Squeezed: the low earners audit

Background to the audit

• First major study of group, published March 2009

• First update with focus on employment, published August 2009

• Numbers in, and composition of, group varies across policy areas • cf. housing, skills training and long-term care

• Took wide view to uncover range of challenges

Defining low earners

• For analysis, number of ways of defining group• upper threshold of median income • lower threshold of independence from state support harder to

capture

• Detailed analysis of benefit-receipt in BHPS found 30 per cent of adults in GB within group

• Also used 30 per cent of households directly below median (i.e. income deciles 3, 4 & 5) as proxy• gross, disposable and equivalised income bases

Household composition

• 7.6 million low earner households • 4.7 million non-retired

households • 2.9 million retired households

• 13.7 million adults in low earner households• 29 per cent of total adult

population

• 4.3 million children• 32 per cent of total child

population

Household composition by income group: UK 2007/08 (000s)Benefit-

dependentLow

earnersHigh

earners

Total number of households 5,050 7,600 12,700

Non-retired households 3,100 4,700 10,950

One adult 800 700 2,050

One adult: men 500 400 1,200

One adult: women 350 300 900

Tw o adults 550 1,100 4,250

Three or more adults 200 550 1,200

One adult w ith children 600 550 300

Tw o adults w ith one child 250 450 1,150

Tw o adults w ith tw o children 300 700 1,250

Tw o adults w ith three or more children 250 300 250

Three or more adults w ith children 250 400 450

Retired households 2,000 2,850 1,800

One adult 1,000 1,550 1,000

One adult: men 250 500 300

One adult: women 800 1,100 700

Tw o or more adults 1,000 1,300 800

Total number of people 11,900 18,250 29,950

Adults 8,600 13,700 24,350

Men 3,800 6,600 12,450

Women 4,550 7,600 11,900

Children 3,300 4,300 5,850

Social class

Over 60 per cent of heads of low earner households are in social classes C1 and C2

1%

6%

23%

19%

24%28%

1%

10%

32%29%

23%

5%6%

27%

37%

21%

8%

1%

0%

10%

20%

30%

40%

A B C1 C2 D E

Distribution of social class of heads of household by income: GB Sep/Oct 2008

Benefit-dependent Low earners High earners

Over 80 per cent are in classes C1, C2 and D

Financial health

• Low earner households spend nearly all of their disposable income each week

• Income is frequently variable, due to the nature of work patterns

• Have low levels of savings and are less likely than high earners to have life, income protection and critical illness insurance

• Debt levels have increased rapidly in recent years, with a growing number expressing difficulty making repayments

• Faced higher levels of personal inflation in 2008 than high earners

• Lack access to financial advice

Financial health

78 per cent of low earners were in poor financial health during economically benign period 12 per cent were in an

acute position

Financial health of low earnersGreat Britain 2004

Healthy, 22%

Has pension and selection of other major financial products

Has sensible combination of products

Has more than minimal savings for age

Mild, 39%

Has one or more of the following symptoms:

Potentially inefficient combination of products;

No pension;

Minimal savings for age

Chronic, 26%

As acute, but with £70k equity

No acute condition, but one or more of the following symptoms:

High debt gearing (debt excluding mortgage of 70-100% income);

High mortgage gearing (payment of 50-70% income);

Usually runs out of money before month end;

Virtually no savings for age

Acute, 12%

One or more of: Highly stressed on debt (debt excluding mortgage >100% income); Highly stressed on mortgage payments (>70% income); Drop in income (job loss, death or divorce); Always runs out of money before end of month

Financial health

Low earners spend nearly all of their disposable income each week Low earners allocate a higher proportion of

their weekly expenditure than high earners to essential items such as housing, food and fuel

