Equivalisation is a standard methodology that adjusts household income to account for the different financial resource requirements of different household types. Household size is an important factor to consider because larger households usually need a higher income than smaller households in order to achieve a comparable standard of living. The composition of a household also affects resource needs, for example living costs for adults are normally higher than those for children. After equivalisation has been applied, households with the same equivalised income can be said to have a comparable standard of living.
This year there has been a change in focus from gross income to disposable income. However both gross and disposable income tables are available on request. Disposable income is defined as gross weekly cash income less the statutory deductions and payments of income tax and National Insurance contributions1. Most analysis looking at income and expenditure together looks at disposable rather than gross income because disposable income is the amount that households have available to spend.
Full details of the equivalisation methodology used for this chapter are given in the Equivalisation methodology section. Information on how the equivalisation process affects the distribution of income data for different household types is presented in the Equivalisation results section.
The next sections of the chapter examine how expenditure varies with income when differences in household size and composition have been taken into account.
Notes for Background:
For other ONS and DWP publications council tax and domestic rates (Northern Ireland) are also deducted from gross income. For Family Spending council tax is counted as an expenditure within the total expenditure definition.
For many households, income is their most important economic resource for meeting everyday living expenses. However, the consumption of goods and services (reflected by expenditure) is pivotal in meeting a household's requirements, and it is argued that income and expenditure together represent a more important determinant of well-being from a personal finance perspective than income alone.
Households can smooth expenditure by, for example, adjusting savings, drawing on wealth and borrowing. Conversely, incomes may be more volatile, a finding that led to Friedman’s ‘permanent income hypothesis’, which suggests that decisions made by consumers are based on long-term income expectations rather than their current income. Therefore, because expenditures fluctuate less than incomes, they can be considered a better proxy of living standards. This view is supported in a number of studies for example (Cutler & Katz, 1991)1 and (Jorgenson & Slesnick, 1987)2 which find stronger relationships between consumption and subjective well-being than between income and subjective well-being measures.
The Commission on the Measurement of Economic Performance and Social Progress (Stiglitz, Sen & Fitoussi, 2009)3 recommended that greater prominence be given to the distributions of both income and expenditure across households and, furthermore, that it is desirable to have information on the joint distribution of these dimensions. That is, the complex nature of household well-being from a personal finance perspective means it is better understood by looking simultaneously at household income and consumption expenditure.
For given levels of expenditure, and everything else being equal, people with higher income can be regarded as having a higher level of well-being from a personal finance perspective than people with lower income. With higher income, they have greater opportunity to increase expenditure now, if desired, or to save income that might be used to finance expenditure in the future.
In light of this context, this chapter examines how expenditure varies with income.
Tables 3.1 (439 Kb Excel sheet) and 3.1E (143.5 Kb Excel sheet) show expenditure, in total and for each of the Classification of Individual COnsumption by Purpose (COICOP) categories, by disposable and equivalised disposable income decile groups respectively.
As shown in Figure 3.1, there is an overall increase in total expenditure as equivalised disposable income increases but the second income decile has a slightly lower expenditure than the bottom income decile, this is often referred to as an ‘expenditure tick’. This is seen only when income has been equivalised. One possible explanation is consumption smoothing, which is caused by individuals who have a low income on a short-term basis but whose expenditure is higher than might be expected for their level of income. Previous research suggests that this could include: students who would be expecting higher incomes in the future; pensioners who may be reliant on savings; and the temporarily unemployed who are expecting to start work within the next few weeks.
As the Living Costs and Food Survey only collects information on households’ current income sources it is not possible to establish whether longer term income expectations account for the expenditure patterns observed. However, as noted in Equivalisation results, the equivalisation process reduces the proportion of retired households found in the bottom income group and it is therefore unlikely that pensioners, who sustain their expenditure using savings, explain why the expenditure tick occurred.
