Research & Policy / Recession & Recovery

Low earners in recession and recovery overview

The current economic context has heightened the exposure experienced by low earners. In relation to those who are already largely dependent on state benefits, low earners are more at risk of a drop in income due to loss of work and more likely to have unsustainable credit commitments. In relation to those who live in households with above median income, low earners are less likely to have a safety net of savings and insurance and less likely to be in a position to return rapidly to employment following redundancy.

In the longer term, low earners’ position on the threshold of state support means that fiscal contraction represents a particular threat to them. It risks squeezing them still tighter by reducing the benefits such as tax credits that some of them may be entitled to, increasing the taxes that some of them may pay and reducing the public services that they can consume.

Low earners through recession and recovery will help to ensure that these challenges are recognised by government and by private, public and third sector service providers during a period of very difficult choices. Stream one, which we completed in November 2009, highlighted the impact of the recession on low earners and made a series of proposals for how they could be better protected during the downturn. Stream two, which runs into Spring 2010, will explore what can be done to prevent low earners from bearing the brunt of spending cuts and tax rises associated with fiscal adjustment.

Low earners and the recession

Closer to Crisis? how low earners are coping in the recession was published on 11th November 2009. This report shares the findings of our project looking at the impact of current economic circumstances on low earners in the mixed economy. The conclusions were developed through a mix of quantitative and qualitative work, with input from a series of expert seminars held in September 2009.

Our analysis shows that low earners are more at risk of being hit by this recession than other groups. Although the biggest increases in unemployment were initially in banking, since then rises in unemployment have been steeper in the industries, occupations and areas where low earners are concentrated. Job loss or reduction in hours are particularly risky for low earners, as their economic independence was already fragile even in better times: 51 per cent of low earners have less than £1500 in the bank, and they are less likely than higher earners to have the safety net of insurance products to fall back on.

Of course not all low earners are affected in the same way. Our report shows that there are particular groups who are exposed by current economic circumstances:

The 7 million low earners with low skills

These people are more vulnerable to job loss than those with higher skill levels because they are easier and cheaper to dismiss and replace. Our research shows that they are less likely to be offered in-work training. For those who do lose their job they are likely to take longer to return to the labour market than those with higher level skills.

The 11.1 million low earners who were in poor financial health already, and the 3.4 million low earners who were putting more than a quarter of their monthly income towards debt repayment in 2008

The recession has reduced the affordability and flexibility of existing credit, as well as limiting access to new credit and pushing levels of indebtedness for the low earning group up.

The 1.2 million low earners who have bought a home within the last decade

The recent drop in house prices puts the 340,000 low earner households who reported having a loan-to-value mortgage of more than 75 per cent at the end of 2008 at risk of negative equity, despite historically low interest rates.

We argue that despite a swift response by government, further action is necessary and feasible. The report makes a number of specific policy recommendations, organised around the themes of sustaining low earners’ positions, smoothing transitions, building on low earners’ capabilities and shaping markets. We argue that achieving change across these themes cannot be done by government alone: action by employers, the financial services industry, housing and welfare-to-work providers is also critical.

Read the full report here and the summary here. The accompanying press release can be found here.

For more information on press coverage please visit out news pages.

Get behind the charts and graphs in the report and see a full breakdown of the data we use in the report here.

If you are particularly interested in the impact of the recession on low earners’ housing situation, employment and skills or household finances you can read the summary of our expert seminar and view the slide presentation below.

Into recovery: protecting low earners

This stream will look both at what fiscal realities the UK can live with without damaging its economic potential and at how tough spending choices can be made without disproportionately hurting low earners.

On public finances, we plan to:

Commission/partner on work to determine the likely length and depth of the recession and the associated impact on public finances (with sensitivity analysis).
Evaluate a range of paths to fiscal balance, considering the effect on UK plc of adjustment periods that differ in pace and overall length.
Hold a roundtable even on 1 October to discuss accounting definitions and the implications of reclassifying spending for investment on government debt.
Publish a detailed description of the advantages and disadvantages of a range of paths to fiscal balance.

It is unlikely that we will settle on a single recommendation, rather the aim is to provoke further debate about what is feasible.

On spending choices, we plan to:

Commission/partner on work to estimate the distributional impact of the fiscal contraction set out in Budget 2009 shared in different ways across tax and spending and across government departments.
Consider how the pressures identified in stream one in relation to housing, household finances and work will be affected by the changed fiscal environment and develop policy solutions designed to protect low earners from being further disadvantaged.
Look in detail at major government departmentâ€™s current and proposed spending programmes to identify the importance of each programme to low earners.
Draw up a list of areas in which we want public spending to be protected and a list of areas in which cuts could be possible.
Seek assurances from each of the major political parties in the build-up to the general election that these spending priorities will be considered in future fiscal tightening decisions.

Steering group

We are very grateful to our steering group for providing invaluable advice and guidance on all aspects of the project: planning, research and findings. Members have been drawn from a wide range of policy areas.

Recent events/publications

30 June 2009: The Foundation launched the recession and recovery project at a breakfast seminar. You can read the event write-up here and view the slides here

1 Sep: Low earners in recession and recovery steering group meeting;

3 Sep: Work expert seminar;

Note of meeting

Who are low earners? Matthew Whittaker, Resolution Foundation

'Low earners' recession and work: Nicola Smith, TUC

8 Sep: Household finances expert seminar;

Note of meeting
How are low earners fairing? Matthew Whittaker, Resolution Foundation
Transact Membership Survey 2009 – Change, Challenges, and Opportunities – Adam Clark, Transact

15 Sep: Housing expert seminar; Housing and recession: how are low earners faring?

Note of meeting

How is the housing market changing? Yolande Barnes, Savills

How are low earners faring? Matthew Whittaker, Resolution Foundation

The future of the private rented sector: Andrew Pratt, Grainger

1 Oct: Accounting definitions roundtable;

11 November: launch of Closer to Crisis?: how low earners are coping in the recession

Full report

Executive Summary

Data

Press release and press coverage

Contact

For more information about our recession work please contact Sophia Parker. If you would like to know more about any aspect of the Foundation’s work on the recovery and how to protect low earners, please contact Matthew Whittaker.