Expenditure and disposable income trends of UK households: evidence from micro-data.
van de Ven, Justin
The view that there is an 'under-savings' problem in the
UK domestic sector has had an important bearing on the contemporary
agenda for policy reform. This paper considers the temporal variation of
household expenditure and disposable income described by micro-data
observed during the past four decades (1971 to 2009). I find a very
close correspondence between the growth of expenditure and disposable
income over the sample period, with the implication that households have
not offset the well-documented decline in occupational pension
provisions during the period through increased private saving out of
disposable income.
Keywords: Under-saving; retirement; expenditure; disposable income
JEL Classifications: D12, D14, D31, D91
I. Introduction
The general perception that there is an 'under-savings'
problem in the UK has motivated much discussion in the contemporary
literature and provided an important impetus to the agenda for policy
reform. Any judgement about the sufficiency of savings behaviour is,
however, complicated by the diversity of incentives that bear upon
intertemporal planning in practice. In this study I take a fresh look at
the statistical evidence, by considering how age profiles of household
expenditure and disposable income have varied between birth cohorts over
a 39-year period. The results obtained suggest that households have not
increased their savings out of disposable income to offset the decline
in occupational pension provisions that has occurred during the past
thirty years.
The perception that the national savings rate is too low is
worrisome from a macroeconomic perspective because it suggests that
investment may be insufficient to sustain prospective growth, or
that--if adequate rates of investment are maintained--then domestic
borrowing may pose a risk to creditworthiness. From a microeconomic
perspective, under-saving is likely to result in insufficient finance to
meet aspirations for prospective consumption, exposing the public sector
to political economy risk. Disgruntled retirees, for example, may
pressure the government to increase state sponsored benefits, putting
the public finances in doubt.
It is, however, exceedingly difficult to determine whether there is
an under-savings problem, both because of the complexity that is usually
attached to identifying 'optimal' saving rates for any
specific objective, and because of the diversity of competing objectives
that characterise our economic environment. Increased saving may be
required to sustain a particular level of growth on the one hand, while
lower saving may be required to support a desired consumption stream on
the other. And even if attention is limited to the household savings
problem, then basic economic theory suggests that savings will respond
to a range of issues that include expectations over future employment
and investment prospects, the evolving policy environment, credit market
conditions, individual demographic and financial circumstances, and the
nature of preferences. We have little data to draw upon in relation to
many of these factors (particularly where expectations are concerned),
and some we can identify only indirectly (e.g. preferences).
Analyses that are concerned with the adequacy of savings have
consequently tended to focus upon particular issues of concern, each on
the basis of a discrete set of assumptions. One subject of concern in
the literature has been the sustainability of national aggregates. Weale
and coauthors, for example, focus upon the savings rate required to
ensure that consumption grows at the same rate as income in steady-state
equilibrium. (1) Comparisons between national saving and the
implications drawn from a highly stylised macro-model that are reported
by these authors suggest that the UK is under-saving by between 1 and 10
per cent of GDP. In a similar vein, a very large literature has explored
the sustainability of public finances, following the seminal
contribution of Auerbach and Kotlikoff (1987). (2)
Although these types of macro-level analyses provide useful
insights into the long-run sustainability of national patterns of income
and expenditure, they are insensitive to the motives that underlie
savings. They do not, for example, distinguish between dis-saving that
is the product of an undesirable behavioural distortion like myopia,
from dis-saving that is an appropriate short-run response to altered
expectations regarding the returns to capital. Most of the related
literature has consequently taken a microeconomic approach.
Microeconomic studies of the adequacy of savings range from
sophisticated applications of fundamental economic theory (e.g. Scholz
et al., 2006), to relatively straight-forward accounting exercises based
on observed age profiles of consumption and income (e.g. Khoman and
Weale, 2006, 2008). Two studies that have had a particularly pronounced
impact on the policy debate in the UK are those reported by the Pensions
Commission (2004, 2005), and the subsequent work undertaken by the
Department for Work and Pensions (2006). Both of these studies focus
primarily upon the adequacy of existing pensions provisions. They find
that, whereas increases in longevity suggest that larger pensions
provisions would be prudent, public and private pensions taken together
have been declining since the early 1980s. These findings provided the
fundamental motivation for the extensive pension reforms that were
enacted in 2007 and 2008, and continue to bear upon the associated
policy debate.