Further information concerning the factors underlying the expenditure tick can be obtained by examining the spending patterns for individual expenditure categories. As shown in Figure 3.2, the slight expenditure tick seen in total expenditure is largely driven by housing (net) fuel and power. Households in the bottom equivalised decile spent £60.80 per week on housing (net) fuel and power while those in the second lowest decile spent only £50.20.This was largely due to the differences in net rent, which refers to the amount spent on rent after removing housing benefit and related allowances. Households in the lowest decile spent more on net rent (£32.30 per week) than those in the second decile (£23.10 per week). Lower income households tend to rent their properties rather than own them. Larger households typically need to spend more on net rent and the equivalisation process moves these households into the lowest income bracket. These factors explain why the expenditure tick is observed once equivalisation is applied.
Differences in rent payments are even larger when gross rent rather than net rent is considered. This is because households in the lowest income decile receive substantially more housing benefit and related allowances than those in the second lowest decile (£65.00 compared with £49.50 per week), reflecting the level of housing support required by those on the lowest incomes.
Certain categories show a clear pattern of increasing expenditure in absolute terms as equivalised income increases; these tend to be categories where spending is discretionary, at least to a certain extent. One example is clothing and footwear. As shown in Figure 3.3 households in the top equivalised disposable income group spent an average of £50.00 per week on clothing and footwear, which was over four times more than was spent by the lowest equivalised income group (£12.30). A certain level of spending on essential clothing is expected for all households but clothing offers a broad range of price and higher income households may choose to purchase a larger number of clothing items.
Recreation and culture shows the strongest trend for expenditure to rise with equivalised income. As shown in Figure 3.4 the highest equivalised income households spent £134.10 per week on recreation and culture, almost six times as much as households in the lowest equivalised income decile who only spent £22.10 per week. As this category includes expenditures that are almost entirely discretionary, such as package holidays, sports admissions and audio-visual equipment, it is expected that lower income households spend very little, while higher income households will have more income available to spend on recreational activities.
Tables 3.2 (499.5 Kb Excel sheet) and Table 3.2E (140 Kb Excel sheet) show the share of total expenditure on each COICOP category, by disposable income group and equivalised disposable income group respectively. There was notable variation in the proportion of expenditure assigned to certain COICOP categories as equivalised income increased. A good illustration of this, as shown in Figure 3.5, is the proportion of total expenditure spent on food and non-alcoholic drinks, which tended to decrease as equivalised disposable income increased. For households in the bottom equivalised disposable income decile food and non-alcoholic drink accounted for 16 per cent of total expenditure, but for the top equivalised disposable income decile this category only accounted for 8 per cent of total expenditure. Clearly all households have to spend a certain amount on food and non alcoholic drink. However, as income rises households spend more in absolute terms on this category but there is a limit to how much food households consume and the amount they are willing to spend overall. As a result of this the higher equivalised disposable income deciles spend a lower proportion of their expenditure on food and non-alcoholic drink than the lower income deciles.
For several categories the proportion of expenditure accounted for by that category decreases as equivalised disposable income increases. However, the reverse trend is seen for transport. While absolute spending might be expected to increase with income, it is interesting that the proportion of expenditure allocated to transport also increases. As shown in Figure 3.6 transport accounted for 9 per cent of expenditure for the bottom equivalised disposable income decile compared with 14 per cent for the top income group. This can be explained by two factors. Firstly, higher income households allocate more of their total expenditure to vehicle purchases than lower income households. For example, outright purchases of vehicles accounted for 5 per cent of expenditure for the highest income households compared with 2 per cent for the lowest income group. Secondly, the costs for running and maintaining vehicles places a greater demand on total expenditure for higher income households than for the lowest income groups (7 per cent compared with 5 per cent). This reflects the fact that higher income households are more likely to have a car and make more car journeys than households with lower incomes (National Travel Survey, 2012)1.
In contrast to the above findings, spending on transport services (mainly travel fares) as a proportion of total expenditure did not vary significantly with income. Lower income households tend to make a higher number of bus trips than households with higher incomes but this is offset by the higher number of rail trips taken by households in the top income groups, which is largely due to commuters in London (National Travel Survey, 2012).
The findings discussed in this section illustrate how teasing apart the expenditure patterns for different types of goods and services provides a fuller picture of how households on different income levels spend their money.
