The UK is home to a dynamic ecosystem of fintech organisations. These include new challenger banks (such as Monzo and Starling) and scale-ups that make money transfers faster and cheaper (for example Wise) and legal compliance easier (for example Cube). The application of technology in finance is not new, but the current wave of innovation is notable for its scope and scale.

Artificial intelligence and machine learning, cloud computing, open application programming interfaces and blockchain are among the technologies with the greatest impact. They are changing the ways in which financial service providers operate, communicate and engage with consumers and other stakeholders. New fintech applications are mobile-first, customer-centric and disruptive to previously unchallenged parts of the finance sector.

Is fintech benefiting everyone?

A central claim of many financial technology firms is that they provide new ways in which to tackle financial exclusion, that is, the ‘inability, difficulty or reluctance to access mainstream financial services, which, without intervention, can stimulate social exclusion, poverty and inequality’ (House of Lords Liaison Committee, 2021).

Being excluded makes life difficult in today’s highly financialised society. Access to a bank account and other basic banking products is a de facto requirement for most forms of accommodation, quality jobs or receiving welfare. But while consumers increasingly embrace digital alternatives for basic banking services, uptake of solutions that could have a greater impact – particularly among excluded and otherwise vulnerable consumers – has been slow.

Research exploring the use of fintech by financially vulnerable consumers shows that, for fintech to be more socially productive, entrepreneurs and policy-makers must improve both access and trust.

What opportunities does fintech offer to financially vulnerable and excluded individuals?

Traditionally, financial services firms have relied on brick-and-mortar branches and rigid legacy technology systems that are inefficient and costly to operate. These inefficiencies were often amplified by governance processes that require the completion of a series of time-intensive, manual tasks.

Recent fintech innovations have changed this, for example, by creating fully digital banking experiences and by implementing artificial intelligence (AI) to automate searching, matching, comparing, filling forms, reviewing and other rules-based back-office activities (Ashta and Herrmann, 2021). This type of automation leads to cost reductions that have the potential to make financial products and services more affordable to low-income consumers (Philippon, 2019).

In addition to increasing efficiency, open finance and AI can significantly improve the quality of debt advice services by providing a holistic picture of a customers’ financial situation. Machine learning algorithms can analyse large quantities of financial and non-financial data and potentially uncover patterns or early signs of vulnerability that humans might not be able to identify (Azzopardi et al, 2019).

These insights can help advisers to improve the accuracy and timing of their recommendations to customers. Similarly, financial institutions can use insights from open data and machine learning to provide personalised products and services that can improve the financial wellbeing and resilience of customers.

Other AI applications help consumers to identify opportunities to reduce expenditure and maximise their income, for example, by providing income-smoothing options (services that turn unpredictable income streams into regular payments by identifying a customers’ average earnings and balancing spikes or dips).

They can also assist by identifying benefits eligibility or offering automated money guidance. One of the most successful Scottish financial inclusion fintechs, InBest, has developed a platform that integrates these services to help vulnerable consumers to improve their situation and build up financial resilience.

Combining open data with AI and machine learning also enables fintech firms to use new approaches to credit scoring and risk assessment (Bazarbash, 2019). These approaches are potentially more transparent and do not rely solely on credit history. They can therefore provide easier access to credit for people with no or limited credit history (Jagtiani and Lemieux, 2017).

Besides directly addressing excluded or vulnerable consumers, fintech can have indirect effects on financial poverty by increasing productivity and fostering sustainable economic growth (Appiah-Otoo and Song, 2021; Song and Appiah-Otoo, 2022).

For example, financial technology tools for payments, accounting, cash flow management, smart contracts and other business functions can help small and medium-sized enterprises (SMEs) to increase productivity and build up competitive advantages (for example, based on reduced cost of capital, improved operational efficiency or increased liquidity). This creates opportunities for quality employment within and outside the fintech space.

Fintech can also positively contribute to financial inclusion, resilience and wellbeing through government services. Digitising government services can make the distribution of stimulus packages or financial aid much more efficient. In April 2020, roughly 7.4 million consumers in the United States opened PayPal accounts to enable faster receipt and cashing in of their economic impact payments (EIP) that were part of the Covid-19 relief efforts. This is one example of the potential of government-fintech collaboration.

Why have we not yet seen the expected results?

Financial technologies have the potential to help marginalised communities, yet progress has been slow. Our research indicates that there are two main barriers that can limit the ethical and equitable application of fintech for financial inclusion. Policy-makers and entrepreneurs should take these into account as they encourage further activity in this area.

First, there are issues around access. Some of the most vulnerable financially excluded groups in developed countries lack access to even the most basic information communication technologies. Even where individuals own mobile phones or have access to a personal computer with broadband internet, there remain underappreciated hurdles relating to ‘data poverty’ that restrict access to online services.

