The ONS has just published two of its major annual publications on income and expenditure in the UK. The first is the Annual Survey of Hours and Earnings (ASHE) and looks at earnings from 1998 to 2013. The second is Family Spending and looks at the level and pattern of household spending each year from 2001 to 2012.
Figures from the two publications show that average real incomes have fallen each year since 2008. This is illustrated in the first chart (click here for a PowerPoint of the chart). They also show that household expenditure in real terms is falling and is at the lowest level since 2006.
In 2012, households’ average weekly disposable income was £597. In 2012 prices, this was down from £621 in 2010 (after the recession) and £659 in 2008 (before the recession).
Household expenditure is at its lowest level in real terms for over a decade. In 2012 households spent on average £489.00 per week. In 2012 prices, this compares with £521.90 in 2001/2 and £533.80 in 2006 (the peak year).
Picture for particular income groups and products
Although average real incomes have fallen, not everyone has been affected the same. For example, not all occupations have seen a fall in incomes (see the table at the end of the BBC article, Earnings rise slower than inflation for fifth year running). Also, as income distribution has become less equal, so those in lower income groups have seen their real incomes fall the fastest. This is partly the result of nominal wages rising less fast for low-paid workers and partly the result of price increases for various essentials, such as food and power being greater than the rate of inflation, and these products constituting a higher proportion of expenditure for poor people than rich people (see Squeezed Britain 2013).
Likewise expenditure hasn’t fallen on all categories of product. Since 2006, real expenditure on clothing and footwear and on housing, fuel and power has risen. The second chart illustrates expenditure on some of the different categories and how the balance has changed (click here for a PowerPoint). This partly reflects the changes in prices of products, with some items, such as electricity, gas and rent having risen faster than the average, and with the demand for such items being relatively price inelastic.
The changing pattern is also partly the result of different income elasticities of demand for different items. Thus, with falling real incomes, the proportion of income spent on products with a low income elasticity of demand is likely to rise.
Expenditure also varies by income group. People on higher incomes tend to spend a greater proportion of their income on things such as leisure activities (e.g. eating out and holidays), motoring, and clothing and footwear. Poorer people tend to spend proportionately more on food and drink, and on electricity, gas and rent (even net of housing benefit). These differences are illustrated in the third chart which looks at certain categories of expenditure of three different disposable income groups: the poorest 10% (decile), the richest 10% and the 6th decile (i.e. the 6th group up from the bottom – the group with average or just above average income) (click here for a PowerPoint for the chart). Detailed figures can be found here, which is Table 3.2 from Family Spending.
Just as the time-series data looking at changing income and expenditure over time can illustrate the different income elasticities of demand for different products, so can the cross-sectional data in Tables 3.1 and 3.2 of Family Spending.
Earnings rise slower than inflation for fifth year running BBC News (12/12/13)
Energy and rent are now the biggest family bills The Telegraph, Steve Hawkes (11/12/13)
Families spend £489 each week – on what? The Guardian, Mona Chalabi (11/12/13)
Cost of energy hits family budgets, says ONS BBC News (11/12/13)
Family spending interactive: how has it changed? The Guardian Datastore, Mona Chalabi (11/12/13)
Annual Survey of Hours and Earnings, 2013 Provisional Results ONS (12/12/13)
Annual Survey of Hours and Earnings, 2013 Provisional Results: Statistical Bulletin ONS (12/12/13)
Family Spending, 2013 Edition ONS (11/12/13)
Family spending in 2012: Infographic ONS (11/12/13)
Video Summary: Are you an average spender? ONS (11/12/13)
Household expenditure based on COICOP classification, 2001-02 to 2012 at 2012 prices: Table 4.1 of Family Spending ONS (11/12/13)
Detailed household expenditure as a percentage of total expenditure by disposable income decile group, 2012: Table 3.2 of Family Spending ONS (11/12/13)
- What are the determinants of the price elasticity of demand for a product?
- What are the limitations of using time-series data of prices and expenditure to estimate the price elasticity of demand for particular products?
- What are the determinants of the income elasticity of demand for a product?
- What are the limitations of using time-series data of incomes and expenditure to estimate the income elasticity of demand for particular products?
- What are the limitations of using cross-sectional data of expenditure of different income groups to estimate the income elasticity of demand for particular products?
- How do your answers to the above questions demonstrate the significance of the ceteris paribus (other things being equal) assumption?
- If real earnings are falling, why are people able to spend more in real terms?
- What are the macroeconomic implications of increased consumer spending at a time of falling real incomes?
- How could increased consumer spending help to reverse the fall in real incomes (a) in the short run (b) over a period of a few years? Distinguish between the effects on aggregate demand and aggregate supply.