Low income households depend more on external support

Households with low to middle incomes (LMI) are more dependent on female employment and on the benefit and tax credit system than in the past, finds the Institute for Fiscal Studies (IFS) in Why did Britain’s households get richer? The IFS analysis, conducted for the Resolution Foundation, found that among low- to middle-income households:

In little more than a generation, low- to middle-income households have seen a major shift in the sources of their income, while the richest households have seen little change. The key dynamic has been one of diversification; having been dominated by the earnings of a (generally male) main earner, LMI households today receive large portions of their income from female employment and from the benefit and tax credit system. This greater diversity of income sources may reduce the risk of negative income shocks. But these changes mean that LMI households are now more dependent on external support, whether directly (through the generosity of the benefit and tax credit system) or indirectly (through the availability of services, such as childcare, that make dual earning, or lone-parent working, possible).

The research finds that between 1968 and 2008/09:

  • Over one quarter (27 per cent) of all income growth for low- to middle-income households came from women’s work, with only 8 per cent from men. In 1968, 86 per cent of household gross employment income in this group came from men and 14 per cent from women; by 2008, 63 per cent came from men and 37 per cent from women.
  • Tax credits accounted for around one sixth of the total rise in household income among the low- to middle-income group since 1968, despite the fact that their major expansion took place in the past 10 years. All other state benefits accounted for a similar-sized rise.

Looking to the future the report notes:

These trends carry one inescapable implication for the prospects of future growth in LMI household income. Because wages now make up less of LMI household income, wage growth – even if it is flat across the household income distribution – does less to raise the income of this group than it does to raise the income of households higher up the distribution. In other words, even if wage growth is spread equally across all households, households will fall behind unless benefits and tax credits see year-on-year above-inflation increases, or there is a substantial increase in employment rates or hours worked in LMI households relative to the overall population. If, instead, earnings growth is not flat but regressive across the household income distribution, as it has been consistently for several decades, these pressures will be increased.

The full report, Institute for Fiscal Studies Briefing Note 125, Why did Britain’s households get richer? Decomposing UK household income growth between 1968 and 2008–09 is available on the Institute for Fiscal Studies website.

Further information is available on the Resolution Foundation website.