How Low-Paid Employees Avoid Poverty: An Analysis by Family Type and Household Structure

The risk of poverty is very unevenly distributed in society. Some groups – unemployed people, lone parents, large families, people with disabilities, and some ethnic groups – have much higher poverty rates than average. Some events – losing a job, marital breakdown, having children – also put people at high risk of poverty. But being in a high-risk group does not necessarily mean you will be poor, nor does experiencing an event with a high poverty risk attached to it. Some people avoid poverty, despite being in high-risk groups or facing high-risk events. This article focuses on one such group – low-paid workers – and explores whether and how people in low-paid jobs are able to avoid poverty. We consider three main options – own wages and in particular working long hours, living with other people and sharing income, and state transfers through the tax and benefit system – and compare these across different family and household types. The results highlight the importance of household living arrangements in protecting low-waged individuals against poverty. Introduction The risk of poverty is very unevenly distributed in society, with some groups having much higher poverty rates than average. In the UK today, those with the highest poverty risks include unemployed people, lone parents, large families, people with disabilities, and some ethnic groups (DWP, 2004; Flaherty et al., 2004; Sutherland et al., 2003). There are also certain events that carry a high risk of poverty, as research on poverty dynamics has shown (Jenkins and Rigg, 2001; Jenkins and Schluter, 2003; Taylor et al., 2004). These include both socioeconomic events (such as job loss through unemployment or sickness) and demographic events (such as the birth of a child or marital breakdown). However, being in a high-risk group does not necessarily mean you will be poor, nor does experiencing an event with a high poverty risk attached to it. Some people avoid 352 karen gardiner and jane millar poverty, despite being in high-risk groups or facing high-risk events. Taking a closer look at these people who avoid poverty, and how they do so, may thus provide a useful way of understanding how to protect people who may be vulnerable to poverty. People in work are generally not in a high poverty risk group, and indeed those who move into work from unemployment often escape poverty at the same time. Recognition of the importance of paid work in combating poverty has thus been at the centre of the Labour government’s anti-poverty strategy, and increasing employment participation rates has been an important policy goal. Over three-quarters of all working-age adults are now in full-time work and the number of people in employment has been growing steadily, by an average of 1.1 per cent per annum, since 1997 (Balls et al., 2004: 25). But the labour market does not offer the same opportunities to all and there are many people in jobs that are low paid, insecure and with limited scope for advancement. The national minimum wage sets a floor for hourly wages, but many of those protected by the national minimum wage are not working full time, and low weekly hours mean low weekly wages. About 7.4 million people work in part-time jobs for fewer than 30 hours a week, including 2.5 million working fewer than 16 hours per week (Francesconi and Gosling, 2005). Some people in paid work are thus unlikely to be able to achieve an adequate weekly income from their wages alone, and are likely to be reliant on other sources of income to avoid falling into poverty. The analysis reported here sets out to examine whether and how workers with low hourly pay are able to avoid household poverty, and to explore the ways in which different sources of income play a role in this poverty avoidance, for different types of families and households. There are several main ways in which an individual with hourly low pay might nevertheless avoid household poverty. Working long hours, either by overtime working or by having more than one job, is one possibility. This option is likely to be possible only for people who either have no caring responsibilities (such as single people), or for those who live with others who take the responsibility for caring (such as men in one-earner couples). Another option is to pool wages with other people living in the household, so two-earner couples may be able to avoid poverty, even if one or both are low paid. Households with three or more earners – a couple living with their working children, a lone parent living with her parents, a group of people sharing a flat – might also have a good chance of avoiding poverty. Finally, low-paid people may be able to avoid poverty by means of in-work state transfers – benefits and tax credits – which top up their wages. The aim of our analysis is to explore the relative importance of these three main options – own wages, living with others, receiving state benefits and tax credits – in allowing low-paid people to avoid poverty. For this analysis, it is therefore necessary for us to divide household income into these component parts, and to look separately at each of these. This raises some complex analysis by family type and household structure 353 methodological issues, both in respect of how the different income sources combine and in respect of the different units – individual, family, household – that we need to take into account. The next section discusses these points in more