Living standards, poverty and inequality in the UK: 2021

This report examines how household incomes were changing in the UK up to the eve of the COVID-19 pandemic, and how other measures of household living standards have changed over the course of the pandemic. In particular, we use the latest official data covering years up to 2019–20 to provide a comprehensive picture of UK household incomes before the pandemic hit. We subsequently use more recent data to examine how the pandemic and associated restrictions on economic activity have radically affected the scope for people to earn an income in the labour market, and what the implications of the pandemic have been for measures of household deprivation. We look at how different groups have fared, with a focus on low-income households, both before and during the pandemic.

Key findings

Where were we before the pandemic?

1. Median household net income was finally growing steadily again prior to the COVID-19 pandemic, with growth of 3% in real terms over two years from 2017–18 to 2019–20. However, that still meant just 9% growth in total in the 12 years since 2007–08, prior to the previous recession. If the pre-financial-crisis trend of 2.2% growth per year had continued since 2007–08, by 2019–20 median income would have been almost 20% higher than it actually was.
   
   
2. In the run-up to the pandemic, even the very modest income growth in the middle of the distribution had eluded low-income households. Income at the 10th percentile of the household income distribution was almost unchanged over the six years between 2013–14 and 2019–20.
   
   
3. Looking over the whole period between 2007–08 and 2019–20, the striking pattern is how poor income growth has been right across the income distribution compared with modern British history.
   
   
4. Since 2007–08, incomes of poor households have been pushed up by significant reductions in worklessness. The fraction of low-income people (excluding pensioners) who live in a workless household has fallen from 45% in 2007–08 to 33% in 2019–20. This boosted incomes at a time when cuts to working-age benefit entitlements (since 2010) have pushed in the other direction.
   
   
5. This pattern of income growth means that overall measures of relative poverty (measured after housing costs are deducted) were essentially unchanged in recent years, at 22%, the same level as in 2007–08. However, relative child poverty has continued to creep up, and in 2019–20 was 4 percentage points higher than in 2011–12 (a rise of 700,000 children).
   
   
6. Absolute income poverty has gradually declined from 22% prior to the Great Recession to 18% in 2019–20. This fall occurred across all major demographic groups (children, pensioners, working-age non-parents), but was modest compared with historical changes in absolute poverty. There have also been recent gradual declines in child and pensioner material deprivation.
   
   
7. The fraction of non-pensioners in relative poverty who live in a working household rose from 56% to 67% between 2007–08 and 2019–20.This was due to a combination of more households with someone in work and a rising rate of poverty among such households.
   
   
8. Falling mortgage interest costs in the wake of the 2008 financial crisis have benefited people with mortgages, and the poverty rate for this group has fallen from 13% to 10% since 2007–08. This, combined with falls in homeownership for working-age people, and rises in private renting, means that by 2019–20 the fraction of those in poverty who were private renters has risen from 22% to 31%.
   
   
9. Pre-pandemic, there had been some notable falls in the poverty rates of some ethnic minorities, though for many they remain high compared with the white population (for whom it was 19% pre-pandemic). The relative poverty rate for people with Indian backgrounds fell from 26% pre-financial-crisis to 23% prior to the pandemic. The most striking change was for people with Pakistani/Bangladeshi backgrounds, for whom the relative poverty rate fell from 61% to 49%, though most of this fall occurred before 2010–12. In comparison, the relative poverty rate for black people, at 40%, was unchanged from before the Great Recession.
   
   
10. The relative poverty rates of different age groups and household types have also changed in recent years. Most notably, the relative (AHC) poverty rate for lone-parent households fell from 52% pre-financial-crisis to 41% in 2010–12 though it rose back to 47% in 2017–19, below its pre-recession level but still very high compared with other groups. Younger adults (aged 18–24) saw rising relative poverty during the Great Recession, but a better recovery, reaching 24% in 2017–19, compared with 27% pre-recession. On the other hand, 55- to 64-year-olds have seen rising relative poverty, up to 21% pre-pandemic compared with 17% in 2010–12, at least in part due to a higher state pension age for women.

The labour market during the pandemic

1. Although there were large rises in the proportion of people not working at least one hour a week in 2020, there was very little rise in unemployment and economic inactivity (where people have no job at all). By 2021Q1, 1.3 million more adults (aged 19–64) were not working at least an hour a week compared with 2019Q4, whereas only 0.3 million more adults were unemployed or economically inactive. The furlough scheme has kept unemployment from rising sharply during the pandemic.
   
