19 June 2019

In-work poverty is up – is that necessarily a bad thing?

By

Three cheers for more in-work poverty!

It’s not a sentence one expects to write, but it might actually be (somewhat) justified.

A new report from the Institute for Fiscal Studies points out that “between 1994 and 2017 there was an increase from 13 per cent to 18 per cent in the proportion of people in working households living in relative poverty”.

How could that possibly be a good thing, I hear you ask? Well, as the IFS themselves point out, increases in in-work poverty are not simply a matter of low pay.

Firstly, the measure most organisations currently use to define UK poverty is actually of “relative poverty”, defined as a household income that is 60 per cent or less of the median.

As we’ve noted on CapX before, that is really a measure of inequality, and it means someone can become “relatively poor” even if there is no actual change in their own circumstances, if average incomes have risen.  This is exactly what has happened over the last few decades, principally because pensioners’ incomes have risen steadily, which has forced the median income up. So, part of the rise in relative poverty is actually about another poor group now being better off – not something we ought to be too miserable about.

Another reason in-work poverty has gone up is that the number of people living in workless households has fallen dramatically since the 1990s, a trend which is clearly extremely welcome. The fact more people are working pushes the in-work poverty figure up. It’s a strange statistical artefact, in the sense that people who are now working but in relative poverty are actually better off than they would have been if they had remained unemployed.

They may be less well-off than the median income, but they are better off than they would have been without the big surge in employment over the past 25 years or so.

That said, simply pointing to high employment rates as proof the economy is ticking along well is clearly not telling the whole story. In fairness, ministers have recognised this, with just about everyone pointing to low rates of productivity in the UK as a problem (though why this is remains hotly disputed).

And although absolute poverty is now lower than it has been in the past, and vastly lower than in previous generations, inequality is not something to be blithely dismissed.  After all, if more of what Tony Blair might have called “the proceeds of growth” are accruing to the already well off, that is clearly a concern.  Even if some of the causes of rising in-work poverty are not all that negative, it is still the case that over the last few decades, those on lower wages have seen smaller improvements in their living standards than the better off.

Boosting wages is certainly a top priority, but making sure workers keep more of the wages they are earning is also key. It’s why our parent organisation, the CPS, has suggested taking lower paid workers out of National Insurance – a move that would enhance the existing government policy of progressively raising the threshold at which people pay income tax.

Another big driver of inequality is the high cost of housing, an issue that really grinds our gears here at CapX. Cuts to housing benefit since 2010 have played a role, but welfare payments on that kind are simply a palliative for the sickness that is the English planning system.

As Anthony Breach of the Centre for Cities has pointed out, high housing costs not only make life harder for those on low incomes and lower rates of home ownership, they have also led to huge regional disparities in housing wealth. It’s equally worth noting that home ownership is not necessarily for everyone — a big part of the housing mix needs to be a bigger supply of affordable homes for rent, a point which is often neglected in a debate dominated by how to get on the housing ladder.

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John Ashmore is Deputy Editor of CapX.