detail, with the results then reported in the main body of the article. Poverty avoidance: individuals, families and households In this study we are interested in identifying those who have avoided poverty, despite being in the potentially high-risk situation of working for low hourly pay. Thus we start with the low-paid individual, defined as someone earning less than two-thirds of the median hourly wage.1 We then look at the total household income of that person and consider whether they live in a poor household or not. A poor household is defined as one with a total household income below 60 per cent of median equivalised disposable household income, before housing costs. To anticipate the results, discussed in more detail below, we find that the vast majority – 86 per cent – of low-paid people do not live in poor households (83 per cent of low-paid men and 87 per cent of low-paid women). Most studies of low pay and poverty stop at this point. They show the overlap between low pay and poverty, and identify which types of low-paid people are most at risk of living in poor households (for example, McKnight, 2002), but do not explore how some low-paid people avoid poverty while others do not. Our approach (first developed in Millar et al., 1997) is to divide household income into various separate components and then add these up, one by one. As each income source is added in, we calculate whether this is enough total income to take the household over the poverty line. Thus, for example, if an individual has wages that are high enough to take the whole household over the poverty line, then the household moves out of poverty at that first step. If not, then we move on to the next source of income and see if adding that in will take the household income over the poverty line, and so on. Some households are, of course, still in poverty after the final step. The method thus provides a way to examine both whether low-paid people can avoid poverty, and how they do so. In order to do this, it is necessary to divide up household income and so we need to decide first how many and what components to use and second to decide the order in which to add these to the total. In the discussion above, we identified three main types of income – own individual income, the income of other people in the household and state transfers. However, such a threefold division might obscure some interesting differences within these categories: for example, between social security benefits such as child benefit on the one hand and tax credits on the other. We therefore identify three types of state transfers: non-means-tested social security benefits, means-tested social security benefits and working families’ and disabled person’s tax credits.2 Similarly, in looking at the income of other people in the household, we want to identify 354 karen gardiner and jane millar separately the contribution of a spouse or partner from that of other people in the household. We therefore divide the income contributed by other household members into partner’s income and others’ income. This gives us seven main categories of income: the individual’s own market income, three types of state transfers, market income from partners, market income from other people and any other household income. The next issue is to decide the order in which these sources of income should be added up in order to create a cumulative total, and to identify at what point household income crosses the poverty line. The order we use is as follows: own market income, market income of a partner, non-means-tested social security benefits, tax credits, means-tested social security benefits, the market incomes of other household members, and other household income. This order thus starts with own market income (which includes wages, selfemployment and investment income) and then market income of partners and the various state transfers, before including market income from others living in the household and finally including any household income that cannot be readily attributed to particular individuals. This sequence is designed to reflect what we know – which is still quite limited – about how people perceive and value different sources of income and about the ways in which people living together pool their incomes. Various studies have shown that most people prefer to increase their incomes by additional work – second jobs or second earners – rather than by receipt of tax credits or benefits (McLaughlin et al., 1989; Jordan et al., 1992; Kempson, 1996; Kempson et al., 1996; Goode et al., 1998). Therefore the earnings (and other market income) of self and a partner are placed first in the list. These studies also suggest that non-means-tested benefits are generally preferred to means-tested support, and this is also reflected in the ordering in the list. One of the government’s main arguments for replacing family credit with a tax credit was that tax credits are less stigmatising and more acceptable than benefits (HM Treasury, 1998) and there is some evidence that families preferred the working families tax credit to family credit (McKay, 2002), although this may be more to do with the higher amounts than any intrinsic preference. Nevertheless, we have placed tax credits above other means-tested benefits in our sequence. The income of other household members (adults other than a partner) is placed below benefits and tax credits, rather than next to partner’s income. This is because they fall outside the individual’s ‘family’ unit (defined