This section looks at how expenditure varies with income for different household types (see Tables 3.3 (95.5 Kb Excel sheet) to 3.10 (94.5 Kb Excel sheet) and Tables 3.3E (114 Kb Excel sheet) to 3.10E (114.5 Kb Excel sheet) ).
Figure 3.7 shows expenditure on selected categories, by equivalised disposable income for retired households containing two adults. In this context retired households (not mainly dependent on state pensions) are those where the household reference person (see Appendix B for definition) has reached state pension age, is not working or seeking work, and is mainly dependent on income sources other than the state pension (e.g. occupational pension, income from investments, or annuities). The tables showing retired households mainly dependent on state pensions have been excluded from this analysis due to reliability concerns arising from the low sample sizes for this group.
For retired households containing two adults, total expenditure rose steeply with equivalised disposable income, increasing from £257.70 per week for the lowest income quintile to £594.90 for the highest income group. Most individual expenditure categories showed a similar pattern. For example, two adult retired households in the lowest income quintile spent £27.00 per week on transport compared with £81.80 for the highest income group. For certain categories however, the variation in spending with income was less marked. Spending on household goods and services for example was £24.70 for the lowest income households compared with £32.40 for the highest income group. This category includes items such as furniture, household appliances, and household and garden tools. The spending figures suggest that higher-earning retired households limit the amount they spend on certain categories, such as this one, that have a discretionary component.
Total spending increased sharply as equivalised disposable income increased for non-retired households. This pattern was particularly striking for transport where spending increased from £35.50 for the lowest income group to £128.00 for the highest income households (See Figure 3.8). Spending also increased with income for retired households, although the absolute amounts were lower. The relatively high expenditure on transport by non-retired households reflects the fact that non-retired households are more likely than retired households to contain individuals who are working and therefore incur higher commuting costs. Concessionary travel schemes available to individuals of pensionable age may also contribute to the lower transport spending seen for retired households.
In contrast to the pattern seen for retired households, spending on household goods and services varied considerably with income for two adult non-retired households, rising from £14.60 in the lowest income group to £47.70 for the highest income group. This is an example of non-retired households with higher incomes spending notably more on discretionary expenditure items, to a greater extent than retired households.
These points illustrate how expenditure requirements differ between retired and non-retired households; it is also worth noting that non-retired household tend to have higher incomes. Income quintiles have been calculated separately for retired and non-retired households for this analysis, to enable patterns of expenditure within these groups to be explored meaningfully.
Examining spending patterns by income allows us to see how households prioritise spending in order to acquire essentials, and how they balance this with the need to enjoy some goods and services that might be considered non-essential, or discretionary. Equivalisation provides a powerful tool to understand how income relates to the needs and choices of households of different sizes and compositions. The complex findings give some clues as to what is important for well-being. Chapter 4 looks at this issue from a different angle, by considering how spending patterns have changed over time.
Equivalisation scales are used to adjust household income in such a way that both household size and composition are taken into account. There are various scales available, which differ in their complexity and methodology. For example, the Organisation for Economic Cooperation and Development (OECD) modified equivalence scale is used widely across Europe: it adjusts household income to reflect the different resource needs of single adults, any additional adults in the household, and children in various age groups.
The modified OECD equivalence scale is the standard scale for the Statistical Office of the European Union (Eurostat) and several government departments in the UK use it for key household income statistics. For example, the Department for Work and Pensions (DWP) use the modified OECD equivalence scale for their Households Below Average Income (HBAI) publication and ONS use it for the Effects of Taxes and Benefits on Household Income (ETB) analysis.
