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Notes, Definitions and Further Reading

The Department for Work and Pensions' ( DWP) Households Below Average Income data are published annually and are used to provide the official snapshot low income estimates for individuals, children, working age adults and pensioners for the UK and Scotland. This publication notice provides the revised headline estimates for Scotland only. For the revised UK estimates (and some regional analysis) please see the DWP publication 'Households Below Average Income: An analysis of the income distribution 1994/95-2005/06' on the DWP website: http://www.dwp.gov.uk/asd/hbai.asp.

Why have these statistics been revised?

Following the publication of the Scottish Households Below Average Income 2005/06 Statistics Publication Notice on 27th March 2007, The Department for Work and Pensions ( DWP) identified an error in the Households Below Average Income ( HBAI) dataset that is used to produce the estimates. This error affected both the UK estimates and the Scottish estimates. The error concerned the grossing factor used to multiply the survey data up to population estimates: a data-processing error meant that incorrect population control totals were applied to the original dataset.

In line with National Statistics protocols this error was announced on 23 ^rd April 2007, as soon as possible after it was discovered. The DWP corrected the error and the revised HBAI dataset has been checked by the Institute for Fiscal Studies ( IFS) for quality control purposes.

How large was the error?

The error had only a minor effect on the estimates in this publication. The table below shows the difference between the previously published and revised key estimates. The biggest change is in the percentage change since 1998/99 of pensioners in relative low income: it was previously estimated that the number had fallen by 22 per cent, but the revisions show the true figure to be 17 per cent.

Income definitions and measures

The income used in the 'low income' estimates is called 'net disposable household income'. It is simply income from all sources, for all members of the household but after deductions for income tax, National Insurance contributions, council tax, pension contributions and maintenance payments.

Equivalisation

In order for the net disposable household income to be used as a proxy for living standards it has to be adjusted. This adjustment is called 'equivalisation'. This equivalised income allows the comparison of living standards between households that vary in size and composition. This adjustment reflects the fact that a family of several people requires a higher income than a single person in order for both households to enjoy a comparable standard of living. The key assumption is that all individuals in the household benefit equally from the combined (equivalised) income of the household. There are several different equivalence scales which will result in slightly different estimates. These latest low income figures in this publication notice use the modified OECD equivalence scale to bring the methodology in line with the rest of Europe and the new child poverty measure. The tables in Annex 2 show what the current estimates would be if the previous methodology was still used for our headline estimates (McClements equivalence scale and 1996/97 base year). The DWP have published a paper with further details about the effects of changing equivalisation scales. This can be found at the following website: www.dwp.gov.uk/asd/hbai/nsfr_newequiv.pdf. In general the modified OECD equivalence scale results in a higher proportion of children and pensioners living in households with low incomes than on the McClements scale. The DWP publication 'Households Below Average Income: An analysis of the income distribution 1994/95 - 2005/06' contains further details on equivalence scales ( http://www.dwp.gov.uk/asd/hbai.asp).

How is low income measured?

Individuals are defined as being in low income if their equivalised net disposable household income is below 60% of the median. The median is the income value which divides a population, when ranked by income, into two equal sized groups. Since the mean is influenced significantly by the highest incomes, median income thresholds are widely accepted as a better benchmark when considering a derived measure for low income. 60% of median is the most commonly used low income measure, however additional 50% and 70% of median figures are shown in Annex 1 in support of 'Opportunity for All' (this is the annual UK Government report about tackling poverty and social exclusion, please see useful references here) and to give an idea of the depth of low income. It should be noted that those households reporting the lowest incomes may not have the lowest living standards. The bottom ten per cent of the income distribution should not, therefore, be interpreted as having the bottom ten per cent of living standards. This will have relatively greater effect on results where incomes are compared against low thresholds of median, for example below 50% of median.

For a couple with no children, the median income before housing costs in 2005/06 was £362 per week, this is a real terms increase of £49 (16%) since 1998/99 (the inflation adjusted median income in 1998/99 was £313). After housing costs the increase is from £253 per week in 1998/99 (inflation adjusted) to £310 in 2005/06. This is an increase of 22% or £57.

