5. Other labour market outcomes during the period of high employment rates in the UK economy

The high employment rate in the economy indicates a strong labour market. The state of the labour market is important because employment plays an important distributional role. It facilitates social mobility and can aid households to exit from poverty. In this section, we examine the outcomes of some labour market variables alongside the high rate of employment. We start by presenting the trends of the employment rate and vacancies from 2001 onwards in Figure 3.

In the three months to April 2019, the employment rate remained largely unchanged. In April 2019, there were 841,000 vacancies.

Figure 3: The employment rate and vacancies have similar procyclical trends UK, seasonally adjusted, January to March 2001 to February to April 2019 Source: Office for National Statistics – Labour Force Survey and ONS Vacancy Survey Download this chart Figure 3: The employment rate and vacancies have similar procyclical trends Image .csv .xls

The employment rate and vacancies track each other closely. Both variables are procyclical to the business cycle. The employment rate has been on an upward trend since mid-2012, reaching a record rate of 76.1% in the period November 2018 to January 2019.

Vacancies started to increase from the period March to May 2009. They reached a peak of 861,000 in the period November 2018 to January 2019. In our March 2019 labour market economic commentary, we discussed some of the implications of rising vacancies in the economy.

Underneath the high employment numbers lay mixed patterns of other labour market variables which, in part, indicate the unevenness of the benefits of the strong labour market. In this commentary, we analyse the patterns and trends of poverty and inequality. Other variables like trends of atypical employment including zero-hours contracts, growth in employment of older workers, the unionisation rate, falling under-utilisation of labour and growth in earnings will be examined in future commentaries.

Relative poverty has remained stable and absolute poverty has reduced

The Department for Work and Pensions (DWP) publishes analytical tables of households below average income based on the Family Resources Survey. The survey covers financial years from that ending 1995 (April 1994 to March 1995) onwards. The analysis is based on income that has been adjusted for housing costs and for household size.

A recent UN report on poverty in the UK stated that poverty increased significantly recently due partly to in-work poverty, but the UK government did not agree with the report. Instead, the government argued that extreme poverty has been falling. The tables show that absolute income poverty decreased, but relative poverty had mixed results. Absolute income poverty is defined as income that falls below 60% of the financial year ending 2011 median income held constant in real terms. Relative income poverty is defined as income that falls below 60% of the contemporary median income.

The percentage of working-age adults in relative low-income households increased by 1 percentage point from 19% in the financial year ending 2003 to 20% in the financial year ending 2018. The percentage of working-age adults in absolute low-income households reduced by 3 percentage points from 21% in the financial year ending 2003 to 18% in the financial year ending 2018.

Absolute income poverty decreased among individuals in households where someone was disabled, but relative income poverty did not change. On child poverty, the data show that the percentage of children in relative income poverty marginally increased by a percentage point to 30% between the financial year ending 2003 and the financial year ending 2018. The percentage of children in absolute income poverty decreased by 6 percentage points to 26% over the same period.

Although the percentage of individuals in relative income poverty remained unchanged at 22% between the financial year ending 2003 and the financial year ending 2018, that of individuals in absolute income poverty reduced by 5 percentage points to 19% over the same period. From this analysis, it appears the greatest gains were against absolute poverty while relative poverty remained broadly the same.

The gap between the bottom quintile group and the rest has increased since 1994

In terms of inequality, the Gini coefficient of income distribution after housing costs marginally reduced by 1 percentage point from 40% in the financial year ending 2010 to 39% in the financial year ending 2018. This means that although employment has been increasing, income inequality has largely stayed the same.

Analysis of the gaps between weekly incomes of quintile groups (which ranks equivalised household incomes of individuals after housing costs from lowest to highest, groups them into five categories (quintiles) and averages their income) in Figure 4 shows that the gap between the first and second quintile groups (that is, Quintile 2 minus Quintile 1) increased between the financial years ending 1995 and 2018. This indicates growing inequality between the bottom 20% of households and the next 20%.

Figure 4: The gaps between income quintiles has been increasing Quintile gaps, UK, financial years ending 1995 to 2018 Source: Department for Work and Pensions – Family Resources Survey Download this chart Figure 4: The gaps between income quintiles has been increasing Image .csv .xls

The gap between the second and third quintile groups (that is, Quintile 3 minus Quintile 2) also increased over the study period. The gap between the first and second quintile groups increased at a faster rate than that between the second and third quintile groups between the financial years ending 1995 and 2004. However, from the financial year ending 2005 onwards, the Quintile 2 minus Quintile 1 and Quintile 3 minus Quintile 2 gaps had similar trends, with the Quintile 2 minus Quintile 1 gap exceeding the Quintile 3 minus Quintile 2 gap for most of the period. This indicates that the second quintile group experienced faster income growth from 2003 onwards and this helped to improve the household income position of that quintile relative to the other two quintile groups.

The gap between the third and fourth quintile groups (that is, Quintile 4 minus Quintile 3) increased over the period of analysis. From the financial year ending 2009 onwards, the gap was relatively unchanged. The gap between the fourth and the fifth quintile groups (that is, Quintile 5 minus Quintile 4) increased between the financial year ending 1995 and the financial year ending 2009, and it became unchanged thereafter. The widening gaps indicate growing inequality between the quintile groups.

In addition to the gaps between quintile groups, we can perform comparative analysis of the growth of the incomes of the quintile groups. We generate indices of the average incomes of the quintile groups and analyse the trends over time. The indices are illustrated in Figure 5.

Figure 5: Average income for the second quintile grew fastest and that of the first quintile slowest UK, quintile indices (financial year ending 1995 = 100), financial years ending 1995 to 2018 Source: Department for Work and Pensions – Family Resources Survey Download this chart Figure 5: Average income for the second quintile grew fastest and that of the first quintile slowest Image .csv .xls

Figure 5 shows that the second quintile group experienced the highest income growth between 1994 and 2018. This narrowed the level of inequality between itself and higher quintile groups.

The third quintile group had the second-highest income growth during the reference period. The fourth quintile group average income performed worse than the average incomes of the second, third and fifth quintile groups. This indicates an income squeeze in the upper-middle section of the income spectrum and growing inequality at the bottom of the income distribution. The latter is because the lowest quintile group had the lowest average income growth, which enhanced inequality between itself and higher quintile groups. In other words, the growth in employment and incomes have been least beneficial to households at the lowest level of the income spectrum. This appears to tally with some of the findings of the UN report on poverty in the UK.

Our analysis of persistent poverty1 in the UK and EU based on 2017 data shows that persistent poverty rates in the UK in 2017 were comparable with the rates in 2008.

Notes for: Other labour market outcomes during the period of high employment rates in the UK economy