Poverty and Income Inequality in Scotland 2010/11

Annex 2: Data Sources and Definitions

Data sources

Family Resources Survey, Households Below Average Income (HBAI) dataset:

All the figures in this publication come from the Department for Work and Pensions' (DWP) Households Below Average Income dataset which is produced from the Family Resources Survey. UK figures are published by DWP in 'Households Below Average Income: 2010/11' on the same day as 'Poverty and income inequality in Scotland'. For the UK figures, as well as more detail about the way these figures are collected and calculated, see the DWP website: http://research.dwp.gov.uk/asd/index.php?page=hbai.

Future plans for updating persistent poverty figures

Data on Persistent Poverty has been obtained from the British Household Panel Survey (BHPS) and figures are published here: http://www.scotland.gov.uk/Topics/Statistics/Browse/Social-Welfare/IncomePoverty/Publications. The BHPS has been subsumed into the larger Understanding Society survey from the start of 2009. These figures will be updated when the new data becomes available during 2012. For more detail see www.understandingsociety.org.uk.

Definitions

Measures of income

The income measure used in HBAI is weekly net (disposable) equivalised household income. This comprises total income from all sources of all household members including dependants.

Income is adjusted for household size and composition by means of equivalence scales, which reflect the extent to which households of different size and composition require a different level of income to achieve the same standard of living. This adjusted income is referred to as equivalised income (see definition below and section 1.2 for more information on equivalisation).

• Income Before Housing Costs (BHC) includes the following main components: net earnings; profit or loss from self-employment after income tax and NI; all social security benefits, including housing and council tax benefits; all tax credits, including Social Fund grants; occupational and private pension income; investment income; maintenance payments; top-up loans and parental contributions for students, educational grants and payments; the cash value of certain forms of income in kind such as free school meals, free welfare milk and free school milk and free TV licences for the over 75s (where data is available). Income is net of: income tax payments; National Insurance contributions; contributions to occupational, stakeholder and personal pension schemes; council tax; maintenance and child support payments made; and parental contributions to students living away from home.
• Income After Housing Costs (AHC) is derived by deducting a measure of housing costs from the above income measure.
• Housing Costs include the following: rent (gross of housing benefit); water rates; mortgage interest payments; structural insurance premiums; ground rent and service charges.

Equivalisation is the process by which household income is adjusted to take into account variations in the size and composition of the households in which individuals live. This reflects the common sense notion that, in order to enjoy a comparable standard of living, a household of say three adults will need a higher income than a single person living alone. The process of adjusting income in this way is known as equivalisation and is needed in order to make sensible income comparisons between households.

Equivalence scales conventionally take an adult couple without children as the reference point, with an equivalence value of one. The process then increases relatively the income of single person households (since their incomes are divided by a value of less than one) and reduces relatively the incomes of households with three or more persons, which have an equivalence value of greater than one.

Consider a single person, a couple with no children, and a couple with two children aged fourteen and ten, all having unadjusted weekly household incomes of £200 (Before Housing Costs). The process of equivalisation, as conducted in HBAI, gives an equivalised income of £299 to the single person, £200 to the couple with no children, but only £131 to the couple with children.

The equivalence scales used here are the modified OECD scales. Two separate scales are used, one for income Before Housing Costs (BHC) and one for income After Housing Costs (AHC). Modified OECD rescaled to couple without children, BHC is as follows:

First Adult	0.67
Spouse	0.33
Other Second Adult2	0.33
Third Adult	0.33
Subsequent Adults	0.33
Children aged under 14yrs3	0.20
Children aged 14yrs and over3	0.33

The construction of household equivalence values from these scales is quite straightforward. For example, the BHC equivalence value for a household containing a couple with a fourteen year old and a ten year old child together with one other adult would be 1.86 from the sum of the scale values:

0.67 + 0.33 + 0.33 + 0.33 + 0.20 = 1.86

This is made up of 0.67 for the first adult, 0.33 for their spouse, the other adult and the fourteen year old child and 0.20 for the ten year old child. The total income for the household would then be divided by 1.86 in order to arrive at the measure of equivalised household income used in HBAI analysis.

Further information on equivalisation can be found in the following report on the Scottish Government website: http://www.scotland.gov.uk/Topics/Statistics/Browse/Social-Welfare/IncomePoverty/equivalence-scales-paper

Poverty measurement from the Family Resources Survey

Individuals are defined as being in poverty if their equivalised net disposable household income is below 60% of the UK 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 considerably by the highest incomes, median income thresholds are widely accepted as a better benchmark when considering a derived measure for low income. Sixty per cent of the median is the most commonly used low income measure.

For a couple with no children, the UK median income (BHC) in 2010/11 was £419 per week, this is a real terms increase of £52 (14%) since 1998/99 (the inflation adjusted median income in 1998/99 was £367). After housing costs the increase was from £304 per week in 1998/99 (inflation adjusted) to £359 in 2010/11. This is an increase of 18% or £55.