Data poverty occurs where disadvantaged groups cannot afford to purchase enough data to access online services, thus excluding them from the full range of financial services. This data poverty can be especially pronounced in rural areas, where residents can have less reliable 4G and 5G phone signals.

This research also shows that vulnerable consumers often feel excluded from existing fintech services as they do not have sufficient financial literacy to make sense of new products and services. Attempts to address this issue by ‘educating’ vulnerable consumers are often seen as patronising and can disengage users by putting them into boxes they don’t see themselves in. The complexity of technical jargon and the overuse of buzzwords also act as significant barriers to engaging many vulnerable groups.

A lack of trust is the second major barrier limiting the extent to which fintech is addressing financial inclusion. Research highlights that some disadvantaged groups are wary of new fintech services that are designed specifically to help them.

For example, this study found resistance to a new service that used an innovative algorithm to maximise government welfare benefits for claimants. This was viewed with suspicion by many potential users despite appearing to be a beneficial service. In particular, vulnerable groups were concerned that providing more information to government agencies and their intermediaries could result in them losing money or otherwise being reprimanded for the information they disclosed.

Given that many fintech solutions rely on large quantities of user data to function, the withholding of important information could undermine the viability of services for disadvantaged groups, leading to even greater marginalisation.

The study also showed that individuals can conflate the use of legitimate digital financial services with an increased risk of online fraud and exploitation. Many older communities, and other vulnerable user groups, generalised that ‘most online services are a scam’ and therefore all digital services are better avoided.

There is general inertia around moving away from physical currency, as cash is perceived as a lower risk. Conflicting expert advice (share your data to get better products and services versus don’t share any data to avoid being exploited), as well as complex public debates around questionable data practices – for example, the Facebook-Cambridge Analytica scandal – make it even more challenging for non-expert consumers to judge the legitimacy of fintech solutions without any form of trusted guidance.

How can fintech overcome remaining barriers?

Financial technology holds promise for addressing social exclusion, but there are still barriers from a user perspective. Policy-makers have an important role to play in bridging these supply and demand-side issues that are currently holding back progress.

A first step in this direction could be the development of a set of principles guiding how fintech products and services are developed for marginalised, vulnerable and excluded groups. If widely adopted these could give those groups confidence that financial products and services were ‘safe’ to use. They would also ensure accessibility for a wider community.

We identify the following six principles for those developing fintech solutions for financially excluded groups.

1. Explainability: technologically augmented decision-making affecting vulnerable groups should be fully explicable and auditable. There should be quick, easy and independent means available to challenge potentially unfair decisions.

• Bias mitigation: fintech developers should evaluate potential direct, indirect and intersecting biases when building products and services for marginalised user groups. Mitigation measures should be transparent and comprehensible to consumers and supporting third-sector organisations.

• Dignity: where possible, innovations should be created with – not for – users. User-centred and co-creation design tools should be adopted to improve the legitimacy and adoption of new innovations.

• Business model transparency: fintech ventures working with marginalised groups should be transparent about how revenue is generated, particularly where there is monetisation of user data or customer service fees and interest charged.

• Lightweight and non-obsolescent technologies: fintech entrepreneurs should build technological solutions that require minimal data usage and work on older hardware and operating systems.

• Accessibility and navigability: products and services should have only necessary functionality, be accessible for physically and cognitively impaired individuals and should adopt regionally appropriate variations of the internet crystal mark, which denotes clear use of language.

A common standard based on these principles, or some variation of them would be a productive way of addressing the concerns many vulnerable groups have around adopting new financial technology innovations. Indeed, the adoption of these guiding principles could help all fintech firms – not just those that specifically address vulnerable consumers – to become more socially productive.

Where can I find out more?

• Fintech: financial inclusion or exclusion? Report by Yoke Wang Tok and Dyna Heng (International Monetary Fund working paper).
• On fintech and financial inclusion: Report by Thomas Philippon (Bank of International Settlements working paper).
• Data poverty in Scotland and Wales: Nesta report by Patricia J. Lucas, Rosa Robinson and Lizzy Treacy.
• The impact of digital credit in low-income countries: Report by Valentina Brailovskaya, Pascaline Dupas and Jonathan Robinson.
• Video might kill the radio star: digitalisation and the future of banking: Report by Thorsten Beck, Stephen Cecchetti, Magdalena Grothe, Malcolm Kemp, Loriana Pelizzon and Antonio Sánchez Serrano.
• Fostering fintech for financial transformation: Report by Thorsten Beck and Yung Chul Park.

Who are experts on this question?

