Few report reductions in income among the economically inactive

It has been widely expected, and reported, that the COVID-19 pandemic would have the biggest negative impacts on lower-income households. This is indeed often the case for economic shocks, because lower-income individuals tend to have fewer savings as a buffer and tend to be less-well educated, reducing their ability to find new employment if they are laid off.

These patterns were exacerbated in the pandemic due to the nature of many lower-paid jobs: they often require close contact with customers (e.g., retail, hospitality, personal services) or the use of special equipment (e.g., transport, manufacturing) — so can not be performed while socially distancing or working remotely.

Now, the UK’s Office for National Statistics has released new data on the impact of the crisis on individuals’ experiences. Among the questions asked is the obvious one: did people’s income decrease, stay the same, or increase during the last 12 months. There are a few interesting, and even unexpected, results that come through.

I was initially surprised to see that the proportion of people saying their income had decreased was not drastically different between different income deciles. However, this was only at the aggregate level. When the population is broken down into those who are economically active (left hand panel of the chart) and inactive (right hand panel), the picture makes more sense.

Among the economically active — i.e., those either working or looking for work (and, I think through statistical convention, also those on furlough) — there is clearly a correlation between an individuals’ initial income level and the degree to which they experienced a loss of income during the year. More than 40% of the group representing the bottom 20% of the population by income said that they had seen their incomes drop. In the top quintile, the proportion was a materially lower, but still substantial, 31%.

What I hadn’t appreciated was the picture for the nearly 40% of the 16+ population that are classified in these statistics as “economically inactive”. This includes all kinds of people not working or actively looking for work: students, retirees, people looking after their family or home, people not working due to sickness, and so on. Here, fewer than 20% of people in all income categories said their incomes dropped since the pandemic started. Moreover, it was people in the top income quintile that most frequently reported a loss in income.

This explains quite a bit about the economic dynamics of the last year. I had been wondering why, even in previous recessions, the economy has tended to be quite resilient. I didn’t think all of it could be explained by counter-cyclical tendencies in government or monetary policy. However, if you consider that the main sources of income for two fifths of the population are not directly linked to economic output, it helps better understand the slightly buffered nature of these shocks.

By no means should we conclude from this that there are not individuals, families, businesses and places that have been severely impacted. As I have mentioned earlier, for example, claimant count rates combined with furlough rates in some local areas are rather scary. Nevertheless, I always find it reassuring to better understand, at a granular household level, what is going on in people’s lives, economically or otherwise.