Benefit- dependent

Low earners

Highearners

Benefit- dependent

Low earners

Highearners

Housing (net), fuel & pow er 20.7% 15.1% 9.0% 20.1% 13.9% 7.6%

Food & non-alcoholic drinks 15.4% 12.8% 9.2% 14.9% 11.7% 7.7%

Recreation & culture 11.2% 12.6% 12.6% 10.8% 11.6% 10.6%

Transport 8.5% 12.0% 14.4% 8.2% 11.0% 12.1%

Miscellaneous goods & services 7.4% 7.3% 7.8% 7.2% 6.6% 6.6%

Restaurants & hotels 5.9% 7.0% 8.7% 5.7% 6.4% 7.3%

Household goods & services 7.4% 6.9% 6.6% 7.1% 6.3% 5.5%

Clothing & footw ear 4.2% 4.6% 4.9% 4.1% 4.2% 4.1%

Communication 3.5% 3.0% 2.4% 3.4% 2.8% 2.0%

Alcoholic drinks, tobacco & narcotics 3.4% 2.8% 2.2% 3.3% 2.6% 1.9%

Health 1.2% 1.4% 1.2% 1.2% 1.3% 1.0%

Education 1.1% 0.7% 1.8% 1.1% 0.6% 1.5%

All expenditure groups 89.8% 86.2% 80.9% 87.0% 78.9% 67.7%

Other expenditure items 10.2% 13.8% 19.1% 9.9% 12.6% 16.0%

Total expenditure 100.0% 100.0% 100.0% 96.9% 91.6% 83.7%

Weekly household expenditure by income group: UK 2007As proportion of total expenditure As proportion of disposable household income

Financial health

35 per cent of low earners have no savings and a further 21 per cent have savings of less than £1,500

24 per cent of low earner households spent more than one quarter of their

monthly income on debt repayments in 2008; up from 12 per cent in 2005

Sep2005

Sep2006

Sep2007

Sep/Oct 2008

Secured debtBase 313 275 280 3860 75% 74% 83% 71%<0.25 19% 16% 10% 13%>0.25 5% 10% 7% 16%

Unsecured debtBase 313 273 248 3440 65% 55% 55% 49%<0.25 33% 41% 40% 44%>0.25 2% 4% 5% 6%

Total debtBase 313 264 241 3270 51% 42% 49% 37%<0.25 37% 42% 37% 40%>0.25 12% 15% 13% 24%

Distribution of ratio of last monthly debt payment to monthly income among low earner households: GB 2005-08

34.9%

21.1%

6.0%

13.2%

3.4%

6.1%

2.1%

13.3%

15.6%

19.9%

8.0%

16.3%

4.2%

8.4%

3.9%

23.7%

0% 10% 20% 30% 40%

No savings

Less than £1,500

£1,500 but less than £3,000

£3,000 but less than £8,000

£8,000 but less than £10,000

£10,000 but less than …

£16,000 but less than …

£20,000 or more

Savings by income group: UK 2007-08

Low earners

High earners

Financial health

Low earners have experienced much higher levels of price increases than high earners

Often on threshold of state support from sources such as fuel poverty social tariffs

and Warm Front grants

-0.4-0.2

+0.0+0.2+0.4+0.6+0.8+1.0+1.2+1.4+1.6+1.8+2.0

1988 1992 1996 2000 2004 2008

Difference between low earner-weighted and high earner- weighted price indices:

UK Jan 1998 - Jun 2009

Low earner-weighted CPI lower than high earner-weighted CPI

Low earner-weighted CPI higher than high earner-weighted CPI

Financial health: Chris

• 49 year-old male, works full time• Separated from wife but can’t afford to move out• Lost eligibility for tax credits • Rent up 5 per cent; salary up 0.5 per cent• Taken a second job, looking for a third• Can’t buy new shoes for children• No money for self – no socialising, no eye test• Avoids credit• Saves with a credit union but unexpected costs – like

new washing machine or bank charges – eat into this• Doesn’t want to think about the future