In this paper I consider the relationship between temporal trends
observed for household expenditure and disposable income, focussing upon
identifying whether expenditure growth between cohorts has out-paced
income growth during the past 40 years. Comparing age profiles of income
and expenditure between birth cohorts reveals weak evidence that
expenditure growth has increased relative to income growth, and that
saving rates have fallen among households towards the bottom of the
income distribution.
The study is organised as follows. Section 2 briefly describes the
data upon which the analysis is based. Results are reported in Section
3, and implications of the results are discussed in the conclusion.
2. Data
The analysis is based upon micro-data drawn from the Family
Expenditure Survey (FES, and its successors), which are reported at
annual intervals for all years between 1971 and 2009. The FES provides
detailed information regarding expenditure, income, and demographics for
a random sample of UK households. The household level data that are
reported by the FES were reconfigured to focus upon the family unit,
defined here as a single adult or adult couple and their dependent
children. Further details regarding specifics of the micro-data
considered for analysis, including survey methodology and coding
definitions, are provided in Appendix A.
The representative nature of the income and expenditure data
reported by the FES has been the subject of much research. Significant
studies in this vein include Atkinson and Micklewright (1983), Kemsley
et al. (1980), and the edited volume by Banks and Johnson (1998). These
studies have typically found that the FES under-reported measures of
self-employment and investment income described by the National
Accounts, and of expenditure on selected categories including tobacco.
On the whole, however, there appeared to be a reasonably close
correspondence between the FES and the National Accounts up until the
early 1990s, for measures of both household income and expenditure.
However, the past fifteen years have seen disparities between
aggregates reported in the National Accounts and those implied by the
FES widen substantially; whereas the FES accounts for 91 per cent of
aggregate household expenditure and disposable income reported in the
National Accounts for 1971, it accounts for 71 per cent of expenditure
and 77 per cent of income in 2009 (see Appendix B for further details).
There is no consensus regarding the reasons underlying this decline.
In the absence of further detail regarding this issue, the current
study is primarily based upon FES data that were proportionally adjusted
to ensure that the aggregates implied by the survey population
cross-sections match those reported by the National Accounts. Statistics
that incorporate these adjustments tend to lower rates of saving,
relative to the unadjusted data.
3. Trends described by micro-data
This section explores how age profiles of expenditure, disposable
income, and savings have varied over time and across the income
distribution. Section 3.1 discusses trends in expenditure by age and
birth cohort, and Section 3.2 discusses associated statistics for
disposable income and saving. Statistics that disaggregate by income
quintile are reported in Section 3.3.
3.1 Expenditure
A broad summary of how family expenditure has varied by age and
year of birth over the last four decades is displayed in figure 1. Panel
A of this figure displays the well-known hump-shaped profile of
expenditure over the life-course that has motivated much empirical
research. Expenditure tends to rise early in life as liquidity
constraints are relaxed and as consumption needs rise with relationship
formation and child birth, peaking between ages 40 and 60, before
falling away into retirement. Furthermore, expenditure tends to be
higher at any given age among younger birth cohorts, who benefit from
real wage growth relative to older generations. The growth rates
implicit in the relative consumption profiles reported in panel A of
figure 1 are returned to below.
Comparing the expenditure profiles reveals that the FES data
describe the least variation between birth cohorts--in both absolute and
relative terms--early in the life-course, which corresponds to the
youngest birth cohorts in the sample. This observation suggests that the
credit market liberalisation that took place during the 1990s in the UK
has not resulted in considerable profligacy, at least amongst the young.
