Measuring living standards with income and consumption: evidence from the UK

© Institute for Fiscal Studies

Measuring living standards with income and consumption: evidence from the UKMike Brewer (University of Essex, IFS) & Cormac O’Dea (IFS)

www.iser.essex.ac.uk/publications/working-papers/iser/2012-05

Outline of paper

1. We document the mis-match in the UK household budget survey (LCFS) between reported income and reported spending for households with low resources– We present evidence that this is more likely due to under-reporting of

income than over-reporting of spending or consumption-smoothing

2. We document the high (and growing) under-recording of expenditures in the LCFS relative to National Accounts– Evidence suggests that spending reported by low-spenders is more likely

to be accurately recorded than that of high-spenders

3. We compare impressions of trends in the level and inequality of living standards in GB according to consumption and income– Consumption includes imputed rent from housing

4. We describe what different impressions we get about the composition of households with low living standards if we identify such with consumption, rather than income


Outline of talk

1. We document the mis-match in the UK household budget survey (LCFS) between reported income and reported spending for households with low resources– We present evidence that this is more likely due to under-reporting of

income than over-reporting of spending or consumption-smoothing

2. We document the high (and growing) under-recording of expenditures in the LCFS relative to National Accounts– Evidence suggests that spending reported by low-spenders is more likely

to be accurately recorded than that of high-spenders

3. We compare impressions of trends in the level and inequality of living standards in GB according to consumption and income– Consumption includes imputed rent from housing

4. We describe what different impressions we get about the composition of households with low living standards if we identify such with consumption, rather than income


Those with the lowest cash incomes do not have the lowest cash outlays... (call this a “tick”)

Notes: LCFS 2009; Great Britain only

£0 £100 £200 £300 £400 £500£0

£70

£140

£210

£280

£350

£420

£490

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Median expenditure

CDF

Income

Med

ian

Expe

ndit

ure

Frac

tion

of

hous

ehol

ds w

ith

inco

me

belo

w

…

...but those with the lowest cash outlays do have the lowest cash income

Notes: LCFS 2009; Great Britain only

£0 £100 £200 £300 £400 £500£0

£70

£140

£210

£280

£350

£420

£490

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Median ex-penditureMedian incomeCDF, incomeCDF, spending

Income

Med

ian

Expe

ndit

ure

Frac

tion

of

hous

ehol

ds w

ith

inco

me

or

cons

umpt

ion

belo

w …

What explains the tick?

• Over-reporting spending– Unlikely. In any case, get similar tick-charts if we plot income vs other

measures of living standards• Dis-saving

– Hard to say: no good direct measure of saving in UK, and no data on saving, income and consumption for the same individuals

– However, very hard to reflect size of tick using simulated data (produced by intertemporal consumption-saving model with dynamic income process calibrated to match longitudinal income data)

• Under-reporting income– Yes! Income from some cash benefits substantially under-reported

• NB get similar results for other UK household datasets, so problem not survey-specific

– But suspect very lowest incomes due to omission of private income

“Missing” income from state benefits in UK household budget survey

1999

/020

00/120

01/220

02/320

03/420

04/520

05/620

06/720

07/820

08/9

2009

/10-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%OtherWorking and child tax creditsIncome supportRetirementRent rebates and allowancesIncapacity benefitWar pensionsChild benefitMaternity/Statutory maternity payJob seekers allowanceStudent support

“miss

ing”

ben

efit i

ncom

e as

% (r

e-co

rded

inco

me

+ m

issin

g in

com

e)

Notes: based on Barnard (2011) analysis of LCFS 2009 and 2010 and previous editions

Three ways to measure living standards• “Cash income”• “Broad income” starts with cash income but

– adds some benefits-in-kind & imputed income from housing & cars

– deducts income which is immediately saved• “Consumption” starts with all cash spending but

– deducts outlays which represents saving– adds consumption stream from housing less spending on

housing• Consumption stream imputed by regressing private rents on quadratic

in council tax payments interacted with government office region, and number of rooms

– adds consumption stream from vehicles• All households assigned average recorded expenditure (inc zeros) on

vehicles of those in same year of data, with same education, and with same number of cars

– NB we count expenditure on other durables as “consumption”

– NB do NOT deduct childcare, medical or education expenses

Relative poverty rate, cash income (<60% of median household income)

1978 1982 1986 1990 1994 1998 2002 2006 20100.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45 ChildrenWorking-agePensioners

Relative poverty rate, broad income (<60% of median household income)

1978 1982 1986 1990 1994 1998 2002 2006 20100.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40


Relative poverty rate, consumption (<60% of median household income)

1978 1982 1986 1990 1994 1998 2002 2006 20100.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40


