Why are Households that Report the Lowest Incomes So Well-off?

Authors


  • We are very grateful to Thomas Crossley for advice and encouragement and to Robert Joyce, Laura Keyse, Barra Roantree, Richard Tonkin and Karen Watkins for a number of useful conversations and to seminar participants at the Institute for Fiscal Studies, the Institute for Social and Economic Research at the University of Essex, and the Department for Economics at the University of Sheffield for useful comments. The authors gratefully acknowledge funding from the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (Reference RES-544-28-5001) (Brewer, Etheridge and O’Dea) and from the ESRC Research Centre on Micro-Social Change at the University of Essex (ES/L009153/1) (Brewer). The Living Cost and Food Survey and its predecessors, and the Family Resources Survey, are Crown copyright and are reproduced with the permission of the Controller of HMSO and the Queen's Printer for Scotland, and are available from the Economic and Social Data Service (http://www.esds.ac.uk). The ESDS, the original owners of the data (the Office for National Statistics and the Department for Work and Pensions respectively) and the copyright holders bear no responsibility for their further analysis or interpretation. Any errors remain the responsibility of the authors.

Abstract

We document that households in the UK with extremely low measured income tend to spend much more than those with merely moderately low income. This phenomenon is evident throughout three decades worth of microdata and across different employment states, levels of education and marital statuses. Of the likely explanations, we provide several arguments that discount over-reporting of expenditure and argue that under-reporting of income plays the major role. In particular, by using a dynamic model of consumption and saving, and paying special attention to poverty dynamics, we show that consumption smoothing cannot explain all the apparent dissaving.

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