In the years since the financial crisis, the so-called ‘cost of living crisis’ has pushed the political focus onto the ‘squeezed middle’. But are the middle really under the epic pressure that some politicians claim? A new report, Riders on the Storm: Britain’s middle income households since 2007, launched by the Social Market Foundation on Monday 7th April, suggests that the squeeze on living standards is being exaggerated.
Riders on the Storm takes a unique look at the experience of working age households who were in the middle 20% of the income distribution at the start of the economic downturn in 2007-08 and tracked what happened to them by 2011-12 (the latest available data). These are households with total pre-tax and benefits income of £26,100 – £41,200 pa in 2011-12.
Social Market Foundation Director, Emran Mian said:
“Ed Miliband has said that the greatest challenge for our generation is restoring the living standards of the middle class, while many on the Conservative benches have been pushing for middle class tax cuts by the election.”
“In reality the middle has coped surprisingly well since 2007-08. We found that even in the teeth of the recession, two fifths of them moved up the income distribution. Just as many managed to stay where they were. By 2011-12, the middle as a whole had the same earnings in real terms as they did in 2007-08. With the recovery underway, their prospects are likely to improve further.”
WHAT HAS HAPPENED TO OUR MIDDLE?
While previous analysis of the ‘squeezed middle’ has tended to capture snapshots only, Riders on the Storm draws on the British Household Panel Survey (BHPS) and its successor the Understanding Society Survey (USS) to follow actual households from the brink of the downturn in 2007-08 to 2011-12.
Working age households who were in the middle in 2007-08 experienced the following mobility by 2011-12:
- 42% climbed into the fourth and top income bracket;
- 40% stayed in the middle income bracket; and,
- Only 18% fell into the second and lowest income brackets.
This shows that social mobility for the middle continued even in the teeth of the worst recession in a generation.
HOW HAVE THEY DONE IT?
To understand how they coped during the economic downturn the SMF tracked middle income households back from 2011-12 to 2007-08.
Employment is a major factor explaining movements up and down the income scale:
- Households in the middle in 2011-12 were more likely to have two earners rather than one, compared to 2007-08.
- The proportion of double-earner households rose from 35% to 49% amongst the climbers from the bottom.
- Many middle income households in 2007-08 who lost a second earner fell down the income scale.
Households in the middle in 2011-12 saw on the whole their incomes rise in line with inflation over the past 4 years which means more income stagnation than squeeze.
This may have contributed to an increase in the number of households feeling like they are squeezed:
- 19% said they felt dissatisfied with life overall which is double the number from 2007-08 but still less than a fifth of middle income households.
- When asked if they are ‘living comfortably’ or ‘doing alright’, close to 60% of households in 2011-12 said yes, compared to 70% in 2007-08.
In response to feeling squeezed the middle proved very good at adapting their spending:
- Food: they have managed food spending during the recession to avoid the 25% increase in food prices over the period.
- Childcare: the middle are using 20% more free childcare than 2007-08 for children aged under 2, relying on the generosity of grandparents rather than paying someone else.
- Housing: over half of middle income households own a home with a mortgage so low interest rates have helped keep housing costs down among the large number of home-owners in the middle.
SMF Director, Emran Mian said:
“Families in the middle have adapted to evade the squeeze. The super-consumers among them have beaten the market, managing their costs so that they rise by less than inflation. We should expand access to consumer data so that everyone can see how they’ve done it.”
WHAT NEXT FOR THE MIDDLE?
Overall, those in the middle today have been remarkably resilient in changing their spending habits to suit their means. But how will they cope when interest rates finally rise?
In response SMF Director, Emran Mian said:
“Our work shows that 10% of families in the middle were behind on their rent or mortgage. These are likely to be the people who have tumbled down the income distribution during the recession. For the rest, the big question is whether the rise in their incomes will outpace the rise in interest rates. That’s how it looks for the moment, not least because the Bank of England is showing a high level of caution in raising rates.”
“While analysis of statistical averages is important, an ‘average’ family only exists on a spread sheet. This unique research undertaken by the SMF reveals real families change their behaviour when put under economic pressure. We expect them to continue to show resilience and adaptability and perhaps the best policy is for policy makers to help them continue to help themselves.”
NOTES TO EDITORS
- Riders on the Storm will be launched at an event on Monday 7 April 2014. Details are available here.
- The British Household Panel Survey and Understanding Society Survey (successor to the British Household Panel Survey) are conducted by the IESR at the University of Essex (funded by the ESRC) and is the largest survey of households in the UK.
- The Social Market Foundation (SMF) is a leading independent UK think tank which develops innovative ideas across a broad range of economic and social policy, champions policy ideas which marry markets with social justice and takes a pro-market rather than free-market approach – smf.jynk.net.
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