To calculate equivalised income using the modified OECD equivalence scale, each member of the household is first given an equivalence value. The modified OECD equivalence values are shown in Table 3A. Single adult households are taken as the reference group and are given a value of one. For larger households, each additional adult is given a smaller value of 0.5 to reflect the economies of scale achieved when people live together. Economies of scale arise when households share resources such as water and electricity, which reduces the living costs per person. Children under the age of 14 are given a value of 0.3 to take account of their lower living costs while children aged 14 and over are given a value of 0.5 because their living costs are assumed to be the same as those of an adult.
|Type of Household Member||Equivalence value|
|Child aged: 14 and over||0.5|
|Child aged: 0-13||0.3|
In the next stage of the calculation, the equivalence values for each household member are summed to give a total equivalence number for the household. For example, the total equivalence value for a household containing a married couple with two children aged 10 and 14 is calculated as follows:
1 (first adult) + 0.5 (second adult) + 0.5 (14-year-old child) + 0.3 (10-year-old child) = 2.3
The total equivalence value of 2.3 shows that the household needs more than twice the income of a single adult household in order to achieve a comparable standard of living.
In the final step of the calculation the total income for the household is divided by the equivalence value. For example, if the household described in the example above has an annual income of £30,000, their equivalised income is calculated as follows:
£30,000/2.3 = £13,043
For a single adult household with an actual income of £30,000 the equivalised income remains at £30,000, because the equivalence value for this household is equal to one. This demonstrates that a single adult household will have a higher standard of living than a larger household with the same level of income.
Equivalised household incomes were calculated for each household using the modified OECD equivalence scale. Household equivalised incomes were then ranked in ascending order and divided into ten equally sized (decile) groups, with households having the lowest equivalised income in the first decile group. Disposable (non-equivalised) income data are presented in Tables 3.1 (439 Kb Excel sheet) to 3.11 (66 Kb Excel sheet) ; equivalised disposable income data based on the modified OECD scale are shown in Tables 3.1E (143.5 Kb Excel sheet) to 3.11E (66.5 Kb Excel sheet) .
The income decile groups can be seen in table 3B.
|Income Decile||Disposable weekly income||Disposable weekly equivalised income (OECD-modified scale)|
|1||Up to £167||Up to £138|
|2||£168 to £243||£139 to £182|
|3||£244 to £314||£183 to £221|
|4||£315 to £395||£222 to £262|
|5||£396 to £476||£263 to £303|
|6||£477 to £577||£304 to £351|
|7||£578 to £688||£352 to £408|
|8||£689 to £832||£409 to £492|
|9||£833 to £1,103||£493 to £645|
|10||£1,104 and over||£646 and over|
Table 3.12 (43.5 Kb Excel sheet) shows the household composition of the disposable (non-equivalised) income decile groups and the OECD-equivalised disposable income decile groups. Equivalisation has a large impact on the income positioning of households containing one adult without children. The effects of equivalisation can be illustrated using households containing one non-retired adult. These households accounted for 43 per cent of households in the lowest disposable income decile group but when income was equivalised they accounted for only 35 per cent of the lowest income group. These households tended to move to a higher income decile group after income was equivalised. These results demonstrate that when equivalisation is used to look at the incomes of all households on a comparable basis, single adult households tend to be better off than they appear pre-equivalisation.
The proportion of households containing at least one retired person by disposable income decile group before and after income equivalisation is shown in Figure 3.9. Equivalisation has a large effect on the proportion of retired households in the lowest income decile group. Retired households accounted for just under two-fifths (37 per cent) of households in the bottom disposable income group but after equivalisation they accounted for only 13 per cent of households in the bottom income group. This result can largely be explained by the fact that a relatively high proportion of retired households contain only one adult and, as explained above, the incomes of single adult households are scaled up (relative to other households) when income is equivalised. The proportion of retired households in the second lowest income decile also decreased after equivalisation, although the effect was much smaller. The opposite was true of the higher income decile groups; the proportion of retired households increased slightly after income was equivalised.
Figure 3.10 shows the percentage of households with children in each income group before and after income equivalisation. As disposable income increases, the proportion of households with children generally increases. Factoring in living costs for children as part of the equivalisation process, however, brings about large changes in the income distribution. There are more households with children in the lower income groups and there is no longer a consistent increase in the number of households with children as income increases.
Table 3.12 (43.5 Kb Excel sheet) also shows how equivalisation affects the average household size for each income decile group. As disposable income increases the average number of people in each household also increases: the average household size for the highest income group (3.2 people) was almost two and a half times that of the lowest income group (1.3 people). After income was equivalised, the average number of people in each household was more similar for each income decile group, with the average varying between 2.1 and 2.5. This pattern of results occurs because the equivalisation process scales up the income of households containing one adult (relative to other households) and scales down the income of households with more people.