Consequently, the 60% low income threshold, which is used to derive the low income household figures, has increased by £29 per week (before housing costs) in real terms, from £188 in 1998/99 (inflation adjusted) to £217 in 2005/06. After housing costs the 60% of median has increased by £34 per week in real terms, from £152 to £186.

Before housing costs ( BHC) and after housing costs ( AHC)

This publication provides low income estimates on a before housing costs basis and on an after housing costs basis. Since some people choose to spend more of their income on housing costs, an after housing costs measure would understate the relative standard of living of those individuals who were actually benefiting from a better quality of life by paying more for better accommodation. Conversely, any income measure which does not deduct housing costs (i.e. the before housing costs measure) will overstate the living standards of individuals whose housing costs are high relative to the quality of their accommodation.

Absolute and relative measures

There are two further measures that are used to describe trends over time: absolute low income and relative low income. In essence, the absolute measures whether individuals in the lowest income households are seeing their incomes rise in real terms. The relative measures whether those in the lowest incomes are keeping up with the growth of the economy as a whole.

Absolute low income: individuals living in households whose equivalised income is below 60% of inflation adjusted median income in 1998/99. This is a measure of whether those in the lowest income households are seeing their incomes rise in real terms.

Relative low income: individuals living in households whose equivalised income is below 60% of median income in the same year. This is a measure of whether those in the lowest income households are keeping pace with the growth of incomes in the economy as a whole.

Use of GB and UK medians

Since 2002/03 the Family Resources Survey has included Northern Ireland. As a result all relative low income figures from 2002/03 will be calculated using the UK median.

Absolute measures utilise a base year prior to the inclusion of Northern Ireland and will therefore continue to use the GB median as the basis for the low income threshold.

In practice the change from GB to UK median makes very little impact on the figures; in 2005/06 the estimated UK median income for a couple with no children is £1 less than the GB estimate for the same year.

Quintiles

Quintiles are income values which divide the population, when ranked by income, into five equal-sized groups.

Other points to note

The percentages show the proportion of the population that fall below the threshold in the year in question. Therefore, due to changing demographics, the same number of persons one year may represent a different proportion to the same number in a previous year.

The figures are estimates based on a sample survey - The Family Resources Survey - and are therefore subject to sampling variation. Extreme caution should be exercised in the interpretation of small year-on-year fluctuations. Identification of trends must be based on data for several years. As the Scottish Executive has funded a doubling of the Scottish sample since 2002/03, the Scottish figures from 2002/03 onwards should be less prone to fluctuation within key trends than those for earlier years.

The Household Below Average Income data are grossed up to produce estimates for the overall population. Following a review, the Department for Work and Pensions announced a new grossing regime in February 2005. This new grossing regime, which came into effect in 2005, improves the accuracy of regional-level counts drawn from the Family Resources Survey (from which the HBAI is based). The full HBAI series from 1994/95 was revised in 2005 in line with the new grossing regime. Further information about the new grossing regime is available at the DWP website: www.dwp.gov.uk/asd/frs.

Useful references

Scottish Executive websites:

Income and Poverty statistics website:
www.scotland.gov.uk/stats/incomepoverty

High Level Summary of Statistics (Chapter 12, Social and welfare):
http://www.scotland.gov.uk/Topics/Statistics/About/HighLevelTrends

High Level Summary of Equality Statistics (Chapter 12, Social and welfare):
http://www.scotland.gov.uk/Topics/Statistics/About/HighLevelTrends

Scottish Economic Statistics (Household Sector chapter):
http://www.scotland.gov.uk/stats/ses/ses-00m.asp

For further information on all Scottish Executive statistics:
www.scotland.gov.uk/topics/statistics

Department for Work and Pensions' websites:

Family Resources Survey, Department for Work and Pensions
http://www.dwp.gov.uk/asd/frs

Households Below Average Income, Department for Work and Pensions (methodology and UK estimates):
http://www.dwp.gov.uk/asd/hbai.asp

Measuring child poverty, Department for Work and Pensions:
www.dwp.gov.uk/consultations/consult/2003/childpov/final.pdf

Opportunity for all, Department for Work and Pensions:
http://www.dwp.gov.uk/ofa/

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