Bottom decile by age and cohort, cash income

25 30 35 40 45 50 55 60 65 70 750.000.020.040.060.080.100.120.140.160.180.20

1910-19191920-19291930-19391940-1949

Age

Bottom decile by age and cohort, broad income

25 30 35 40 45 50 55 60 65 70 750.000.020.040.060.080.100.120.140.160.180.20

1910-19191920-19291930-19391940-1949

Age

Bottom decile by age and cohort, consumption

25 30 35 40 45 50 55 60 65 70 750.000.020.040.060.080.100.120.140.160.180.20

1910-19191920-19291930-19391940-1949

Age

Relative poverty rate by age and time, cash income

25 30 35 40 45 50 55 60 65 70 75-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

1978-1982

2003-

Age

Relative poverty rate by age and time, broad income

25 30 35 40 45 50 55 60 65 70 75-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1978-1982

2003-

1978-1982 hous-ing (RH axis)

2003- hous-ing (RH axis)

Age

Relative poverty rate by age and time, consumption

25 30 35 40 45 50 55 60 65 70 75-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1978-1982

2003-

1978-1982 hous-ing (RH axis)

2003- hous-ing (RH axis)

Age

Summary

1. Big mis-match in the UK household budget survey (LCFS) between reported income and reported spending for households with low resources– More likely due to under-reporting of income than over-reporting of

spending or consumption-smoothing

2. We document the high (and growing) under-recording of expenditures in the LCFS relative to National Accounts

3. We compare impressions of trends in the level and inequality of living standards in GB according to consumption and income

4. Composition of households with low living standards changes if we identify such with consumption, or broad measure of income, rather than cash income– The elderly do not look poor, especially the baby boomers!– Mostly arises by imputing income to owner occupiers

Spare slides

Income and expenditure “coverage” of LCFS


19761978

19801982

19841986

19881990

19921994

19961998

2000

20022004

2006

200850%

55%

60%

65%

70%

75%

80%

85%

90%

95%

IncomeExpenditure

LC

FS t

otal

s as %

Nat

iona

l Acc

ount

s

Household saving ratios


19741977

19801983

19861989

19921995

19982001

20042007

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

National AccountsLCFS

Savi

ng R

ate

Corr =

-0.7

Where in the distribution of household expenditure (or of income) is this under-recording happening?

• There must be serious under-recording at the top of the expenditure distribution (these are aggregate numbers so are dominated by effect of those who spend the most)

• But is there more happening at the bottom of the expenditure distribution?

• Look at expenditure coverage by category


Coverage: groups (1)


0%

20%

40%

60%

80%

100%

120%

Food

Household fuel

Motoring running costs

Year

Cov

erag

e



1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0%

20%

40%

60%

80%

100%

120%

Catering Alcohol

Tobacco Clothing

Public transport

Year

Cov

erag

e



1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0%

20%

40%

60%

80%

100%

120%

Household services Personal services

Vehicle purchase Durable leisure

Year

Cov

erag

e

Where in the distribution of household expenditure (or of income) is this under-recording happening?

• There must be serious under-recording at the top of the expenditure distribution (these are aggregate numbers so are dominated by effect of those who spend the most)

• But is there more happening at the bottom of the expenditure distribution?

• Look at expenditure coverage by category• Those items with the ‘best’ coverage are those that those with the least

expenditure spend more on than those with the most expenditure – Suggestive that under-reporting of expenditures is greater among those

with the most resources


Expenditure Decile 1 2 3 4 5 6 7 8 9 10Budget share of ‘best three’ 0.39 0.33 0.31 0.30 0.27 0.26 0.23 0.23 0.19 0.15

Deprivation and income for children in UK


£0 £50£100

£150£200

£250£300

£350£400

£450£500

£550£600

£650£700

£7500

5

10

15

20

25

30

35

Weekly net income

Mat

eria

l dep

riva

tion

scor

e (0

=not

dep

rive

d)

Source: Brewer, O’Dea, Paull, Sibieta (2009). Households with children only. Based on FRS 2004/5 to 2006/7

How well is income from benefits captured in LCFS?


Coverage Spend (£m/yr)

Retirement pension 95% 66,480

“Other” 52% 27,970

Working and child tax credits 50% 21,270

Rent rebates and allowances 83% 18,930

Income support & pension credit 68% 16,580

Child benefit 96% 11,880

Incapacity benefit 74% 6,670Maternity/Statutory maternity

pay 119% 1,900

Jobseekers allowance 80% 1,200

War pensions 33% 1,020

Student support 236% 970

Notes: based on Barnard (2011) analysis of LCFS 2009 and 2010

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Measuring living standards with income and consumption: evidence from the UK

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