This article examines the at-risk-of-poverty rate for the UK in comparison to other countries in the European Union and how this rate has changed over time, using data from EU Statistics on Income and Living Conditions. The at-risk-of-poverty rate is the share of people with an equivalised disposable income (after social transfers) below 60 per cent of the national median. The article shows:
• In 2010, 17.1 per cent of the UK population were defined as being at risk of poverty, equivalent to 10.7 million people. This is higher than the overall EU at-risk-of-poverty rate of 16.4 per cent.
• The at-risk-of-poverty rate in the UK decreased by 1.9 percentage points between 2005 and 2010. In comparison, the EU average remained relatively stable over this period.
• The overall decrease in at-risk-of-poverty rates in the UK between 2005 and 2010 was most pronounced among young people and those aged 65 and over, though rates remain highest for these groups.
• Among those aged 65 and over, in 2010, the at-risk-of-poverty rate in the UK was considerably higher than the EU average, a difference of 5.5 percentage points.
• Females in both the UK and the majority of other EU countries were more likely to be defined as being at risk of poverty throughout this period.
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The Stiglitz, Sen and Fitoussi report on the ‘Measurement of Economic Performance and Social Progress’ (2009) was commissioned in response to increasing concerns about the adequacy of current measures of economic performance, in particular those based on GDP figures, and about the relevance of these figures as measures of well-being. A number of recommendations were made, including to look at income and consumption rather than production, emphasizing the household perspective and giving more prominence to the distribution of income consumption and wealth. This article adds to ONS’s growing literature on Measuring National Well-being by examining income distributions of households.
The measurement of at-risk-of-poverty rates also has a European dimension, as it is one component of the EU indicator on the proportion of the population at-risk-of-poverty or social exclusion. This indicator is used to monitor progress towards the Europe 2020 headline target, which aims to lift at least 20 million people out of poverty and social exclusion by 2020.
The at-risk-of-poverty rate is defined as the share of people with an equivalised disposable income (after social transfers such as direct income support, child benefits, and non-contributory pensions) below the at-risk-of-poverty threshold. The threshold is 60 per cent of national median equivalised disposable income. This type of relative indicator does not measure wealth or poverty, but low income in comparison to other residents in that country, which does not necessarily imply a low standard of living.
The income of individuals is based on total household income – adjusted to take account of household size and composition - and then allocated to each household member. Therefore all individuals within a household have the same income. One implication of this, for example, is when comparing at-risk-of-poverty rates between men and women. The comparison is only between households where there is only one man, or one woman. In mixed-sex households both the man and woman have the same income, and therefore, the same poverty status.
The EU-defined poverty indicator reported in this article forms part of the EU Statistics on Income and Living Conditions (SILC), a harmonised set of statistics on income distribution and social inclusion collected across all EU member states (see background notes for a list of EU member states). This poverty indicator is not directly comparable to the relative at-risk-of-poverty rates reported in the Households Below Average Income (HBAI) publication produced by the Department for Work and Pensions (DWP), which are used to measure existing UK government targets to reduce poverty. This is primarily because the two indicators use different definitions of disposable income. HBAI is the preferred UK policy measure, due to its larger sample size, though the EU-SILC indicator is used for this article due to its cross-European comparability.
In 2010, 17.1 per cent of the UK population were defined as being at risk of poverty, equivalent to 10.7 million people. This was a decrease of 1.9 percentage points from a rate in 2005 of 19.0 per cent (Figure 1).
The percentage of people at-risk-of-poverty in the UK stayed relatively constant between 2005 and 2008; however it decreased between 2008 and 2010, falling from 19.0 to 17.1 per cent. In contrast, the EU average has remained broadly unchanged between 2005 and 2010, averaging 16.4 per cent over the period. This has led to the gap between the UK and the EU average rates narrowing over time, bringing the UK at-risk-of-poverty rate closer to the EU average. The gap was 0.7 percentage points in 2010, compared with a 2.6 percentage point difference in 2005.
The relatively large decrease of 1.4 percentage points between 2008 and 2009 for the UK is likely explained by the at-risk-of-poverty threshold decreasing by £348, due to a fall in median disposable income from £15,068 to £14,488 in cash terms. Therefore, we are probably experiencing a narrowing of the gap between the incomes of those at the bottom and those in the middle of the income distribution, rather than an improvement in the incomes of those at the bottom. This highlights one of the features of this type of poverty measure, which are normally termed relative measures.
