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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. This publication notice provides the headline estimates for Scotland only. For the UK estimates (and some regional analysis) please see the DWP publication 'Households Below Average Income: An analysis of the income distribution 1994/95-2006/07' on the DWP website: http://www.dwp.gov.uk/asd/hbai.asp.
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. The low income figures in this publication notice use the modified OECD equivalence scale in line with the rest of Europe.
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 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 2006/07 was £377 per week, this is a real terms increase of £53 (16%) since 1998/99 (the inflation adjusted median income in 1998/99 was £324). After housing costs the increase is from £261 per week in 1998/99 (inflation adjusted) to £321 in 2006/07. This is an increase of 23% or £60.
Consequently, the 60% low income threshold, which is used to derive the low income household figures, has increased by £31 per week (before housing costs) in real terms, from £195 in 1998/99 (inflation adjusted) to £226 in 2006/07. After housing costs the 60% of median has increased by £37 per week in real terms, from £156 to £193.
How is material deprivation defined and measured?
Since 2004/05 the Family Resources Survey has asked respondents whether they have 21 goods and services, both child and household items. If they do not have them, they are asked whether this is because they do not want them or because they cannot afford them. Material deprivation is defined on the basis of those items that cannot be afforded.
To determine the level of material deprivation a child experiences, a 'prevalence weighted' approach is used: for each item a child's family cannot afford they will be given a weight or score. This weight will be equivalent to the proportion of families who have this item. In this way, the higher the proportion that own that item, the more not having it suggests an inability to afford it and the greater weight it has in the measure.
The weighted scores for each item lacked through an inability to afford are summed and translated into a total material deprivation score which can range from 0 to 100. Children are materially deprived if they have a material deprivation score of 25 or more. Analysis conducted by Department for Work and Pensions has shown that this score is a good discriminator between those that are deprived and those that are not.
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.
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. 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 Government 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. Details of the confidence intervals that surround the key estimates in this publication will be published on the Scottish government Income and Poverty website shortly.
Useful references
Scottish Government websites:
Income and Poverty statistics website:
http://www.scotland.gov.uk/Topics/Statistics/Browse/Social-Welfare/incomepoverty
High Level Summary of Statistics (Chapter 12, Social and Welfare):
http://www.scotland.gov.uk/Topics/Statistics/About/HighLevelTrends
Scottish Government Economic Strategy and 2007 Spending Review:
http://www.scotland.gov.uk/Topics/Economy/Scotlands-Economy
Technical Notes for the 2007 Spending Review:
http://www.scotland.gov.uk/Publications/2007/11/30090722/0
For further information on all Scottish Government statistics:
http://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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