The real threat to living standards for those on low to middle incomes

Ed Miliband’s attempt on Friday’s Today programme to define the ‘squeezed middle’ has made some people question the point of the term. Shadow chief secretary Liam Byrne tried again on Sunday to pin down the concept. But the big question remains: is the ‘squeezed middle’ just a political slogan – as meaningless as ‘the deserving majority’ – or does it refer to something real, and a big, new challenge for political leaders?

James Plunkett is a Research and Policy Analyst at the Resolution Foundation

Ed Miliband’s attempt on Friday’s Today programme to define the ‘squeezed middle’ has made some people question the point of the term. Shadow chief secretary Liam Byrne tried again on Sunday to pin down the concept. But the big question remains: is the ‘squeezed middle’ just a political slogan – as meaningless as ‘the deserving majority’ – or does it refer to something real, and a big, new challenge for political leaders?

Whatever your views on the phrase itself, there is no doubt that we are now seeing a serious challenge to the living standards of those on low to middle incomes.

Last week at the Resolution Foundation, we published a report that explains those trends. It focuses, as does all our work, on households whose incomes are too high to qualify for significant state support, but too low to escape a real battle with day-to-day living costs.

If any group has a claim to being ‘squeezed’, this group has a pretty good one. So what does the report tell us about definitions? Well, lesson one is that, when it comes to standards of living, family size and composition are of course enormously important.

The table below shows a wide range of incomes that, in terms of living standards, are deemed to be ‘equivalent’ (based on a device used by statisticians to compare households of different sizes). It shows that, for example, a couple with no children earning £30,300 has roughly the same standard of living – in terms of income – as a couple with three children on £48,500.

Upper-and-lower-gross-income-thresholds-for-low-to-middle-earner-households-by-selected-composition

That’s why, when comparing households, it is general practice for statisticians to translate their incomes into the equivalent income for a couple with no kids. In stat-speak, £30,300 is the ‘equivalised’ version of £48,500. It’s these ‘equivalent’ incomes that we need to work with if what we care about is people’s real standard of living.

That brings us to lesson two: in terms of living standards, the middle is much lower than many people think. The graph below shows the distribution of equivalised incomes, and it makes this point clearly; the bulge in the distribution sits between £12,000 and £30,000 – and it captures a huge number of people.

Eleven million adults live in these households, marked out in green below as ‘low-to-middle earners’ (LMEs). That’s one in three of Britain’s working-age population. Anyone to their right, in grey, is above the average income.

Position-of-low-to-middle-earners-in-annual-eqivalised-gross-household-income-distribution-UK-2008-09

These low-to-middle earner households are not the poorest – most are in work. But on a number of fronts they’re struggling to thrive in the modern market economy. More than half in the group say they find it tough to keep up with household bills; more than half have less than one month’s income in savings, two thirds are not contributing to a pension.

Put that all together, and it suggests that Byrne’s definition – an income range between £16,000 and £40,000-50,000 – is not unreasonable, with some important caveats. If you’re on £50,000 – and if you have three kids or more (but not if you don’t) – then you can be fairly described as being in the ‘middle’.

So although many in the media clearly overplayed the impact on the middle of the withdrawal of Child Benefit from top-rate taxpayers (particularly compared to the impact of cuts to tax credits), it is the case that some genuinely ‘middle’ income families will be hit.

Finally, the report reminds us that, although income figures can tell us a lot, they represent only half the story. Prices are crucial, not just incomes, and, as the chart below shows, in the next two years, the pressure on living standards will come as much from above-target inflation as from low wage growth. On the basis of these Office for Budget Responsibility projections, the average low-to-middle earning household will be £720 worse off in 2012 than they were in 2009, in real terms.

Annual-change-in-average-earnings-and-prices-GB-2001-2015

Of course, none of that makes the challenge of definitions any easier. But nor does it make the task of understanding the problem any less pressing. Whatever we choose to call it, something is happening to the living standards of a big swathe of the population. As you can see, it’s a difficult one to pin down. But that’s no excuse not to bother.

9 Responses to “The real threat to living standards for those on low to middle incomes”

  1. Jane Phillips

    RT @leftfootfwd: The real threat to living standards for those on low to middle incomes: //bit.ly/evF7AT writes @JamesTPlunkett

  2. James Plunkett

    New LFF piece: call it what you like, low to middle earners face a real threat to living standards //bit.ly/iipjKS @leftfootfwd

  3. Diane Hain

    RT @leftfootfwd: The real threat to living standards for those on low to middle incomes //bit.ly/iipjKS. he squeezed majority cut hit.

  4. Ash

    “The graph below shows the distribution of equivalised incomes, and it makes this point clearly; the bulge in the distribution sits between £12,000 and £30,000”

    That bulge is not as obvious, though, as the one between £10,000 and £46,000.

    Personally I’d tend to favour roughly that broader definition of “the middle” – not because I think families on equivalised incomes of £46,000 face a daily struggle with the cost of living, but because I think the real dividing line between the privileged few (at the top) and the bulk of society(in the middle) is this: the privileged few can afford excellent private healthcare, education, pensions, unemployment insurance, security etc., while the bulk of society have to rely on the state to provide these things. That is the great divide between the people whose interests right-wing, lower-tax, smaller-state parties represent (maybe the top 5% of the income distribution) and the people whose interests left-wing, higher-tax, bigger-state parties represent (everyone else). Labour should be very cautious about defining households on good but ‘mainstream’ incomes as rich, and hence encouraging them to see themselves (falsely) as having the same interest in lower taxes and a smaller-state as people on truly exceptional incomes.

    (Obviously there’s no clear boundary between the two groups; I suppose the right-wing press’s ‘squeezed middle’/’coping classes’ are the ones in that grey area, who try to live like the rich – sending their kids to private school etc. – but for whom a £20,000 bill for school fees (say) represents a substantial proportion of their income.)

  5. alexsmith1982

    A very good piece on the very real "squeezed middle" //bit.ly/eompCF

  6. Dirk Wolbers

    The real threat to living standards for those on low to middle … //bit.ly/gdqsbI

  7. Imogen Ward

    Quite interesting: RT @leftfootfwd The real threat to living standards for those on low to middle incomes: //bit.ly/evF7AT

  8. Wendy Maddox

    RT @leftfootfwd: The real threat to living standards for those on low to middle incomes //bit.ly/iipjKS

  9. Considering income alone is never enough when looking at living standards | Left Foot Forward

    […] challenge for the government is that this question of adjusting for household size isn’t just a problem for the way we analyse the impact of upcoming cuts, it’s a fundamental […]

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