Living Standards And Inequality

7th July 2023

The Institute for Fiscal Studies looks recent trends in households' living standards, with a particular focus on the impact of the COVID-19 pandemic in 2020-21 and 2021-22.

It's often assumed that older people who left the workforce during the pandemic were largely wealthy people retiring in comfort.

Our new report, part of our annual report on living standards, poverty and inequality and funded by the Joseph Rowntree Foundation, finds that this wasn't the case for many. We find that nearly half of the older adults who had left the workforce in 2020-21 ended up in relative poverty.

This report examines recent trends in households' living standards, with a particular focus on the impact of the COVID-19 pandemic in 2020-21 and 2021-22.

Read the report HERE

Key findings
1. Average (median) disposable household income before deducting housing costs rose by 0.5% in 2021-22, but remained 1.2% lower than its pre-pandemic level. The relatively muted increase in 2021–22 reflected a 4.8% rebound in nominal incomes being largely offset by a sharp rise in inflation. A fall in housing costs over the pandemic means that average incomes measured after deducting housing costs were 0.2% higher in 2021–22 than in 2019–20.

2. Income growth was stronger among poorer households, with those in the bottom third of the distribution seeing a rise between 2019–20 and 2021–22 of 1.5% before deducting housing costs and 2.7% after deducting housing costs. Large falls in employment income among this group were more than offset by a rise in benefit incomes (in particular the temporary £20 uplift to universal credit) and a fall in housing costs, both of which affected low-income households more than households further up the income distribution.

3. The increase in benefit incomes among low-income households did not simply reflect a fall in employment income. Average benefit receipt in 2021–22 was higher than in 2019–20 at every level of earnings, due to the £20 universal credit uplift that persisted until October 2021 and the increased generosity of universal credit for in-work households from November 2021. The share of households in the bottom third of incomes that received disability benefits rose by 26%, from 12% in 2019–20 to 15% in 2021–22, driven entirely by an increase among working-age households.

4. Individuals aged 50–70 who moved from employment into economic inactivity in 2020–21 were more likely to end up in poverty (in the year of exit) than those who became inactive in previous years. This is despite poverty rates falling among 50- to 70-year-olds who had been inactive for more than a year (that is, it does not reflect an overall fall in living standards among inactive individuals in the age group). Measures of self-reported well-being also declined more for recently inactive individuals in 2020 than for those who had been inactive for longer. For people who became inactive in 2021–22, outcomes were much more similar to those seen among people who became inactive pre-pandemic, suggesting that there is particular cause for concern for the 2020–21 cohort.

5. This decline in living standards and well-being challenges the perception that exits into inactivity over the pandemic were driven by wealthy individuals who could afford to retire in comfort. Instead, many of those who left the workforce in 2020–21 may have been ‘forced' into early retirement, with an associated hit to their living standards and well-being. People who become inactive at older ages often never re-enter the workforce, so it is likely that many in this cohort will experience persistently low living standards. In contrast, those who became inactive in 2021–22, when the labour market disruption and health risk had largely subsided, are more likely to have done so out of choice.

This chapter examines recent trends in and drivers of households’ living standards, with a particular focus on the impact of the COVID-19 pandemic in 2020–21 and 2021–22. We begin by reviewing trends in household incomes across the income distribution, documenting the effects of the onset of the pandemic and subsequent recovery and discussing their implications for income inequality. We then examine the sources of changes to household incomes in more detail, focusing on changes in income from employment and benefits across the income distribution, and setting post-pandemic trends in their recent historical context. Finally, we examine how the recent rise in economic inactivity among older individuals has affected their living standards and well-being.

We primarily rely on the Households Below Average Income (HBAI) statistics. To examine the living standards of recently inactive individuals, we also corroborate results using the HBAI data with data from Understanding Society: The UK Household Longitudinal Study (UKHLS), a panel survey that samples households at annual intervals. We also draw on the Annual Population Survey (APS) to track self-reported well-being measures among those who recently entered economic inactivity.