Living standards for low- and middle-income (LMI) households are predicted to be lower in 2020 than a decade earlier even if the economy recovers, according to a new analysis.

The study, prepared for the Resolution Foundation think-tank, looks at the changing structure of the jobs market in tandem with the effects of the tax and benefit system, and models the prospects for different households. It assumes the economy recovers steadily from the recession, and then grows at 2.5 per cent each year from 2015.

Key findings

• LMI households face income falls of between 3 and 15 per cent over the period 2008–2020.
• Low-income households (those in the lowest decile group) had an average net income of £10,600 a year in 2008. By 2020 they are expected to have an income of just £9,000 a year (at 2008 prices) – a fall in real terms of 15 per cent.
• Middle-income households (those at the median) had an average net income of £23,000 in 2008. By 2020, they are expected to have an income of £22,200 (at 2008 prices) – a fall in real terms of 3 per cent.
• By 2020 there will be 2 million more jobs in high-paid professional and managerial occupations, and more than 700,000 new jobs in low-skilled service roles. But growth in traditional jobs in the middle – such as in administrative work and skilled manufacturing areas – is set to dry up.
• Planned changes in the tax-benefit system will see households that receive government income support – particularly those with children – falling steadily further behind. The most important of these is the indexation of benefits and tax credits to consumer prices rather than retail prices.

The report also looks at the potential effect of measures such as raising female employment to the level of better performing OECD countries, raising the quality and quantity of skills of workers in the bottom half of the income distribution, and boosting wages for the lowest-paid workers. The combined effect would be to leave a middle-income household £1,600 better off in 2020 than under existing projections. Income would fall between 2008 and 2020 for only 22 of households, rather than 52 per cent.

Source: Institute for Employment Research/Institute for Fiscal Studies, Who Gains from Growth? Living Standards in 2020, Resolution Foundation
Links: Report | Resolution press release | Guardian report (1) | Guardian report (2) | Observer editorial