In this annual report, the latest in our decade-long series, we take a forensic look at both recent and longer-term trends in UK living standards. We consider how incomes have changed and for whom, and this year we dig deeper into what economic trends have driven those changes over the past 25 years. With a new Prime Minister arriving in Downing Street and living standards progress appearing to go backwards over recent years, we also ponder what we can learn from this detailed exploration of the past about how best to restart household income growth today.
- Average disposable household incomes have roughly tripled since 1961, after accounting for inflation. But the last two-year period (2017-18 and 2018-19) looks to have been the worst on record outside of recessions. For the typical income we estimate average annual growth of -0.3 per cent, which if confirmed would be even weaker than the early 1990s recession.
- This period of weak growth post-referendum comes on the back of both the financial crisis as well as an earlier mid-2000s slowdown for some, with only a short period of healthy income recovery between 2012-13 and 2016-17. This helps to explain why the typical incomes of pensioners have recently converged with those of non-pensioners. And for people in their late 20s typical incomes were lower in the three years to 2017-18 than they were in the mid-2000s.
- The groups most at risk of relative poverty have also changed. Parents living in couples, up to the age of 35, are now more likely to be living in poverty than a single pensioner age 80 or over is. And over half of pre-primary school children living with only one parent are in poverty.
- Relative inequality remains high by international and historical standards, following rapid increases in the 1980s, but there has been only a small rise since then (for incomes after housing costs). Increases in employment since the mid-1990s, particularly among parents, have helped to hold down inequality while the distribution of housing cost rises has pushed it up.
- New analysis of different forms of working-age income finds that men and women have contributed in roughly equal measure to overall income growth over the past 25 years, despite men starting from a higher base. Average annual female employment income has grown by £6,100 (or 70 per cent) since 1994-95, while male employment income has grown by £7,100 (or 44 per cent).
- Ordinarily, the most important driver of this overall growth (for both men and women) has been hourly pay growth, rather than changes in employment or hours. However, households are still recovering from the crisis, with male employment income lower in 2017-18 than in 2007-08.
- Instead, the economy has relied on other forms of growth. Population growth has accounted for over-two thirds (65 per cent) of overall GDP growth since 2007, compared to just 15 per cent pre-crisis. Conversely, productivity growth has gone from accounting for the large majority (69 per cent) of overall growth to just 22 per cent post-crisis. Employment growth has continued to support incomes, while the previous long-term decline in the length of the working week has paused. And dramatic falls in mortgage interest costs have taken housing from being a drag on disposable income growth pre-crisis to being a boost overall – though not everyone has benefited from this.
- These trends cannot be relied upon for future income growth, however, with some having already run out of road. To restore strong household income growth, the next Prime Minister will need to restore sustained productivity growth; make the right distributional choices to help everyone benefit from that growth; reduce housing costs; and build on the country’s previous successes in helping parents to work.