This analysis by the IFS for Resolution Foundation is concerned with decomposing UK household income growth between 1968 and 2008–09. It seeks to investigate the sources of the rise in average household income that has occurred in the UK over the last four decades and finds that there are several important sources of this growth, and that these sources have varied substantially across time and across different parts of the income distribution.
- In little more than a generation, low- to middle-income households have seen a major shift in the sources of their income, while the richest households have seen little change. The key dynamic has been one of diversification; having been dominated by the earnings of a (generally male) main earner, LMI households today receive large portions of their income from female employment and from the benefit and tax credit system.
- This greater diversity of income sources may reduce the risk of negative income shocks. But these changes mean that LMI households are now more dependent on external support, whether directly (through the generosity of the benefit and tax credit system) or indirectly (through the availability of services, such as childcare, that make dual earning, or lone-parent working, possible).
- Looking forwards, these trends carry one inescapable implication for the prospects of future growth in LMI household income. Because wages now make up less of LMI household income, wage growth – even if it is flat across the household income distribution – does less to raise the income of this group than it does to raise the income of households higher up the distribution.
- In other words, even if wage growth is spread equally across all households, LMI households will fall behind unless benefits and tax credits see year-on-year above-inflation increases, or there is a substantial increase in employment rates or hours worked in LMI households relative to the overall population. If, instead, earnings growth is not flat but regressive across the household income distribution, as it has been consistently for several decades, these pressures will be increased.