Living standards

Living standards

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I recently read an interesting article published by the Financial Times, on FT.com, about research by the Institute of Fiscal Studies (IFS) on the latest UK living standards across different age ranges. 

It highlighted what most of us would assume, such as that the incomes of the poorest 20% have fallen since the 1990s as state benefits have been frozen, although they have only fallen by c.1.6%.  However, overall income inequality remained roughly stable with only small changes and the share of income held by the richest 1% is roughly the same as it was in 2000.  

Whether this is actually a good measure of living standards depends on your view as to what makes up your standard of living.  The article did point out that a leading economist stated that ‘health inequalities, regional differences and gaps in power’ were more important to the quality of life than a single measure of income.

What I found encouraging was that young people (workers in their 20s) are finally experiencing a faster growth in living standards (as measured by income growth) over the last five years than any other group. 

This group had previously been the worst affected by the financial crisis and subsequent recession.  In a recession, young worker earnings tend of suffer most and this time young people also had to cope with rising student debt and housing costs.  This partially explains why this group started returning home because they couldn’t afford private rents, let alone consider getting on the housing ladder.

So, this news is much better for young workers in their 20s.  Their income growth has increased in real terms by 13% compared to 5% for older workers and it seems to show that the effects of the financial crisis are no longer being felt by this age group.  Young people entering the labour market in recent years are experiencing faster growth in income and, even taking into account housing costs, are seeing an increase in their disposable incomes.  This leads to the conclusion that this age group’s income can be hardest hit but, as the research has found, can also rebound quickly.

According to the IFS research, and as described in the article, things are not so promising for workers in their 30s who were the young workers affected by the last recession 10 years ago.  These workers’ incomes are not increasing and for most workers (not those in their 20s) standards of living dropped in 2017-18 as prices rose faster than wages due to the fall in sterling following the Brexit referendum.

The article also noted that according to the research, the IFS stated that another change had occurred over the last five years relating to the living standards of pensioners.  Five years ago, the data indicated that average pensioner incomes, after housing costs, had risen to be above average workers’ incomes.  In my view this could have long term implications for the economy as it could lead to a reduction in the labour market with fewer experienced workers and therefore affect productivity as people decide that they are better off retiring.

The main reasons attributed to this is that a generation has been retiring with good occupational pension schemes and that the state pension has been increasing faster than inflation.  This trend has now changed and by 2017/18 average pensioner incomes, after housing costs, had fallen below those of workers. 

One impact of the rise in pensioner incomes over the last 20 years is that the average level of income used to measure relative poverty has risen, which has increased the percentage of working people in ‘poverty’.  Working people in poverty are defined as having living standards below 60% of the median.  The proportion of workers falling below this threshold rose from 13% in 1994 to 18% in 2017/18.    

According to the article the IFS said that this was also caused by an increase in lower paid jobs and increases in housing costs.

All in all, an interesting article and study by the IFS which indicates that the impact of the last recession is still being felt by some but at least the new generation of workers should receive higher relative wages than their predecessors. 

It also encouraging that pensioner incomes have risen but are now moving back into a slightly lower position relative to workers.  It is however disappointing that in a modern economy, relative working poverty is still rising even if some of this can be explained by a rise in average incomes.

Cheers

Charles

Source: www.ft.com – “Young adults recover from post-crisis pain” 19th June 2019