Jobs and skills

• Low earner households more vulnerable than others to effects of job loss/reduced income• lack of safety net• less likely to receive substantial redundancy payment

• More likely to face uncertainty because of concentration in SMEs and self-employment• 16 per cent are self-employed; 10 per cent of high earners

• Also concentrated in service industries which face sustained period of reduced demand

• Less able than high earners to progress in labour market or return to the workforce following redundancy

Jobs and skills

Workers in larger organisations and with higher starting levels of skills are more likely to receive training from employers

Government schemes are largely focused on those with lowest levels of skills

54%

80%

92%

94%

94%

53%

34%

19%

7%

0% 20% 40% 60% 80% 100%

2-4

5-24

25-99

100-199

200-499

Managers

Admin.

Elementary occs

Machine operatives

Skills training provided by employers: UK 2007

Training provided by number of employess in organisation

Types of employees trained on-the-job in last 12 months (among firms offering it)

Highest level of educational qualification by income group: GB Sep/Oct 2008Benefit-

dependentLow

earnersHigh

earnersAll

No formal qualif ication 45% 25% 8% 23%GCSE/O-level 18% 25% 22% 22%A-level 12% 15% 20% 16%Bachelor 8% 13% 24% 16%Masters/PhD 2% 3% 9% 5%Vocation 9% 11% 9% 9%Other 7% 8% 8% 8%Still studying 0% 1% 0% 0%

50 per cent of low earners have no qualification above GCSE/O-level. They are more likely to have GCSE’s and A-Levels than other members of society

Jobs and skills: Anne

• 56 year-old woman, renting from housing association• Husband left last year, significantly reducing her income• Lost job as pt pharmacy assistant when shop closed• Visits jobcentre twice a week, searches websites and

asks around in shops/businesses• Available jobs require three years’ relevant experience or

NVQ Level 2, 3 or 4 – only has NVQ 1• Became unwell – depression and anxiety• Sold car – limiting her job prospects• Must choose between heating and eating• Lives hand-to-mouth and feels worthless

Housing

• Low earners have found themselves priced out of the housing market in the last decade

• Falls in 2009 have not been big enough to reverse this trend, particularly with credit restricted

• Buyers from recent years are likely to have stretched themselves• more likely than others to be in negative equity

• Access to social housing has also been restricted• many therefore have little option but to rent privately• fewer rights and possibility of eviction if landlord fails to keep up

repayments

Housing

Overall proportion of low earners owning their own home has changed little, but fewer are entering the market

Affordability has reduced more significantly for low earners than for high earners in the period since 1977

58.6%

33.6%

25.5%

55.9%

37.3%

19.2%

0% 10% 20% 30% 40% 50% 60% 70%

Owners

Owned outright

Buying with a mortgage

Change in home ownership among low earner households:UK 2002-03 & 2007-08

2002-032007-08

High earners

Low earnersBenefit-

dependent

0

50

100

150

200

250

1977 1981 1985 1989 1993 1997 2001 2005

Indices of gross income to first time buyer house price by income group:

UK 1977 - 2008 (1977 = 100)

Housing

In 2008, 3.6 per cent of low earners reported being in negative equity, more than among any other income group

Benefit-dependent

Low earners

High earners

All

0%-25% 47.4% 30.6% 29.3% 31.0%25%-50% 26.3% 32.4% 32.9% 32.3%50%-75% 13.2% 19.8% 23.6% 21.9%75%-100% 10.5% 13.5% 11.8% 12.1%>100% (negative equity) 2.6% 3.6% 2.4% 2.7%

Distribution of loan to value among those with mortgages by income group: GB Sep/Oct 2008

44.7%

25.5%

25.5%

4.3%

0.0%

30.6%

32.4%

19.8%

13.5%

3.6%

0% 10% 20% 30% 40% 50%

0%-25%

25%-50%

50%-75%

75%-100%

>100% (negative equity)