The disparity in family expenditure between birth cohorts increases
between ages 20 and 30, is then approximately stable between ages 30 and
50, after which relative disparity tends to rise again while absolute
disparity between birth cohorts tends to fall. Although the rise in the
relative disparity between birth cohorts reported late in the
life-course--and for older birth cohorts--can be attributed to a range
of interrelated issues, three factors stand out.
[FIGURE 1 OMITTED]
First, is the maturing of the Beveridgean welfare state. This was
introduced with the National Insurance Act 1946, so that the first
generation to spend its entire working lifetime under the scheme was
born in 1930. Second, is the maturing of Defined Benefit occupational
pensions, which only became prevalent during the 1950s and 1960s, and
offered generous (ex post) terms to their members. And third, is the
higher fertility observed among older generations, which exaggerated
their expenditure needs during peak child-rearing years. (3) These three
factors, in conjunction with the general rise in affluence and
longevity, played an important role in improving the retirement
provisions held by recent retirees, relative to older generations.
A clearer picture of how family expenditure by age has changed over
time is reported in figure 2. Panel A of the figure displays family
expenditure at selected ages by year of birth of the eldest family
member. Linear trend-lines and seven point moving averages for each
series are also included in the figure to help identify whether there
has been any appreciable variation in the rate of change of expenditure
by birth year described by the FES data. This figure confirms the trend
growth of family expenditure by year of birth, and the observation, made
in regard to figure 1, that growth over the 39-year sample period is
relatively anaemic at age 20, but rises strongly for people aged in
their 30s and 40s. Each year by which birth is delayed tends to increase
family expenditure at age 20 by 1.80 [pounds sterling] per week on
average (2006 prices), rising to just over 11 [pounds sterling] per week
by age 40.
The linear trend-lines, and moving averages that are reported for
each series make clear that the growth of family expenditure by year of
birth displays some convexity, rising at a faster rate later in the
sample period. Panel B, which reports differences between the linear and
moving average trend lines, is provided to clarify this point, where the
horizontal axis has been respecified in terms of the sample period,
rather than year of birth. The data series reported in Panel B of figure
2 reveal that family expenditure tended to rise more strongly from the
mid-1990s for families between ages 25 and 40 than it had done
previously. No equivalent effect is observed for households at age 20
(noted above), and the timing of the accelerated rise is somewhat
earlier for older households, as displayed by the series reported for 45
year-olds.
[FIGURE 2 OMITTED]
Two important transitions took place in the UK during the early
1990s. On the one hand, the UK experienced an economic recession between
1990 and 1992, and on the other the 1990s corresponded with an important
period of credit market liberalisation. The former of these effects is
likely to be responsible for depressed expenditure growth early in the
decade, and accelerated growth towards the end of the decade as the
economy recovered from its slump. The latter effect is likely to have
relaxed credit market restrictions, at least among some members of the
population.
An alternative way of interpreting the variation displayed by the
FES expenditure data is to calculate the growth rates that convert the
various cohort specific age profiles to a comparable basis. Related
statistics are displayed in figure 3, which reports the geometric growth
rates that minimise the least squares variation between age specific
expenditure reported for any given cohort, and the expenditure reported
for cohorts born more than nine years earlier.
Figure 3 indicates a general downward trend by year of birth in the
growth rates associated with cohort specific expenditure, reflecting a
number of the observations made in the discussion set out above. An
additional issue to note, however, is that the downward trend with age
of birth reported for the growth rates of cohort expenditure is in part
attributable to the limited time period of the sample. The growth rates
reported for the cohort born in 1931, for example, were calculated by
comparing cohort specific expenditure observed between ages 50 and 78
(inclusive). This contrasts with growth rates reported for the cohort
born in 1976, which were calculated on expenditure data reported between
ages 20 and 33. As noted above, expenditure variation between birth
cohorts, and trend growth in particular, appears to be depressed early
in life, and this consequently has an important bearing upon the
temporal variation of the growth rates that are reported in figure 3.
