costs leave those at the bottom struggling to afford essentials even when incomes are protected
Most poverty measures look only at income, but it is just as important to understand how the cost of essentials is changing. Even if incomes are protected, families can find their living standards falling if the cost of basic goods and services rises. Between 2008 and 2014, the cost of essentials rose three times as fast as earnings. Very low inflation since 2014 has been a welcome respite, but inflation looks set to increase for the next few years. The problems caused by inflation are compounded by unfair poverty premiums. People on low incomes often pay more for goods and services such as fuel, insurance, white goods and credit. Recent research found that these poverty premiums cost low-income households on average £490 a year. Changing this should be a top priority for 2017.
The experience of the last twenty years tells us that poverty can be solved if governments, business and individuals work together. However, today’s challenges are different to those of the past two decades. Now we need:
- regulators and businesses to eliminate poverty premiums
- the Government to uprate benefits to keep up with rising prices
- a targeted plan to help employers in low wage sectors such as retail and hospitality to increase productivity and enable more workers to increase their earnings.