Changes in relative poverty measures depend on how changing incomes at the lower end of the distribution compare with income changes for the rest of the population. For example, relative poverty rates fall if income growth at the lower end outstrips overall income growth. If, as in this case, median income - and therefore the threshold - falls, this may potentially lead to households with incomes that were previously just below the threshold no longer being identified as at risk of poverty, even if their situation has not changed significantly.
Figure 2 shows how at-risk-of-poverty rates in the UK compare to those in other EU countries. In 2010, the UK had the 10th highest at-risk-of-poverty rate among the 27 EU member states. In 2005, the UK rate was the 8th highest among the 25 EU member states at that time (Romania and Bulgaria officially joined the EU in 2007). When interpreting these figures it should be noted that the at-risk-of-poverty thresholds for each country are set at 60 per cent of the median equivalised disposable income for that particular country. This means that the rates are relative for each individual country, and those households around the at-risk-of-poverty thresholds in each country will not necessarily have comparable incomes or living standards.
In 2010, the highest at-risk-of-poverty rates were in Latvia (21.3 per cent), Romania (21.1 per cent), and Spain and Bulgaria (both 20.7 per cent). The lowest at-risk-of-poverty rates were in the Czech Republic (9.0 per cent), the Netherlands (10.3 per cent), Slovakia (12.0 per cent) and Austria (12.1 per cent).
Figure 3 shows that in 2010 the UK at-risk-of-poverty rates for individuals aged 25-49 and 50-64 were 13.7 per cent and 14.4 per cent respectively, while for all other age groups the rates were all in excess of 20 per cent. For most age groups the at-risk-of-poverty rate for the UK was fairly close to the EU average, with the exception of those aged 65 and over, where the UK rate was 5.5 percentage points higher.
Figure 4 shows that for those aged under 18 in the UK, between 2005 and 2008, the at-risk-of-poverty rate was relatively stable. However, there was a decrease between 2008 and 2009 of 3.3 percentage points, in line with that seen in the overall population. During this period the average at-risk-of-poverty rate for the EU has remained fairly constant; averaging 20.0 per cent over the period. The decrease in the UK rate has the effect of bringing the UK and EU average rates closer together.
Looking at young adults (aged 18-24) the UK at-risk-of-poverty rate fell by 6.4 percentage points between 2005 and 2008; however, the rate increased in the following two years, though it remains below the 2005 level (Figure 5). This coincided with a rise in the unemployment rate for this age group of 5.4 percentage points, from 12.2 per cent in the first quarter of 2008 to 17.6 per cent in the last quarter of 2010. In contrast, the average at-risk-of-poverty rate for the EU has remained fairly constant over the period. In 2010 the at-risk-of-poverty rate for the UK was broadly comparable to the EU average (20.8 per cent and 21.2 per cent respectively).
Figure 6 shows that the at-risk-of-poverty rate for those aged 25-49 in the UK remained fairly constant; averaging 13.9 per cent over the period. This followed the EU average very closely, which averaged 14.2 per cent over the period.
Similarly, for the population aged 50-64 in the UK, the at-risk-of-poverty rate remained fairly constant overtime; averaging 15.1 per cent. The at-risk-of-poverty rate for the EU was also broadly unchanged, averaging 13.6 per cent (Figure 7).
Figure 8 shows among those aged 65 and over the UK at-risk-of-poverty rate increased between 2005 and 2008 to 27.3 per cent, but then fell between 2008 and 2010 to 21.4 per cent. Similarly, the average at-risk-of-poverty rate for over 65s in the EU remained fairly constant between 2005 and 2008, but decreased between 2008 and 2010 (from 18.9 per cent to 15.9 per cent). In contrast to the at-risk-of-poverty rates for those below 65, in 2010 the UK rate for individuals aged 65 and over was significantly higher than the EU average, a difference of 5.5 percentage points.
Looking at the at-risk-of-poverty rates by gender, the rates for females have consistently been higher than those for males both in the UK and the EU average (Figure 9). In 2010, the at-risk-of-poverty rate in the UK was 17.8 per cent for females, compared with 16.4 per cent for males, while the overall EU rate was 17.1 per cent for females and 15.7 per cent for males.