This is the only chapter that presents equivalised income data; other tables included in Family Spending are available on an equivalised income basis on request from the Office for National Statistics (ONS) (see ‘About this edition of Family Spending’).
Table 3.1 to 3.12 can be accessed using the links on this page.
Table 3.1 (439 Kb Excel sheet) Detailed household expenditure by disposable income decile group, 2012 United Kingdom
Table 3.1E (143.5 Kb Excel sheet) Detailed household expenditure by disposable equivalised income decile group (OECD-modified scale), 2012 United Kingdom
Table 3.2 (499.5 Kb Excel sheet) Detailed household expenditure as a percentage of total expenditure by disposable income decile group, 2012 United Kingdom
Table 3.2E (140 Kb Excel sheet) Household expenditure as a percentage of total expenditure by disposable equivalised income decile group (OECD-modified scale), 2012 United Kingdom
Table 3.3 (95.5 Kb Excel sheet) Expenditure of one adult non-retired households by disposable income quintile group, 2012 United Kingdom
Table 3.3E (114 Kb Excel sheet) Expenditure of one adult non-retired households by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.4 (94.5 Kb Excel sheet) Expenditure of one person retired households not mainly dependent on state pensions by disposable income quintile group, 2012 United Kingdom
Table 3.4E (115.5 Kb Excel sheet) Expenditure of one person retired households not mainly dependent on state pensions by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.5 (91.5 Kb Excel sheet) Expenditure of two adult households with children by disposable income quintile group, 2012 United Kingdom
Table 3.5E (133 Kb Excel sheet) Expenditure of two adult households with children by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.6 (93 Kb Excel sheet) Expenditure of one adult households with children by disposable income quintile group, 2012 United Kingdom
Table 3.6E (113 Kb Excel sheet) Expenditure of one adult households with children by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.7 (94 Kb Excel sheet) Expenditure of two adult non-retired households by disposable income quintile group, 2012 United Kingdom
Table 3.7E (114 Kb Excel sheet) Expenditure of two adult non-retired households by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.8 (95 Kb Excel sheet) Expenditure of one person retired households mainly dependent on state pensions by disposable income quintile group, 2012 United Kingdom
Table 3.8E (102.5 Kb Excel sheet) Expenditure of one person retired households mainly dependent on state pensions by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.9 (94 Kb Excel sheet) Expenditure of two adult retired households mainly dependent on state pensions by disposable income quintile group, 2012 United Kingdom
Table 3.9E (115 Kb Excel sheet) Expenditure of two adult retired households mainly dependent on state pensions by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.10 (94.5 Kb Excel sheet) Expenditure of two adult retired households not mainly dependent on state pensions by disposable income quintile group, 2012 United Kingdom
Table 3.10E (114.5 Kb Excel sheet) Expenditure of two adult retired households not mainly dependent on state pensions by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.11 (66 Kb Excel sheet) Income and source of income by disposable income quintile group, 2012 United Kingdom
Table 3.11E (66.5 Kb Excel sheet) Income and source of income by disposable equivalised income quintile group (OECD-modified scale), 2012 United Kingdom
Table 3.12 (43.5 Kb Excel sheet) Percentage of households by composition in each disposable and equivalised income decile group (OECD-modified scale), 2012 United Kingdom
Symbols and conventions used in Family Spending 2013 edition
[ ] Figures should be used with extra caution because they are based on fewer than 20 reporting households.
.. The data is suppressed if the unweighted sample counts are less than 10 reporting households.
- No figures are available because there are no reporting households.
Rounding: Individual figures have been rounded independently. The sum of component items does not therefore necessarily add to the totals shown.
Averages: These are averages (means) for all households included in the column or row, and unless specified, are not restricted to those households reporting expenditure on a particular item or income of a particular type.
Period covered: Calendar year 2012 (1 January 2012 to 31 December 2012).
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