Poverty and Income Inequality in Scotland 2015-18

Annex B. 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. An adjustment is made to sample cases at the top of the income distribution to correct for volatility in the highest incomes captured in the survey.

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 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 payments, 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.

Income sources

The analysis on income sources is the only analysis in this report not using net income. This analysis is based on income before taxes from employment or self-employment, social security payments, investment, occupational pensions and other income. In some cases, income from self-employment was negative in a year, for example, when someone in self-employment made a loss. In these cases, total income from earnings was reset to zero.

Real prices

Unless otherwise stated, all figures relating to income are in 2017/18 prices. Values from previous years are uprated to account for inflation using variants of the Consumer Price Index (CPI). This follows a change in methodology for 2014/15. Prior to this the Retail Price Index (RPI) was used.

This change followed an announcement by the National Statistician that, in accordance with the Statistics and Registration Service Act 2007, the RPI and its derivatives had been assessed against the Code of Practice for Official Statistics and found not to meet the required standard for designation as National Statistics.

Following a subsequent review the National Statistician, John Pullinger, wrote to the Chair of the UKSA, Sir Andrew Dilnot, setting out his view that RPI “is not a good measure of inflation” and that future usage is strongly discouraged in favour of alternative measures.

This led to a change in HBAI methodology in 2014/15 and the Scottish Government adopted the change in deflator to allow consistent poverty estimates for Scotland and the UK.

Full details can be found at this link: Methodological changes to poverty statistics

Equivalisation

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, for example, 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 a couple without children

	AHC	BHC
First Adult	0.58	0.67
Spouse	0.42	0.33
Other Second Adult	0.42	0.33
Third Adult	0.42	0.33
Subsequent Adults	0.42	0.33
Children aged under 14 years	0.20	0.20
Children aged 14 years and over	0.42	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.

Poverty measurement from the Family Resources Survey

Individuals are defined as being in poverty if their equivalised net disposable household income is below 60 percent 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 percent of the median is the most commonly used low income measure.

For a couple with no children, the UK median income BHC in 2015-18 was £504 per week, which had increased by £5 in real terms since 2014-17. After housing costs, the UK median increased by £5 to £435 per week in 2015-18.

Consequently, the 60 percent low income threshold, which is used to derive the low income household figures, has also increased in real terms, before and after housing costs. This means a household has to have a larger income in real terms to be above the poverty threshold.

Relative and absolute poverty

• Absolute poverty - individuals living in households whose equivalised income is below 60 percent of inflation adjusted median income in 2010/11. 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 percent 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 households 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). Together, these questions form the best discriminator between those households 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 households.

A prevalence weighted approach has been used, in combination with a relative low income threshold. The income threshold is 70 percent of the median income. Prevalence weighting is a technique of scoring deprivation in which more weight in the deprivation measure is given to households lacking those items that most in the population 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.

Changes to measuring material deprivation in 2010/11

The 21 items in the suite of questions used to measure material deprivation are designed to reflect the items and activities people in the UK believe to be necessary. These items are reviewed periodically to ensure the measure remains a relative measure of poverty. In 2010/11 four new questions about additional items were included in the FRS to be used in the future calculation of material deprivation scores, replacing the four existing items that were identified by research as potentially out of date partly because the proportion of the population considering them necessary had fallen. As such, there is a break in the series for child low income/material deprivation and estimates from 2010/11 onwards cannot be compared to those from before 2010/11.

In the 2010/11 FRS, both the new and the old questions were asked. As such, estimates are presented based on both sets of questions for this year.

For further information about material deprivation see the DWP Households Below Average Income publication.

Material deprivation for pensioners

A suite of questions designed to capture the material deprivation experienced by pensioner households has been included in the Family Resources Survey since 2009/10. 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 on the Bristol University webpages.
• 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 on the Bristol University webpages.

Together, these questions form the best discriminator between those pensioner households that are deprived and those that are not.

Where they do not have a good or service, pensioner households 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, or any other reason. 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, or any other reason - they are counted as being deprived for that item.

The exception to this is for the question on whether they could cover an unexpected expense, where the follow up question was asked to explore how those who responded ‘yes’ would cover this cost. 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, or any other reason. 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 households lacking those items that most 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 for download.

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 percent boost of the Scottish sample. This has increased the sample size available for analysis at the Scottish level. In 2002/03, the sample size was around five thousand. However, following cost savings introduced to the FRS in 2010, the sample size in Scotland has reduced. It was approximately 3,100 in 2017/18. For further information see the DWP Households Below Average Income publication.

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 Scottish Government Poverty statistics webpages shortly after publication.

The method used to calculate these confidence intervals changed in 2015/16. Information on this can be in DWP’s statistical notice. The new method widens confidence intervals for most estimates making statistically significant results less likely than before.

The Family Resources Survey publication 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 DWP’s publication.