as a single person, a single person with dependent children, a childless couple or a couple with dependent children), which is the basic unit for assessment of most social analysis by family type and household structure 355 security benefits and tax credits. Entitlement to these state transfers therefore relates to the family unit rather than the household as a whole. The household as a whole could consist of one or more tax/benefit family units, and this would be the case even, for example, if the household consisted of people who were all family members in the sense of being closely related. Thus, for example, a lone mother living with her two children, one aged 12 and the other aged 19 would be living in a two family unit household: herself and her 12 year old child forming one unit, her 19 year old (and therefore non-dependent) child forming another. Similarly, a woman living with her husband and his elderly mother would be in a two family unit household: the couple as one unit and the mother as another. It makes sense therefore to consider all sources of income from the individual’s own family unit first, before including income from another family unit. In addition, placing the income of these others after the income of partners is intended to recognise the likelihood that such income may be less likely than partners’ income to be shared by all household members. We know that not all couples, married or cohabiting, share all their income, and that household financial allocation and management systems reflect differences in characteristics and circumstances, including income, employment status, age and life-course position (Vogler and Pahl, 1993; Goode et al., 1998; Rake and Jayatilaka, 2002), but there is very little information available about income-sharing within larger households comprising multiple family units. Young people living with their parents may or may not be making a direct financial contribution to the household income, but they are almost certainly benefiting from higher living standards than they could achieve if they lived alone in their own household. Lone parents can never be two-earner families but they can be two (or more) earner households, and the contribution of adult children may be a key factor in boosting household income and – to the extent that income is shared – living standards. Given that in most studies poverty is measured at the level of the household, the fact that we know so little about household income-sharing is perhaps a rather surprising gap in the literature. Measuring income and poverty at the level of the household is based on the assumption that there is income-sharing within the whole household, and not just within the family unit. Thus, in a poor household all members are counted as poor, and in a non-poor household none is counted as poor. This may hide poverty within households, especially among women who are less likely than men to have adequate individual incomes (Bradshaw et al., 2003; Millar, 2003). The income and poverty measures used in our analysis are also household based, so we are assuming equal income sharing, but our method allows us to separately identify the contribution of individual income, partner’s and family income, and wider household income. Hence, our results indicate which findings are likely to be most sensitive to assumptions about equal income sharing, for example, 356 karen gardiner and jane millar TABLE 1. Low pay by family type, % of employees who are low paid, UK 2000/1. Single, no children Single, with children Couple, no children Couple, with children All Gender % % % % % Male 33 7 10 9 18 Female 35 27 26 29 30 All 34 25 18 18 23 Unweighted base (1,531) (207) (1,890) (2,045) (5,673) Source for all tables: own analysis of Family Expenditure Survey 2000/1 (Office for National Statistics, 2001) (subsequently called the Expenditure and Food Survey). where the market income of adults other than a partner makes a big contribution to poverty avoidance. To summarise, in order to identify those low-paid people who avoid household poverty, we calculate whether they earn enough by themselves to take their household out of poverty and then add in all other sources of household income in sequence, starting with partner’s income, then state benefits and tax credits, the income of other household members, and finally all other household income. We then analyse the results by gender and by family type, in order to examine the extent to which there are differences in the way in which low-paid people in different circumstances avoid poverty. In addition to this analysis by gender and family type we also place the family within the wider household. This is something that is rarely done in the analysis of poverty rates, even though these are calculated on a household basis. By analysing household structure we intend to highlight that the family and the household units do not coincide in practice for many low-paid people, and hence this distinction is an important one. Low pay and poverty Before we present our results on poverty avoidance for low-paid employees, we begin with a summary of the relationship between low pay and poverty by family type. Table 1 shows which employees are at greatest risk of hourly low pay. Overall, in 2000/01 we calculate that 23 per cent of employees were low paid,3 with substantially higher chances of low pay among female employees (30 per cent) than among males (18 per cent). At about one in three, the incidence of hourly low pay is noticeably higher for both