The real threat to living standards for those on low to middle incomes

Published on Incomes and Inequality

Defining the squeezed middle will be difficult – but there is a real threat to living standards for those on low to middle incomes.

Ed Miliband’s attempt to define the ‘squeezed middle’ has made some people question the point of the term. Liam Byrne tried again yesterday to pin down the concept.  But the big question remains: is the ‘squeezed middle’ just a political slogan – as meaningless as ‘the deserving majority’ – or does it refer to something real, and a big, new challenge for political leaders?

Whatever your views on the phrase itself, there is no doubt that we are now seeing a serious challenge to the living standards of those on low to middle incomes. Last week at the Resolution Foundation, we published a report – that explains those trends. It focuses, as does all of our work, on households whose incomes are too high to qualify for significant state support, but too low to escape a real battle with day-to-day living costs.

If any group has a claim to being ‘squeezed’, this group has a pretty good one. So what does the report tell us about definitions? Well, lesson one is that, when it comes to standards of living, family size and composition are of course enormously important. The table below shows a wide range of incomes that, in terms of living standards, are deemed to be ‘equivalent’ (based on a device used by statisticians to compare households of different sizes). It shows that, for example, a couple with no children earning £30,300 has roughly the same standard of living – in terms of income – as a couple with three children on £48,500.

That’s why, when comparing households, it’s general practice for statisticians to translate their incomes into the equivalent income for a couple with no kids. In stat-speak, £30,300 is the ‘equivalised’ version of £48,500. It’s these ‘equivalent’ incomes that we need to work with if what we care about is people’s real standard of living.

That brings us to lesson two: in terms of living standards, the middle is much lower than many people think. The graph below shows the distribution of equivalised incomes, and it makes this point clearly; the bulge in the distribution sits between £12k and £30k – and it captures a huge number of people. 11 million adults live in these households, marked out in green below as ‘low-to-middle earners’ (LMEs). That’s one in three of Britain’s working-age population. Anyone to their right, in grey, is above the average income.

These low-to-middle earner households are not the poorest; most are in work. But on a number of fronts they’re struggling to thrive in the modern market economy. More than half in the group say they find it tough to keep up with household bills; more than half have less than one month’s income in savings. Two thirds are not contributing to a pension.

Put that all together, and it suggests that Byrne’s definition – an income range between £16k and £40k-50k – is not unreasonable, with some important caveats. If you’re on £50k – and if you have three kids or more (but not if you don’t) – then you can be fairly described as being in the ‘middle’. So although many in the media clearly overplayed the impact on the middle of the withdrawal of Child Benefit from top-rate taxpayers (particularly compared to the impact of cuts to tax-credits), it is the case that some genuinely ‘middle’ income families will be hit.

Finally, the report reminds us that, although income figures can tell us a lot, they represent only half of the story. Prices are crucial, not just incomes, and, as the below chart shows, in the next two years, the pressure on living standards will come as much from above-target inflation as from low wage growth. On the basis of these OBR projections, the average low-to-middle earning household will be £720 worse off in 2012 than they were in 2009, in real terms.

Of course, none of that makes the challenge of definitions any easier. But nor does it make the task of understanding the problem any less pressing. Whatever we choose to call it, something is happening to the living standards of a big swathe of the population. As you can see, it’s a difficult one to pin down. But that’s no excuse not to bother.

This article was first published on Left Foot Forward