IFS - COVID-19 hit as households were still paying price for long hangover from last crisis
The COVID-19 crisis hit after the weakest decade of growth in incomes since comparable records began. We had suffered years of stalled productivity and poor earnings growth, and deep cuts to working-age benefits had been a further drag on the living standards of many lower-income households. Even after temporary increases to some benefits this year, out-of-work households are on average entitled to £1,600 per year less than they would have been without cuts since 2011.
These are among the findings of new IFS research published today, funded by the Joseph Rowntree Foundation.
- Income at the 10th percentile (higher than for 10% of the population, lower than for the other 90%) was essentially the same in 2018–19 as it had been five years earlier in 2013–14. This was entirely due to falls in benefit and tax credit income, which offset growth in employment incomes. Just the failure to uprate most working-age benefits and tax credits in line with inflation over that period reduced their real value by 5%.
- Even with the temporary benefit increases this year, out-of-work households are on average entitled to about £1,600 per year (10%) less than they would have been without cuts since 2011. This rises to £2,900 (12%) on average for out-of-work households with children.
- The COVID-19 crisis also hit just after another stalling of income growth for those on middle incomes. A short-lived recovery from the Great Recession in the mid 2010s was choked off by a rise in inflation after the Brexit vote of 2016 meaning that median incomes did not grow at all between 2016–17 and 2018–19.
- This had meant an unprecedentedly bad decade for growth in living standards even before the current crisis. Absolute poverty – which tracks the real incomes of low-income households – had fallen by only 2 percentage points since 2007–08. That is a historically small reduction in an absolute measure of poverty over such a number of years since records began in 1961. Median income had also grown less than over any decade since records began, and among those under 60 it was just 3% higher than in 2007–08.
- The employment rate of 25- to 64-year-olds rose from 76% to 80% between 2007 and 2019. This growth in employment was the main thing helping income growth. Employment grew across all regions and almost all demographic groups, but grew most among women, ethnic minorities, older people, lone parents and immigrants, all of whom historically had relatively low levels of employment. The biggest growth by industry was in the professional and finance sectors.
- By contrast, real average hourly wages in 2019 were 2% below where they had been in 2007. But we are now in danger of being reminded all too clearly that no pay growth can still be better than no jobs at all. In an especially cruel twist of fortune, the specific nature of this shock affects the most vulnerable the most, with those already in poverty more likely to be in shut-down sectors and less likely to be able to work from home than other workers.
Pascale Bourquin, a Research Economist at IFS and an author of the research, said:
"The fate of household living standards over the coming years will hinge on how fast the economy can recover from the damage caused by COVID-19. The years following the Great Recession do not provide a good blueprint for a bounce-back: in the last decade, we have witnessed the slowest growth in household incomes since records began as earnings and productivity stalled and working-age benefits were cut sharply. We now have the dual challenge of trying to recover the ground people have lost in their careers and employment prospects, and addressing the problems we already had."
Helen Barnard, Acting Director of the Joseph Rowntree Foundation, said:
"Coronavirus has delivered a major shock for the UK economy but it has also exposed problems which families in poverty have been grappling with for much longer. Finding a lasting solution has taken on a new urgency as the crisis has shown how close many of us are to being swept into poverty when circumstances change."
"As the economy recovers from the initial effects of the pandemic, we must make sure that what follows offers everyone the opportunity to get a good job which allows them to improve their living standards."
"The government’s levelling-up agenda is now more important than ever and it can’t be left to drift. Redesigning our economy so that it works for everyone has the potential to deliver a stronger recovery and loosen poverty’s grip at the same time."
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