Distribution of LTV among low earner mortgagors: GB 2007 & 2008

2007

2008

The proportion of low earners with LTVs in excess of 75 per cent increased significantly between 2007 and 2008

Housing: Julie

• Female in her 40s, works full time as an agency carer• Lives in privately rented flat with partner• On council waiting list for five years• Doesn’t like where she lives, but can’t afford to move• Not much leftover after rent and bills – no prospect of

buying a property• Before meeting her partner she lived with her daughter

because couldn’t afford to live alone• Grand-daughter gave up her room, so she felt like she

was intruding• Worried that landlord might sell – they’re at his mercy

Public policy

• Overall, low earners have become poorer relative to other groups since 1977

• However, have benefitted from a number of policies since 1997:• tax credits• national minimum wage• investment in public services

• Helped shift tax-benefit balance into positive• Number of recession policies will help group• But remain largely overlooked – as evidenced by 10p tax row• Unless the group is recognised, likely to be among biggest

losers in period of fiscal contraction

Public policy

Between 1977 and 1997, low earners became poorer relative to high earners and benefit-dependent households

Since 1997, introduction of tax credits, extension of cash benefits and real-terms increases in public

expenditure have helped low earners close the gap with high

earners slightly

Original income 15,200

+ plus cash benefits 6,800

= Gross income 22,000

- less direct taxes & employees' NIC 3,400

= Disposable income 18,600

- less indirect taxes 3,900

= Post-tax income 14,700

+ plus benefits in kind 6,600

= Final income 21,400

£ per year

Average income, tax and benefit among low earner households: UK 2007/08

£0.63

£0.49

£0.55

£0.00

£0.10

£0.20

£0.30

£0.40

£0.50

£0.60

£0.70

1977 1981 1985 1989 1993 1996/97

2000/01

2004/05

Average low earner final household income per £1 of average high earner household final income: UK

£1.54

£1.44 £1.49

£1.00

£1.10

£1.20

£1.30

£1.40

£1.50

£1.60

£1.70

1977 1981 1985 1989 1993 1996/97

2000/01

2004/05

Average low earner final household income per £1 of average benefit-dependent income: UK

Public policy

Increases in public spending and introduction of tax credits has driven improvement in low earners’ tax-benefits balance

In 1977, non-retired low earners received £0.76 in benefits for every £1 tax they paid

In 1996/97, they received £0.97

In 2007/08, they received £1.06

£0.76

£0.97

£1.06

£0.60

£0.70

£0.80

£0.90

£1.00

£1.10

£1.20

1977 1979 1981 1983 1985 1987 1989 1991 1993 1994/95

1996/97

1998/99

2000/01

2002/03

2004/05

2006/07

Average value of benefits received and public services consumed for every £1 tax paid by non-retired low earner households

In June 2009, 14 per cent of C2

group said they would vote for

UKIP, compared with 6 per cent

among the population as a

whole

In May 2009, 17 per cent of low earners said they would not

vote in a general election, compared

with 14 per cent among the overall

population

Low earners and voting

Since 1997, support for the Government among low earners (as represented by C1C2 group) has differed from the population as a whole on both the up-side and down-side

31 33 33 33 33 35 39 42

44 42 42 4336 35 27 23

17 17 19 1823 21

18 18

8 8 6 6 8 815 17

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997 election

All

1997 election C1C2

2001 election

All

2001 election C1C2

2005 election

All

2005 election C1C2

2009 June All

2009 June C1C2

Voting intention among those saying they are certain to vote: All respondents compared with C1C2 only

Other

Lib Dem

Labour

Conservative

Conclusions

• Low earners have been squeezed, exposed and overlooked during economically benign times

• The recession is highlighting their exposure and focusing attention on the group• more at risk than benefit-dependent households of a drop in income due

to loss of work and more likely to have credit commitments• less likely than high earners 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 longer term, position on threshold of state support means that fiscal contraction represents a particular threat to them• 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.