Nevertheless, the temporal profiles of cohort expenditure growth
reported in figure 3 cannot be entirely attributed to variation in the
underlying age bands used for the associated calculations. The downward
trend that is evident for older cohorts, for example, extends to cohorts
born between 1945 and 1961, and the calculations for these cohorts refer
entirely to consumption below state pension age and for whom maturation
of the UK pensions system was complete. Furthermore, there is evidence
of a slight increase in expenditure growth from the cohort born in 1960,
which contrasts with the increasing weight placed on younger ages that
underlies the associated calculations.
[FIGURE 3 OMITTED]
Discussion now turns to profiles of disposable income, and saving.
3.2 Disposable income and saving
The FES data describe very similar profiles for disposable income
as they do for expenditure, which is made clear by comparing the
profiles reported in figure 4 with those reported in figures 1 and 2.
Like the expenditure profiles, the profiles of disposable income display
a hump-shape, rising to peak about age 50, before falling away into
retirement. The dispersion of income is relatively low at the beginning
of the working lifetime, and rises in a profile similar to that reported
for expenditure. Furthermore, the age profiles of income by birth cohort
exhibit similar convexity to those reported for expenditure, suggesting
that the increased rate of ascent observed for the expenditure profiles
late in the sample period may be more attributable to the economic
recovery following the recession of the early 1990s than to the
coincident credit liberalisation.
[FIGURE 4 OMITTED]
Given the similarity between the profiles reported for expenditure
and income, it is perhaps unsurprising that the temporal variations of
savings rates exhibit more noise than they do any persistent temporal
trend. After filtering out this noise, savings rates are observed to
vary inversely with the economic cycle, falling during the booms of the
1980s and 2000s and rising with the recession in the early 1990s and the
2008 financial crisis (for which only two data points are available).
Related statistics are displayed in figure 5, which reports differences
between age specific savings rates and their respective averages taken
over the sample period from 1971 to 2009.
The statistics reported in figure 5 suggest that household savings
tend to respond similarly to changes in the economic cycle across the
ages reported in the figure, with some evidence of heightened
sensitivity among 60 year olds. The figure suggests a consistent and
broad-based downward trend in savings rates throughout the economic boom
of the early and mid-2000s. This observation gives some credence to the
proposition that the duration and strength of the economic boom of the
2000s gave households the confidence to reduce savings in a way that was
not observed at any other time during the 39-year sample period covered
by the FES.
[FIGURE 5 OMITTED]
An alternative way of presenting this evidence is by contrasting
the growth rates implicit in the cohort profiles of disposable income
with those calculated for expenditure (discussed at the end of Section
3.1). Related statistics are displayed in figure 6. The statistics that
are calculated on series adjusted to reflect the National Accounts
aggregates suggest that expenditure growth was approximately matched by
growth in disposable income for cohorts born to 1950. There is, however,
some evidence to suggest that expenditure growth has exceeded disposable
income growth for cohorts born after 1950. The greatest disparity
between the two series is reported for the cohort born in 1968, for
which consumption growth is reported to exceed income growth by 0.4
percentage points per annum (1.9 per cent c.f. 1.5 per cent).
Interpretation of these results is discussed in Section 4.
[FIGURE 6 OMITTED]
3.3 Distributional variation
The population average statistics reported above indicate that
family expenditure has tracked disposable income fairly closely over the
39-year sample period covered by the FES. They also suggest that savings
have, on average, reacted more to the economic cycle than they have
displayed any temporal trend over the period. This section explores
these issues at a greater depth, on the basis of statistics
disaggregated by family income quintile.
Figure 7 indicates that ratios of average family expenditure
between the highest and lowest income quintiles exhibited a fairly
consistent pattern across the age distribution during the 40-year sample
period. The inequality of expenditure tended to recede during the 1970s,
a trend that was reversed during the 1980s and early 1990s. From the
early 1990s, there appears to have been some reversal of the increased
age specific inequality of expenditure amongst retirees, which is not
evident for families of working age. The five-year moving averages
reported in the figure indicate that, in 1980, families in the highest
income quintile spent between 3.0 and 4.1 times that of families in the
lowest income quintile. This multiple rose to between 5.1 and 6.0 in
2007 for families aged between 25 and 55 reported in the figure, was
slightly lower for families aged 75 (4.1), and considerably lower for
families aged 65 (3.1).