   
2. Despite the large falls in the number of people working at least an hour a week, the number of households where no one was working has risen only modestly. This is particularly important for 19- to 24-year-olds, many of whom live with their parents. Even excluding full-time students who moved back home when universities and colleges shut, the share of 19- to 24-year-olds who lived with their parents rose from 45% in 2020Q1 to 50% in 2021Q1 – an increase of around 200,000 people. As a result, whilst the share of young adults who were not working rose by 10 percentage points by 2021Q1, the share living in a household where no one is working rose by just 1 percentage point – no more than the general population.
   
   
3. Looking at the (relatively small) increase in the number of households where no one has a job (i.e. all adults are unemployed or inactive), there are a number of groups where rises are more concerning: single-adult households without children (who by definition do not have a working partner to support them), and Pakistani and Bangladeshi people (who pre-pandemic were particularly likely to be single-earner households). These groups had relatively high levels of poverty before the pandemic. The share of lone parents who were not working also rose sharply, though this reflected an increase in furlough rather than unemployment and inactivity.
   
   
4. People who continued to work through the pandemic experienced real earnings growth that was fairly similar to the immediate pre-pandemic years, and much higher than in the aftermath of the Great Recession. Real earnings growth has been supported by low measured inflation during the pandemic.
   
   
5. Average earnings growth during the pandemic has tended to be stronger for public sector workers and for workers with lower levels of education, the latter perhaps in part due to a significant rise in the National Living Wage in 2020. Conversely, there is some evidence that younger workers (aged 19–34) have seen weaker growth in earnings. This may be due to the lack of vacancies: those earlier on in their career are more likely to move employers more regularly and this is often a source of wage growth.
   
   

Financial difficulties and deprivation during the pandemic

1. The start of the pandemic saw rises in some measures of deprivation. But these rises were temporary, leaving deprivation measures in early 2021 similar to, or on some measures below, their pre-pandemic levels. For example, the proportion of people reporting they were in arrears on at least one of their household bills rose from 6.6% in 2018–19 to 8.1% in April–May 2020, a 22% rise, but then fell back to 7.0% by March 2021. Food-bank use also rose from 1.7% of the population in February 2020 to 1.9% in April–May 2020, before falling back to 1.4% in early 2021.
   
   
2. Expectations of becoming financially worse off a month from the time of interview were very high at the beginning of the pandemic, with 17% of the population expecting this in April 2020, but then quickly declined, and remained lower through to 2021. These expectations did not translate into more people reporting current financial difficulties. These trends reflect the huge uncertainty faced by many at the onset of the pandemic, which was eased by the government support measures that were introduced.
   
   
3. Households that were in relative income poverty prior to the pandemic (measured between 2016 and 2019) saw the largest rises in deprivation at the start of the pandemic. In comparison, households that were not in poverty pre-pandemic saw little change on most of the measures. The proportion of poor households behind on their household bills rose from 15% in 2018–19 to 22% in April–May 2020, compared with a much smaller rise from 5% to 6% for households not in poverty pre-pandemic. By March 2021, the proportion of those in poor households behind on their bills remained higher, at 20%, than it was pre-pandemic.
   
   
4. The group most clearly struggling, particularly at the start of the pandemic, was self-employed people who had lost all work by April 2020. The proportion of this group reporting being in arrears on household bills rose from 2% pre-pandemic to 13% in April–May 2020. There was also a rise for furloughed employees but it was much smaller and less persistent into early 2021. The self-employed who could not work in April 2020 were also a group that reported a big rise in the fraction experiencing financial difficulties, from 16% pre-pandemic to 24% by April–May 2020.
   
   
5. Consistent with the larger rises in household worklessness for some ethnic minorities, there is evidence that ethnic minorities suffered greater economic hardship during the pandemic. The proportion of people belonging to ethnic minorities who are in arrears on bills rose from 12% in 2018–19 to 21% in April–May 2020 (compared with a rise from 5% to 6% for white people) and there were also increases in people from ethnic minorities reporting financial difficulties. By early 2021, there was a partial recovery for ethnic minorities, with 15% behind on their bills, but the gap remained wider than pre-pandemic.
   
   
6. Changes in deprivation for 18- to 24-year-olds actually look better than those for older working-age people (aged 25–64) on some measures, particularly regarding foodbank use, which fell for young adults from 6% pre-pandemic to 3% in April–May 2020. This is likely to be because their incomes have been supported through the furlough scheme and there has not been a rise in household worklessness for this age group during the pandemic as many have been living with their parents.