7. Measuring these data

Statistics that reflect the experience of a typical person such as median income reported here, are important to properly understand changes in material living conditions. However, the complexities involved in collecting, processing and analysing household and individual financial survey data mean indicators concerning the distribution of income are typically only available with a sizeable time lag.

For instance, estimated median income (estimated using survey data) for the financial year ending (FYE) 2018 was published more than 11 months after the end of the reference period. Meeting the considerable user demand for more timely data on the distribution of household income , we have developed these Experimental Statistics, which are produced using so-called “nowcasting” techniques.

Nowcasting is an increasingly popular approach for providing initial estimates of economic indicators, such as median income. In contrast to forecasting, which relies heavily on projections and assumptions about future economic circumstances, nowcasting uses data that are more timely and already available for the period of study.

Although, at the time of producing these statistics, detailed survey data on household incomes are not yet available for FYE 2019, a lot is known about its individual components and the factors that affect them. This includes data on earnings, employment and inflation, as well as details of how changes to the tax and benefits system affect different types of households and individuals. This information is used to adjust income survey data for recent years to reflect the current period and measures such as median income are published earlier than was previously possible.

While nowcast estimates do not perfectly reflect changes in the distribution of income, particularly when examining smaller sub-groups of the population, they provide an early indication of what the full survey-based data may show when published later this year, or early next.

The methodology used in this bulletin has undergone significant testing and benefitted from having a range of external experts to ensure it is as robust as possible. As Experimental Statistics, the content of this bulletin and the associated dataset will continue to be evaluated to ensure that user needs are met."

How are these estimates adjusted?

All measures of income for the UK given in this article are calculated without adjusting for expenses relating to housing costs. The measures have been deflated to FYE 2019 prices using the Consumer Prices Index including owner occupiers’ housing costs (CPIH), excluding Council Tax, to give a better comparison of households’ standards of living. These deflated measures are referred to as “real” in this publication. This contrasts with “nominal” measures, which have not been deflated.

The provisional estimate income publication requires a deflator dating back to 1977. The CPIH, excluding Council Tax, is currently available from January 2005. The Consumer Prices Index (CPI) is available from 1996, with a modelled historical series available from 1950. For this analysis, the owner occupiers’ housing costs (OOH) component is estimated using the actual rental series available from the Retail Prices Index (RPI). The OOH component is factored into the CPI (and modelled CPI prior to 1996) using the average OOH weight. Prior to 2005, this series is classed as experimental.

Methodology

The input data for this analysis come from the Living Costs and Food Survey (LCF) and the Effects of taxes and benefits on household income (ETB) dataset, which is derived from the LCF. Together, these provide information on income, expenditure and important family characteristics.

There are four main steps involved to produce nowcast estimates of disposable income. These are:

compile base data – this involves joining three years of historic LCF data

uprate base data – adjust the base data to reflect changes in the macro-economic conditions that have affected households at different points of the income distribution; for instance, taking into account wage growth from more timely earnings growth data

model tax and benefit changes – apply rules of the current tax and benefit system to the uprated base data

recalibrate weights – account for changes in labour market participation and the socio-demographic characteristics of the population between base data and reference period

For this analysis, historical LCF data covering the financial years ending (FYE) 2013, 2014, and 2015 were combined to produce nowcast estimates of disposable income for different household types and measures of inequality for FYE 2018 and FYE 2019. The growth rate between the various nowcasts are applied to the published FYE 2018 estimates presented within Average household income, UK: Financial year ending 2018. A more detailed description of the methodology is provided in the accompanying article, Nowcasting household income in the UK: Methodology, 2016.

The historical data in this article are based on the Effects of Taxes and Benefits (ETB) series, produced by the Office for National Statistics, which itself is derived from the LCF. This series has been chosen for this article because of its long time series and its use as the primary input for the Intra-Governmental Tax and Benefit Model (IGOTM) used for producing the FYE 2019 provisional estimates.

More information about the accuracy and reliability of these statistics is contained in the Quality and methodology section of Effects of taxes and benefits on UK household income – flash estimate: financial year ending 2018.

How do these estimates fit in with other official statistics on household incomes?

These experimental estimates have been developed to serve as early or provisional estimates of figures that are currently published in within Average household income, UK: Financial year ending 2018. When the survey-based estimates for FYE 2019 are available they will supersede these estimates. We will also use these survey-based figures to evaluate the accuracy of these nowcasts.

The figures published in this bulletin use the same definition of disposable income used in these other releases, which in turn is consistent with the concepts set out in the second edition of the United Nations Economic Commission for Europe Canberra Handbook (UNECE, 2011); this sets out the main international standards in this area.

Future plans

In February 2019, the Office for National Statistics published Using tax data to better capture top earners in household income inequality statistics. This investigates the adjustments made to deal with the issues of under-reporting of UK top incomes. This will be fully incorporated in the survey-based estimates for FYE 2019 release.