[FIGURE 7 OMITTED]
The decline in inequality of expenditure amongst retirees observed
from the mid-1990s coincides with the maturation of the welfare state in
the UK, and the pensions system more generally, as discussed above. With
regard to the other trends described in figure 7, the analysis presented
in Section 3.2 highlights the underlying importance of coincident trends
in disposable income, and it is to these trends that we now turn.
Figure 8 restates figure 7 with disposable income in place of
family expenditure. Comparing these two figures reveals that the close
relationship between income and expenditure that is discussed in Section
3.2 carries over to the distributional statistics that are reported
here. The highest to lowest quintile ratios for both expenditure and
income exhibit a slight downward trend during the 1970s, and rise
relatively rapidly during the 1980s, before levelling off from the early
1990s. Furthermore, there is some evidence that the highest to lowest
quintile ratios for households aged 65 and 75 tend to decline from the
early 1990s, particularly relative to the wider population. These
observations reinforce the impression that expenditure patterns and
income patterns are largely coincident, and to the extent that income
variation is subject to substantial exogenous drivers, (endogenous)
family expenditure adjusts to accommodate.
The rise in inequality from the 1980s in the UK is well documented
(see, e.g., Atkinson, 2007, and National Equality Panel, 2010), and the
reasons for this rise are widely recognised as complex. Important
factors identified in the literature as underlying drivers of the
contemporary trend in income inequality include the growth of earnings
inequality, the reduction in tax progressivity, and the growing
disparities within demographic groups over a broad range of
circumstances.
[FIGURE 8 OMITTED]
The similarities between the expenditure and income statistics that
are discussed above provide little indication of whether there have been
any strong trends in coincident savings behaviour when the population is
disaggregated by income quintile. A detailed consideration of the
savings rates of individual income quintiles revealed no temporal trends
of particular note during the past 40 years for the vast majority of the
population. Two broad population subgroups do, however, depart from this
wider generalisation: families in the bottom disposable income quintile,
and those at young ages. Associated statistics are reported in figure 9.
Panel A of figure 9 reports temporal variation of the average
savings rates of families in the lowest disposable income quintile, by
age and survey year. The statistics in this panel reveal that, with the
exception of the series reported for 75 year olds (the oldest age
reported in the figure), there is a distinct downward trend in savings
rates among households in the bottom income quintile across all age
groups. This downward trend is coincident with the credit liberalisation
that occurred during the period, which may have helped low income people
smooth their expenditure through rough patches.
[FIGURE 9 OMITTED]
Panel B of figure 9 indicates that the downward trend in savings
rates with survey year is also evident for families in the highest
income quintile at age 25 and slightly less so for families in the
fourth income quintile. Given that, all else being equal, credit
constraints tend to bite most at the extremes of the life course, the
statistics reported here give added credence to the proposition that the
additional access to credit offered by financial market liberalisation
has affected the expenditure patterns of selected household types,
depressing savings for some as a result.
4. Conclusion
The 39-year period covered by the household micro-data explored in
this study provides an interesting snapshot of how domestic
circumstances in the UK have changed. One of the key observations
reported in this study is the close relationship that exists between the
temporal evolution of family expenditure and disposable income during
the past four decades, a correlation that is consistent with
international evidence, and has generated much research (see, e.g.,
Attanasio and Webber, 2010). Another is that no trends in domestic
saving out of disposable income are identified that are of sufficient
magnitude to compensate for the decline in occupational pension
provisions that has occurred in the UK since the 1980s (e.g. Pensions
Commission, 2004). This last observation corroborates an important
empirical motivation cited in relation to contemporary pensions policy
reforms (DWP, 2006).
