Today has seen an eye-catching report issued by the Institute for Fiscal Studies or IFS about living standards in the UK. Let me open by quoting from the headline.
Average income back to around pre-recession level
Sadly it is somewhat contradicted to some extent by the very next sentence so let me quote from that too.
New IFS projections suggest median (middle) household income in 2014–15 is at around the same level as it was in 2007–08 before the recession, though still more than 2% below its 2009–10 peak.
Let us hope that the IFS is clear on the difference between the average or mean and median incomes. They do matter as the average income is pulled higher by the incomes of Elton John, Paul McCartney and suchlike in the way that the median is not. In case anyone is not clear on the two issues Mathcentral helps out.
A statistician or mathematician would use the terms mean and average to refer to the sum of all values divided by the total number of values, what you have called the average.
The median is the central point of a data set. To find the median, you would list all data points in ascending order and simply pick the entry in the middle of that list.
If we move on from that nuance the situation remains eye-catching as this is a very different situation from the position with real wages which in spite of the recent improvement remain some 10% or so (depending on inflation measure used) below their previous peak. The ONS (Office for National Statistics) February Economic Review updated us on how this impacted different areas.
hourly real wages fell most in construction between Q1 2008 and Q3 2014 – by 14.6%. Real hourly wages fell by less in manufacturing, and were 5.5% lower than their Q1 2008 level in Q3 2014. This could partially reflect the more favourable labour productivity performance of manufacturing compared to construction. Real hourly wages in finance and business services fellleast over this period, by around 3.5% on average. (Overall they have an average of -8.4%).
As ever the picture is ever-changing! What I mean by this is that reality back in 2011,12,13 and 14 is of course unchanged but the UK ONS has this morning in its March Review shown signs of a rethink.
This more detailed analysis also provides some evidence that wage growth started to pick up between 2011 and 2014. The fraction of full-time workers achieving a real hourly earnings increase has grown slightly each year over this period, rising from 34% in 2011 to just over 48% in 2014.
Why the difference between wages and incomes?
However you tweek the numbers you would need something of a twerk to get them to tell the same story without making some adjustments so let me make them. Here is the view from the IFS.
Real household incomes continued to grow slowly during the recession of 2008 and 2009, in part due to temporary fiscal stimulus measures.
social security benefits were initially largely protected
To this I can think of a couple of extra factors. Firstly whilst the higher income tax thresholds have not been adjusted for inflation this has been more than offset by the rises in the Personal Allowance (the amount earned before income tax is due). The rise from £6475 per annum to £10,000 has according to the TUC had this impact.
increases up to £10,000 have cost £10.75billion per
So an extra £10.75 billion in incomes per year is no small sum. Individually it breaks done thus.
‘typical basic rate taxpayer will pay £705 less income tax per year in cash terms than they would have in 2010-11,
Also there has been a gain for retired people who as I discussed only recently have seen gains. I know that savings rates have fallen substantially but in other areas they have advanced. For example the “triple lock” on the basic state pension which if inflation remains low will this year provide quite a real terms boost as it gives a 2.5% rise. Actually this may be a longer-term trend if the Department of Work and Pensions is correct.
Net income After Housing Costs for pensioner units has grown by 37 per cent between 1998/99 and 2012/13 in real terms, whereas mean incomes for the whole population have risen by 12 per cent in real terms over the same period.
Perhaps the housing cost element distorts things.
What has the pattern been?
The IFS tells us this.
Having continued to rise slowly during the recession itself, real median household income then fell by 4.0% from peak in 2009–10 to trough in 2011–12, driven by falls in workers’ pay and in employment……..We project that median household income grew by just 1.8% in total between 2011–12 and 2014–15.
So we initially rose (perhaps a little surprisingly) then fell then rose again. Right now we are apparently singing along with Maxine Nightingale.
It’s alright and it’s coming on
We gotta get right back to where we started from.
However this hides quite a few different experiences
My discussion from the about the intergenerational effect of the credit crunch is reinforced by these numbers.
After adjusting for group-specific inflation, median income for young adults (aged 22 to 30) is projected to be 7.6% lower in 2014–15 than in 2007–08, and it is estimated to be 2.5% lower for those aged 31 to 59. Meanwhile, median income among those aged 60 and over is projected to
have risen by 1.8% over the same period.
Also something has happened which may be more of a surprise to readers.
Falls in income have been larger for higher-income households. This is largely because real earnings fell significantly after the recession, while social security benefits were initially largely protected.
I also notice that whilst they do not quite put it like that this IFS research has confirmed one of the themes of this blog which is that above target inflation had all sorts of bad impacts.
But low-income households have faced higher inflation. This is mostly due to changes in the period up to and including 2009–10. Low income households were hit harder by rising food and energy prices.
Remember when the Bank of England was trumpeting the fact that looking through above target inflation was a benefit to the UK economy? Tell that to our poorest citizens and in fact anyone who has seen their real wages fall in this period which is a very large group of people.
The headline of this report is eye-catching and no doubt a type of click bait. However it is perfectly reasonable to make a completely different case from the data. First let me give the IFS some credit for openly stating the inflation measure used.
Here and throughout, we adjust for inflation using the RPIJ price index, available since 1997–98.
Much less credit comes from the fact that actually it is a new concept only a couple of years old which last time I checked does not reach back to 1997-98! Back modeling has its issues and if you did it then you could go back much further than 1997-98. Oh and remember that we have other inflation measures including the Consumer Price Index which is so regularly thrust down our throats as “the” measure.
In total, this means that projected 2014–15 real median income is further below its 2007–08 level if CPI is used (3.0%) than if RPIJ is used (0.4%).
That is a fair bit lower! If we used the headline RPI then you can add around another 3% so it would be 6% lower. I guess that living-standards are 0.4% lower or 3% lower or 6% lower does not make such a great headline does it?! I wonder how much of the media will spot that?
The Office for National Statistics rewrites history
Inflation? now at its lowest rate for over half a century
Really as the Retail Price Index was negative in 2009? A clue as to their problem is found in this bit.
Consumer Price Inflation: Official, estimated and modelled: 1950-2015.
I know that the Royal Statistics Society has quite a few questions about this estimation and modelling process.
Have we found the man who put drugs and prostitution into GDP?
On a lighter note an adviser to both George Osborne and Boris Johnson has had personal troubles recently. From Business Insider.
According to the Sunday Mirror, the 63-year old executive chairman of London’s top thinktank, the Centre for Economics and Business Research, was allegedly filmed inhaling crack through a glass tube at a flat in North London.
Meanwhile, another report in the same newspaper said McWilliams is accused of attacking prostitute Beverly Shearon at her flat on New Year’s Eve after she refused to smoke crack
Sorry about the early versions of today’s post. There was a ghost in the machine which for a while was defeating me!