As the at-risk-of-poverty rates are based on household incomes, any differences between males and females will be driven largely by differences in those households where there is a single adult. Among those households, the average equivalised disposable income is lower for those with a female head of household than those with a male head of household. This may be for a number of reasons. For example, females spend more time providing unpaid care for children or elderly family members, so are more likely to take time out of work or work part time to enable them to provide this care. Females are also more likely to take on the economic costs of raising children; a much higher proportion of single parents are women.
The at-risk-of-poverty rate fell between 2005 and 2010 for both males and females in the UK, though the rate for females fell mainly between 2008 and 2009, compared to the more steady decrease for the at-risk-of-poverty rate for males. In contrast the at-risk-of-poverty rates for both males and females in the EU remained fairly constant, with both following a similar trend. This has led to the gap between the UK and EU for both males and females gradually closing up over time, bringing the UK at-risk-of-poverty rates closer to the EU average.
Figure 10 shows the at-risk-of-poverty rates for males and females for all EU countries in 2010. The order of countries by at-risk-of-poverty rates for males and females were reasonably similar, showing that there were no major gender differences in particular countries. In similar fashion to the UK, females were slightly more at risk of poverty in most countries.
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Using a poverty threshold
This type of poverty measure has its strengths and weaknesses. Its strengths are that the data is easy to report and can be easily used to compare the poverty rates in the UK to other countries in the EU. However, the weaknesses are that an income slightly above the poverty threshold is not considerably different to an income slightly below it; the scale is continuous. Also, if the disposable income of a country increases, then the at-risk-of-poverty threshold will also increase. This is likely to produce the synthetic result of putting more people at-risk-of-poverty; however, the more likely result is a rise in living standards.
Households Below Average Income (HBAI)
The Households Below Average Income series is an annual publication by the Department for Work and Pensions (DWP) which uses Family Resources Survey data. The publication analyses the income distribution generally, and the numbers and characteristics of low income households using equivalised disposable income. The publication covering the period 2010/2011 will be released by DWP on 14th June 2012.
The EU at-risk-of-poverty indicator used in this article is based on income measured before housing costs. The DWP HBAI publication includes at-risk-of-poverty rates calculated on both a before housing costs and after housing costs basis. There are strong arguments both for and against the deduction of housing costs in determining disposable income. It can be argued that as the housing costs faced by households do not always reflect the true value of the housing they enjoy, housing costs should be deducted in calculating disposable income. However a disadvantage of using an after housing costs measure of disposable income is that it has the effect of understating the relative standard of living of those individuals who benefit from a better quality of housing by paying more for better accommodation. In the case of making comparisons across age groups, it can be argued that as a large proportion of pensioners own their own homes and therefore typically have lower housing costs than those of a working age, it can be useful to consider disposable income after housing.
The share of people with an equivalised disposable income (after social transfers) below the at-risk-of-poverty threshold. This threshold is set at 60 per cent of the national median equivalised disposable income after social transfers. This type of relative indicator does not measure wealth or poverty, but low income in comparison to other residents in that country, which does not necessarily imply a low standard of living.
Equivalised disposable income
The total income of a household, after tax and other deductions, that is available for spending or saving, divided by the number of household members converted into equalised adults; household members are equalised or made equivalent by weighting each according to their age, using the so-called modified OECD equivalence scale.
Modified OECD equivalence scale
The modified OECD scale gives a weight to all members of the household and then adds these up to arrive at the equivalised household size:
• 1.0 to the first adult;
• 0.5 to the second and each subsequent person aged 14 and over;
• 0.3 to each child under 14.
European Union Survey on Living Conditions (EU-SILC)
The European Union Statistics on Living Conditions (EU-SILC) is conducted by a number of European Union and non-European Union states to produce cross sectional and longitudinal data on income, poverty and living conditions across Europe. In the UK, it is derived from ONS’s General Lifestyle Survey.
General Lifestyle Survey (GLF)
The General Lifestyle survey (GLF) is a module of the Integrated Household Survey (IHS), formerly known as the General Household Survey (GHS). It is a multi-purpose continuous survey carried out by the ONS collecting information on a range of topics from people living in private households in Great Britain.