Choices matter when measuring living standards. When looking at Britain’s living standards since before the recession, you can legitimately say incomes are back to the pre-crisis levels or still 10 per cent below those levels.
This post explains how (and the choices the Institute for Fiscal Studies made in its report this morning).
It showed UK living standards were back to the pre-crisis level. The IFS is an extremely reputable research organisation*. It also noted that the recovery in living standards has been painfully slow since the recession and household living standards still have not reached the 2009-10 peak.
I will show in this blog that definitions of living standards really matter, as do the choice of inflation measure, the choice of time period and the choice of average. It is perfectly possible and reasonable to arrive at a conclusion that living standards are 10 per cent below the pre-recession level with the same data as IFS used. This does not mean the IFS is wrong, but it has made choices that reduce the measured drop in living standards.
This is the IFS chart.
As you will notice, the years 2013-14 and 2014-15 have been dashed by me, since this data is estimated by IFS based on the latest available survey evidence which relates to 2012-13. All of the data is based on official sources. To be specific, it is based on the Family Resources Survey, which is used in the long-running official Households Below Average Income (HBAI) series. The IFS is right to have a go at forecasting 2014-15, but it should be stressed that this data does not exist yet.
In most of the following analysis, I will end the chart with the official data in 2012-13, but everyone should remember that incomes have probably grown a bit since then. In each case I have rebased charts to 100 in 2007-08.
What to measure
Labour talks a lot about people being £1,600 worse off than in 2010 and there are other official data series showing something close to living standards, such as the measure of real household disposable income (RHHDI) per capita in the national accounts. Labour is normally clear it is talking about wages rather than incomes and it uses data from the Annual Survey of Hours and Incomes. I have graphed RHHDI here too. The national accounts measure is similar to the IFS measure, but the wages measure is much weaker, for there is no doubt that median wages have not yet recovered to the pre-recession level.
So, the first way to arrive at a different result is to use a completely different measure based on wages, which shows roughly an 8 per cent drop by 2014-15.
In the official HBAI series, there is a choice whether to measure living standards before or after housing costs have been deducted. A problem with the before housing costs measure is that it does not reflect the necessity of having a roof over your head; the problem with the after housing costs measure is that the quality of your housing is – to some extent – a choice you have made.
The reality is that the choice of measure matters and makes almost a 5 percent difference by 2012-13, because housing costs have risen much faster than inflation, leaving household living standards considerably lower after housing costs.
Inflation measures also matter
Britain has a problem with a proliferation of inflation measures. Traditionally the HBAI series has been adjusted for inflation using the now-discredited Retail Prices Index, which tends to exaggerate the rise in prices.
IFS have used a version of the RPI – RPIJ – which corrects for its most egregious problem of using an old-fashioned formula which biases up measured price rises. But you could also chose the Consumer Price Index.
As the next chart shows, the choice of CPI or RPI is actually moot in this case, because another oddity with the RPI is that it fell like a stone in 2008-09 and 2009-10 due to falling mortgage interest costs, thereby showing rising living standards. By the end of the period it shows a similar result to using the CPI, but RPIJ shows higher living standards.
It is odd for IFS to use RPIJ, since its director (in another capacity advising the UK Statistics Authority) recently called for the abolition of this measure. However, it is a reasonable choice – but everyone should be aware that the choice matters, as the chart below shows, making more than a 2 per cent difference.
The choice of average
The IFS chose to highlight changes in median net incomes. (Actually the definition is more complicated – it is the net equivalised household income before housing costs of the median benefit unit.)
But is is also reasonable to consider mean incomes, too. These have fallen more because, contrary to much discussion, the gap between rich and poor has narrowed a little since the crisis.
Put this all together and you can choose before housing costs median household incomes deflated by the RPIJ series until 2014-15, and you can say living standards are back to the pre-crisis peak. This is what the IFS has done.
Or, you could choose after housing costs mean household incomes deflated by the CPI until 2012-13. Then, you can say living standards have fallen 10 per cent since the pre-crisis peak.
Remember: both results are based on the same data, same survey and official figures. I have just made different, but also reasonable, choices.
Sadly, for the public debate, they matter.
* I know, I used to work there.
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