Family expenditure and disposable income profiles by year of birth
both display real growth over the generations covered by the data, where
the rates of growth tend to be relatively low early in the working
lifetime. Real growth in both expenditure and disposable income appeared
to accelerate from the mid-1990s for families of all ages. For the
young, the timing of this acceleration is consistent with the end of the
recession that occurred between 1990 and 1992, and with the coincident
liberalisation of financial markets. For the old, it reflects the
maturation of the Beveridgean welfare state and occupational pension
arrangements more generally.
Matching (incomplete) age profiles of family expenditure and
disposable income of any given birth cohort against profiles observed
for older generations, suggests that rates of growth by year of birth
have exhibited a downward trend during the past four decades. From highs
in the region of 2.5 per cent per annum for those born early in the
1930s, growth rates fell to 1.8 per cent for expenditure and 1.5 per
cent for disposable income for cohorts born in the mid-1960s. These
growth rates appear to have stabilised for subsequent generations, with
some evidence that they have increased slightly for those born during
the 1970s.
The downward trend in cohort specific growth referred to above in
part reflects the fact that the generation born in 1930 entered its
working life (at age 16) following the conclusion of World War II, in
contrast to older generations whose working lives will have been
disrupted by at least one world war. It also reflects the incomplete
nature of the data upon which the analysis is based, so that growth
rates estimated for older generations are disproportionately affected by
the maturation of the pensions system in the UK, while those of younger
generations are influenced by the low growth that is identified for
young ages.
Furthermore, the reliability of the statistics that are cited above
is called into question by trend deterioration of the correspondence
between the micro-data upon which the analysis is based, and aggregates
reported in the National Accounts. Although the analysis reported here
has been specified to reconcile these two data sources (via proportional
adjustments to the micro-data), the underlying causes for the increasing
disparity between the two remain unclear.
Bearing the above in mind, it is of note that--based upon the
preferred data series--the estimated rates of growth implicit in
expenditure patterns appear to be higher than rates of growth of
coincident disposable income patterns for cohorts born from the
mid-1950s. This observation has interesting implications for savings
behaviour. If the income expectations of individuals from cohorts born
after the mid-1950s are based upon the experience of preceding
generations, then the observation that their expenditure profiles
exhibit higher growth than their income profiles suggests four
possibilities: 1) that younger generations are choosing to bring some of
their lifetime expenditure forward, relative to older generations; 2)
that younger generations expect some additional source of financing to
make up for the difference between their expenditure and income growth;
3) that younger generations have unrealistic expectations; 4) that the
growth statistics reported here fail to provide an accurate description
of the practical reality measured over the longer term. There is some
credence to the conjecture that all four of these possibilities have
acted in parallel.
The credit liberalisation of the 1990s may have enabled younger
generations to bring their expenditure forward during the life-course.
This conjecture is supported by the observation that savings rates have
shown a sustained downward trend among households in the lowest income
quintile and the young, particularly since the 1990s.
Sustained growth in context of low inflation and low unemployment
during the decade prior to the financial crisis of 2008 may have
provided the basis for expecting that the favourable economic
environment would continue into the indefinite future. Not only would
this raise hopes regarding the lifetime resources available to younger
generations, but it would also dampen precautionary motivation to save.
The upsurge in savings observed since the 2008 crisis suggests that
households have heavily revised their expectations regarding the future.
The upsurge in saving also suggests that the growth rates for
expenditure and disposable income that are reported here may alter
substantially if they are recalculated on data for years beyond 2009.
Furthermore, the finding that expenditure growth has declined relative
to growth of disposable income that is reported here has not been
subject to rigorous statistical testing, and is shown to be sensitive to
the adjustments made to reflect National Accounts aggregates.
In any event, it can be concluded that temporal variation of
expenditure has tracked reasonably closely that of disposable income
over the 39-year period covered by the FES data. If some of the income
growth that has been observed during the past two decades is interpreted
as compensation for foregone occupational pension rights--consistent
with the well-documented decline in occupational pension provisions that
has occurred since the early 1980s (4)--then the observation that
savings rates out of disposable income have not increased over the same
period does suggest that younger generations are saving less than older
generations. Whether this indicates under-saving, or an efficient
reallocation of consumption over the life-course, remains an open
question.
