Living standards
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Incomes
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Inequality & poverty

Why did Britain’s households get richer? Decomposing UK household income growth between 1968 and 2008–09?

Mike Brewer
Mike Brewer
Liam Wren-Lewis
Liam Wren-Lewis

Institute for Fiscal Studies analysis for the Resolution Foundation Commission on Living Standards.

Average UK household income has almost doubled in real terms over the past forty years. This report asks ‘From where has the growth in household income come?’ and answers this by analysing the various factors that have contributed to this growth. Although many of these have been analysed individually, this is the first detailed study of their relative importance.

Key findings

  • Across the whole population, increases in hourly wages have been the largest force driving growth in household income over the past four decades, and fluctuations in the rate of wage growth have been a major factor in determining the pattern of household income growth. However, other factors have also played a role. A fall in male employment and a rise in female employment have shifted the source of employment income away from the main earner. Sources of income other than earnings have also contributed to the growth in average household incomes, but their impact has not been uniform across the four decades. Income from social security benefits rose considerably between 1973 and 1980 and between 1990 and 2002–03, and tax credits became an important component of household income from 2000–01 onwards. A rise in self-employment income was a major factor in household income growth in the 1980s, but this income source had minimal impact in other periods. Similarly, most of the growth in income from investments and pensions occurred during that decade.
  • For low- to middle-income households, the story has been different. In particular, gross male employment income has barely grown since 1968, with a growth rate of less than a quarter of the population average. This is because male wage growth has been substantially slower for LMI households than for the total population since 1980, and what gains there were in wages were all but cancelled out by falls in male employment. Indeed, since 1980, low- to middle-income households’ incomes have only grown because of rises in other income sources, most notably benefits and tax credits. Meanwhile, employment income for LMI households has become increasingly sourced from female earners, with women earning 37% of household net employment income in 2008–09, compared with 14% in 1968.
  • Low- to middle-income households have therefore seen a major change in the sources of their income, but the richest households have seen little change. For LMIs, the greater diversity of income sources may reduce the risk of negative income shocks. However, the changes also make these households more dependent on external sources such as the generosity of the tax–benefit system and the availability of childcare.
  • Since LMI households receive a smaller portion of their income from wages than the average household does, wage increases will have a relatively smaller impact on household income. For example, if everyone’s net wage doubled, but all other income sources remained constant, then household incomes before deductions would increase by 71% on average, but they would only increase by 64% for LMI households. For these households to keep up with the average would therefore require an increase in income through another source, most likely increased employment or state transfers. If income from benefits did not rise, LMI households would need to increase their hours worked by around 5% on average in order to keep up.
  • There may also be political implications if different segments of the population are relying on differing sources for their income growth. As income sources become more polarised across the distribution, households may take different views on potential trade-offs between wage growth and the generosity of benefits.

Further reading

Unsung Britain
The changing economic circumstances of the poorer half of Britain
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Mike Brewer, Molly Broome, Nye Cominetti, Adam Corlett, Charlie McCurdy, Louise Murphy, Cara Pacitti, Hannah Slaughter, James Smith, Lalitha Try
Cold comfort
Mitigating the Winter Fuel Payment cut
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Alex Clegg, Jonathan Marshall
The Living Standards Outlook 2024
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Alex Clegg, Adam Corlett
Mike Brewer
Mike Brewer Interim Chief Executive
Liam Wren-Lewis
Liam Wren-Lewis