Consequently, the 60% low income threshold, which is used to derive the low income household figures, has increased by £31 per week (BHC) in real terms, from £220 in 1998/99 (inflation adjusted) to £251 in 2010/11. After housing costs the 60% low income threshold has increased by £33 per week in real terms, from £182 to £215.

Relative and absolute poverty:

• Absolute poverty: 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 poverty: 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.

Material deprivation for Children

A suite of questions designed to capture the material deprivation experienced by families with children has been included in the Family Resources Survey since 2004/05. Respondents are asked whether they have 21 goods and services, including child, adult and household items. The list of items was identified by independent academic analysis. See McKay, S. and Collard, S. (2004). Developing deprivation questions for the Family Resources Survey, Department for Work and Pensions Working Paper Number 13 available at http://research.dwp.gov.uk/asd/asd5/WP13.pdf. Together, these questions form the best discriminator between those families that are deprived and those that are not. If they do not have a good or service, they are asked whether this is because they do not want them or because they cannot afford them.

These questions are used as an additional way of measuring living standards for children and their families.

A prevalence weighted approach has been used, in combination with a relative low income threshold. Prevalence weighting is a technique of scoring deprivation in which more weight in the deprivation measure is given to families lacking those items that most families already have. This means a greater importance, when an item is lacked, is assigned to those items that are more commonly owned in the population.

For further information about material deprivation see Appendix 2 of the DWP 'Households below average income' publication. A discussion considering the implications of the changes to the material deprivation goods and services is given in Appendix 3 of this publication.

Material Deprivation for Pensioners

A suite of questions designed to capture the material deprivation experienced by pensioner families has been included in the Family Resources Survey since May 2008. Respondents are asked whether they have access to 15 goods and services. The list of items was identified by independent academic analysis. See Legard, R., Gray, M. and Blake, M. (2008), Cognitive testing: older people and the FRS material deprivation questions, Department for Work and Pensions Working Paper Number 55 available at http://research.dwp.gov.uk/asd/asd5/WP55.pdf and McKay, S. (2008), Measuring material deprivation among older people: Methodological study to revise the Family Resources Survey questions, Department for Work and Pensions Working Paper Number 54 available at http://research.dwp.gov.uk/asd/asd5/WP54.pdf. Together, these questions form the best discriminator between those pensioner families that are deprived and those that are not.

Where they do not have a good or service, they are asked whether this is because: they do not have the money for this; it is not a priority on their current income; their health / disability prevents them; it is too much trouble or tiring; they have no one to do this with or help them; it is not something they want; it is not relevant to them; other. Where a pensioner lacks one of the material deprivation items for one of the following reasons: they do not have the money for this; it is not a priority for them on their current income; their health / disability prevents them; it is too much trouble or tiring; they have no one to do this with or help them; other, they are counted as being deprived for that item.

The exception to this is for the unexpected expense question, where the follow up question was asked to explore how those who responded 'yes' would pay. Options were: use own income but cut back on essentials; use own income but not need to cut back on essentials; use savings; use a form of credit; get money from friends or family; other. Pensioners are counted as materially deprived for this item if and only if they responded 'no' to the initial question.

The same prevalence weighted approach has been used to that for children, in determining a deprivation score. Prevalence weighting is a technique of scoring deprivation in which more weight in the deprivation measure is given to families lacking those items that most pensioner families already have. This means a greater importance, when an item is lacked, is assigned to those items that are more commonly owned in the pensioner population.

For children, material deprivation is presented as an indicator in combination with a low income threshold. However for pensioners, the concept of material deprivation is broad and very different from low income therefore it is appropriate to present it as a separate measure.

A technical note given a full explanation of the pensioner material deprivation measure is available at http://research.dwp.gov.uk/asd/index.php?page=hbai_arc.

Population Coverage

The FRS is a survey of private households. This means that people in residential institutions, such as nursing homes, barracks, prisons or university halls of residence, and also homeless people are excluded from the scope of the analysis presented here. The area of Scotland north of the Caledonian Canal was included in the FRS for the first time in the 2001/02 survey year, and from the 2002/03 survey year, the FRS was extended to include a 100 per cent boost of the Scottish sample. This has increased the sample size available for analysis at the Scottish level.

Reliability of estimates

The figures are estimates based on sample surveys and are therefore subject to sampling variation. Caution should be exercised in the interpretation of small year-on-year fluctuations. Identification of trends should be based on data for several years. Estimates for the confidence intervals around the key figures presented here will be available on the Income and poverty statistics website after publication.

The Family Resources Survey publication at http://research.dwp.gov.uk/asd/frs/index.php?page=intro contains information on topics such as:

• Sample design, non-response biases, weighting
• Item non-response, imputation and editing
• Accuracy of income data

Detailed HBAI definitions and methodology

More detailed information on definitions and methodology can be found in Appendix 1 and 2 of DWP's publication:

http://statistics.dwp.gov.uk/asd/index.php?page=hbai