APPENDIX A. HOUSEHOLD HICRO-DATA
The Family Expenditure Survey (FES) was introduced in 1957, and
reports detailed information regarding demographics, income, and
expenditure for a cross-sectional sample of households in the United
Kingdom. Although the FES was superseded by the Expenditure and Food
Survey (EFS) in 2001, and by the Living Costs and Food Survey (LCFS) in
2008, the basic structure of the survey regarding the characteristics of
concern in this study has remained largely intact from 1971. Reference
throughout this paper is consequently made to the FES whenever
discussing the time-series data provided by these three data sources
(the FES, EFS, and LCFS). The survey is collected on a continuous basis
and reported at annual intervals. (5)
The unit of analysis in the survey is the household, with
households selected at random from the Post Office's list of
addresses (for Great Britain, excluding the Scottish Isles and the Isles
of Scilly; Northern Ireland is sampled through the Valuations and Lands
Agency list), and participation being voluntary. One of the key
advantages of the FES is that it reports data for both household income
and consumption. All individuals aged 16 and over in participating
households are asked to keep a diary of expenditure covering a two-week
period, with children aged 7 to 15 also being asked to keep a simplified
diary since 1998. Regular expenditure, demographic, and income data are
recorded at a household interview, and retrospective information is
collected on expenditure of selected large and infrequent purchases.
The representative nature of the FES for the UK population is
imperfect. People in institutions--including retirement homes, the
military, and prison--are omitted from the survey, as are people with no
fixed address (the homeless). Furthermore, the voluntary nature of the
survey typically obtains a response rate of between 50 and 60 per cent,
and participation has been found in past surveys to be distributed
non-uniformly across the population. Foster (1996), for example,
compares the characteristics of households responding to the 1991 FES
with information derived from the 1991 Census, and finds that response
was lower than average in Greater London, higher in rural areas, and
that the response rate tended to increase with the age of the household
reference person. Low response rates were also found for ethnic
minorities, the lower educated, self-employed, and the manual social
class. (6)
A.1 Units for analysis
A household is defined by the FES as "a group of people living
at the same address with common housekeeping that is sharing household
expenses such as food and bills, or sharing a living room." (7)
This definition of a household can consequently include a group of
disparate adults sharing the same residence who may otherwise keep their
finances quite separate from one another. Given the focus of the current
analysis, the data reported by the FES were disaggregated to focus upon
the family unit--comprised of a single adult or adult couple and their
dependent children. This was achieved by analysing the demographics of
each household reported by the FES to identify discrete family units,
and reallocating measures of household income to each unit where
necessary. (8) In undertaking this analysis, it was necessary to exclude
any households comprised of:
* family units not including the reference person/head of
household, but including dependent children;
* partner couples that did not include the reference person/head of
household;
* more than five family units.
Furthermore, households that are recorded as having self-employed
members are also omitted from the analysis, given the perceived
inaccuracy associated with reported self-employed income.
A.2 Coding
Benefit unit identification
A unique benefit unit identifier, bu, was constructed for each
family unit identified within each household reported by the FES. bu was
set to 1 for the family unit that includes the reference adult
(including their spouse and dependent children to age 17), and set to
progressively higher numbers for each family unit identified thereafter.
The age of each benefit unit was set equal to that of the eldest member
of the unit.
Consumption
The FES reports three measures of aggregate household consumption:
the ONS definition, p550tp, the National Accounts definition (I),
p560tp, and the National Accounts definition (II), p600t. These
statistics differ mainly in that the ONS definition includes expenditure
on various taxes, charges, and fines (e.g. Council Tax, Stamp Duty,
motoring fines), and unrequited domestic transfers that are not included
in the National Accounts definitions. The analysis is based primarily
upon the ONS definition, except where direct comparisons are made with
measures of aggregate consumption reported in the National Accounts.
The consumption codes p550tp and p560tp are reported only from
1991, and p600t from 2001. Otherwise, total household expenditure was
subject to two coding changes, reported as p378 to 1986, and p508 from
1987 to 1991. The definitions of total expenditure prior to 1991 differ
from p550 primarily in that they do not include data derived through
retrospective recall.