men and women who are single without children than it is for other family types. All other male employees appear to have around a one in eleven risk of low pay, regardless of their family circumstances. Similarly, for all women workers who are either in a couple or single with children, their family type has little bearing on their chances of being low paid, which we estimate to be about one in four. analysis by family type and household structure 357 TABLE 2. Poverty rate by family type: all low-paid employees UK 2000/1. Single, no children Single, with children Couple, no children Couple, with children All Gender % % % % % Male 14 ∗ 11 37 17 Female 14 20 9 13 13 All 14 19 10 19 14 Unweighted base (509) (51) (344) (370) (1,274) TABLE 3. Avoiding poverty: all employees and low-paid employees, UK 2000/1. All employees All low-paid employees Avoiding poverty % % Own market income 53 8 Partner’s market income 21 32 Non means-tested benefits 5 8 Tax credits 1 2 Means-tested benefits 1 3 Others’ income 13 30 Other household income 1 2 Remaining in poverty 5 14 Total 100 100 Unweighted base (5,673) (1,274) Table 2 shows the poverty rates for all low-paid employees by gender and family type. Although women are more likely to be low paid than men, those women who are low paid are less likely to be living in poor households. Thus, 17 per cent of low-paid men are living in poverty, compared with 13 per cent of low-paid women. This pattern holds for all family types (although note that there are not enough lone fathers in the sample for separate analysis). Low-paid lone mothers have a very high risk of poverty (20 per cent); only low-paid men in couples with children are more likely to be poor (37 per cent). Thus individual low pay translates into household poverty to a different degree for men and women and for different family types. In the main part of the analysis we explore what enables most low-paid people to avoid poverty and compare how this differs for people in different family circumstances. Avoiding poverty Here we start by putting results on poverty avoidance for low-paid employees in the context of findings for all employees, as presented in Table 3.4 The most 358 karen gardiner and jane millar striking difference between these two groups is the importance of the individual’s own market income in avoiding poverty. More than a half of all employees (53 per cent) have sufficient market income themselves to enable their entire household to avoid poverty. However, this is true for just 8 per cent of low-paid employees. This suggests that most employees who are paid a low hourly rate cannot compensate for this by working long hours. We find that 9 per cent of the low-paid workers are working 50 or more hours a week in their main job and 4 per cent have two or more jobs; these do not really differ from the equivalent statistics for all employees: 10 and 3 per cent respectively. Thus, for most lowpaid people, working long weekly hours is not the way they can avoid poverty. However, other sources of household income do help to compensate for this large discrepancy, narrowing the gap between the proportions of all and low-paid employees who avoid poverty. When all sources of income are taken in to account, 5 per cent of employees remain poor compared with 14 per cent of the low-paid population. As Table 3 shows, the income sources which are most significant in closing the gap in poverty rates between the low paid and all employees are the market income of other household members. Market income includes any earnings, self-employment and/or investment income, but for most people it is mainly earnings. Of all employees, 66 per cent are part of a couple and 51 per cent have a partner with some market income. Low-paid people are both less likely than all employees to have a partner (51 per cent) and less likely to have a partner with market income (42 per cent). However, partners are more important for avoiding poverty for the low paid than they are for the average employee, enabling nearly a third of low-paid workers and their households to avoid poverty (compared with 21 per cent of all employees). Among the low paid, over half (53 per cent) have adults in the household other than partners, and they make almost as big a contribution to poverty avoidance as partners, with 30 per cent of the low paid escaping poverty due to the impact of others’ income. We discuss the role of other adults in greater detail below, but living with adults other than a partner, such as grown-up children, parents or friends, is found to be common, even among the general working population. Of all employees, one third (34 per cent) are in this situation and others’ market income is responsible for 13 per cent of them avoiding poverty, which is a larger impact than, for example, all state benefits and tax credits. Nevertheless, state transfers are, as would be expected, more important for low-paid workers in avoiding poverty (13 per cent) than they are for all employees (7 per cent). Thus low-paid employees are very different from employees in general, not only in the extent to which they experience household poverty (being almost three times as likely to be poor), but also because they can rarely avoid poverty on the basis of their own wages alone. However, this picture of the strategies which low-paid employees use to avoid poverty masks some important variations by analysis by family type and household structure 359 TABLE 4. Avoiding poverty: low-paid single childless people, UK 2000/1.