Disposable income
The FES has reported total household disposable income under the
code p389 since 1978. Prior to 1978, it was reported under code p399.
Family disposable income is allocated within households in proportion to
each unit's share of total household consumption.
APPENDIX B. COMPARING MICRO-DATA AGAINST THE NATIONAL ACCOUNTS
The scale of the growing disparities between the FES and National
Accounts aggregates is displayed in figure B1. This figure indicates
that there has been a consistent downward trend in the proportions of
the National Accounts aggregates that are accounted for by the FES
during the 39-year sample period. From highs of just over 90 per cent
for both household expenditure and disposable income, the ratios of FES
to National Accounts aggregates have fallen to 71 and 76 per cent
respectively, with some evidence that the rate of descent has
accelerated during the past decade.
It is notable that the steepest decline in the ratio reported for
expenditure (ONS definition) occurs from 1997/98, which corresponds to
the year in which population weights were first supplied with the FES.
There is also some evidence that the population sizes implicit in the
weights that are supplied with the FES have fallen, relative to those
reported by the National Accounts. The downward trends described in
figure 10 cannot, however, be attributed to the FES sample weights, as
is made clear by ratios of per capita averages that are reported in the
figure, and is easily verified by reproducing the analysis ignoring the
supplied weights altogether. (9)
Furthermore, disaggregating expenditure into its constituent
sub-categories does not help to clarify the reasons underlying the
growing disparity observed between the micro-data and national
aggregates, with falls identified over almost all individual categories
of goods and services (described previously for durable consumption by
Attanasio et al., 2006). And the matter is further complicated by the
observation that the measures of aggregate consumption reported by the
FES that are directly referred to in calculating the National Accounts
(denoted 'NA definition' in figure B1) show a more pronounced
downward trend than those associated with the traditional 'ONS
definition' of expenditure.
[FIGURE B1 OMITTED]
As the underlying causes for the trends described in figure B1 are
not yet understood, it remains unclear what--if anything--should be done
about them. In the current context, our concern with savings focusses
attention upon variation of income relative to expenditure. In this
regard, the coincident downward trend observed for both income and
expenditure suggests that, whatever the underlying causes for the
growing disparities between the FES and the National Accounts, the
associated implications for savings rates are likely to be less
pronounced than for either expenditure or income taken in isolation.
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NOTES
(1) Weale (2004) and Pomerantz and Weale (2005).
(2) See also Auerbach, Gokhale and Kotlikoff (1994), and McCarthy,
et al. (2011) for Generational Accounts recently produced for the UK.
(3) The total fertility rate in England and Wales fell from an
average of 2.45 between 1945 and 1973, to 1.76 from 1974 (source, ONS
statistics).
(4) See, for example, Pensions Commission (2004, 2005), and DWP
(2006).
(5) The reporting period was changed from financial years (starting
in April) to calendar years in 2006.
(6) This issue is partially corrected for by weights that have been
supplied with the FES since 1999.
(7) The definition prior to 2002 required both shared expenses and
a shared living room, rather than either of these as described under the
harmonised definition that has been applied since that year.
(8) The reallocation of consumption was undertaken by first
allocating individual specific measures of consumption reported by the
survey, and then dividing pooled measures of household consumption on a
pro rata basis by the number of members per family in the household.
(9) The FES provides household weights that are designed to correct
for sample bias from 1997/98. Weights can be generated prior to this
date by comparing the population structure reported by the FES to
alternative data sources, as in Leicester et al. (2009). Unpublished
analysis conducted at the IFS suggests that undertaking such adjustments
has no appreciable impact on the statistics reported here.
Justin van de Ven, National Institute of Economic and Social
Research. e-mail: jvandeven@niesr.ac.uk. I am most grateful to Martin
Weale and Cormac O'Dea for helpful advice regarding comparisons
between the micro-data and the National Accounts. The usual disclaimer
applies.