• Christine Oughton
• Sian Williams
• Karen Elliot
• Thomas Philippon

Authors: Felix Honecker, Dominic Chalmers and Nicola Anderson

Authors’ note: We would like to thank the members and guests of the FinTech Scotland Consumer Panel and the organisations they are affiliated with.
This project has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Sk?odowska-Curie grant agreement No 860364. This article reflects only the author’s view and the agency is not responsible for any use that may be made of the information it contains.

Photo by lucigerma from iStock

The post How can new financial technologies help to tackle social exclusion? appeared first on Economics Observatory.

On Monday, the Conservative Party leadership contest finally came to an end. Liz Truss emerged victorious, gaining 81,326 votes (57.4%) from party members, with former chancellor, Rishi Sunak, backed by 60,399 (42.6%) voters.

But there is to be no honeymoon period for the new prime minister, not least with the passing of Queen Elizabeth, just two days after inviting Truss to form a government. Soaring energy and food prices, the war in Ukraine and issues around the Northern Ireland protocol make for an in-tray few would envy. Truss’s reaction to these challenges – among many others – will quickly define opinions among her own MPs, international leaders and the public.

She has already announced her new government’s response to the energy crisis. The UK energy price cap will be fixed at £2,500 a year for a typical home for the next two years. According to the prime minister, the policy will save the average household £1,000 a year and comes in addition to the £400 energy bill discount announced earlier this year.

Businesses are also to be offered some government protection. They will see their energy costs capped at the same price per unit as households for six months (from October). This will then be reviewed, with possible additional protection to be offered to businesses in more vulnerable sectors.

Crucially, this intervention will not be funded via a windfall tax on energy companies’ excess profits, despite renewed calls to do so from the Labour Party. Instead, the scheme – which could cost in the region of £150 billion over the two years – will be financed via government borrowing. This will have significant and long-lasting effects on the UK’s public finances and future fiscal strategy.

Trust in me

For the prime minister to gain buy-in for this and other policies from the public, rebuilding trust in government will be essential. The importance of trust for effective policy-making is discussed by Chris Dann (London School of Economics) in a recent Economics Observatory piece.

If the government is perceived to be trustworthy, people will be more likely to comply with public policies via consent, such as paying taxes and following the rule of law. As Chris highlights, if we think of state capacity broadly as ’the government’s ability to accomplish its intended policy goals’, then compliance – and therefore trust – is critical.

But the latest data paint a dire picture. In the UK, only 35% of the people trust the government (according to these data from the Office for National Statistics, ONS). This is well below the OECD average of 41%.

Opinions on Westminster seem to be particularly negative compared with local administrations. Around 42% of people trust their local government; and trust is even higher in the civil service, at 55%. Political parties are the institutions in which the public places the lowest level of trust, at only 20% (see Figure 1).

Figure 1: Trust in political institutions

Source: ONS

Clearly, Liz Truss faces a large challenge in rebuilding trust among the public in the UK. This will be vital for the success of her premiership, but also for developing a better long-term relationship between the state and the people. As the country faces significant challenges, such as the current cost of living crisis, it is important for people to believe that those governing have their best interests at heart.

As Chris points out, developing a greater commitment to procedural fairness and amplifying people’s voices in the political process are key. This will help to ensure that policy decisions are seen as being legitimate, strengthening trust.

Pale shelter

The announcement of the energy bill plan will have come as a relief to many who face much increased costs. But as highlighted by two new Observatory articles this week, not all households are affected by the cost of living crisis equally. Two groups that are likely to be disproportionately hurt are disabled people and those already living close to or below the poverty line.

As outlined by Jennifer Remnant (University of Strathclyde), people with disabilities are more likely to face higher household bills already – whether because of extra transport costs or the need for specialist equipment or additional heating. What’s more, they are often excluded from full economic participation, particularly employment.

Benefits, designed to offer support, are of limited assistance as they are falling behind the cost of living. This also affects poorer households, as emphasised by Helen Barnard (Joseph Rowntree Foundation). Individuals with fewer resources are more likely to take on debt to cover essential bills and goods, and this extends the effects of the cost of living crisis and increases the likelihood of falling into poverty.

Hard bargain

With the prices of essentials such as food and other basic household items going up at an alarming rate, some politicians have suggested that ‘looking for bargains’ is the answer. But is this even possible? In another new article, our director Richard Davies explores whether inflation is avoidable and if, by shopping carefully, savvy customers can keep their food bills down.

Drilling into the micro data, Richard finds that many of the prices of bargain options are going up faster than those of higher-cost equivalents. Those who buy goods in the cheapest three baskets of goods (the 10th, 20th and 30th percentiles) are seeing higher rates of inflation than those at the top (the 70th, 80th and 90th percentiles). In short, prices have gone up more for families who already shop for bargain products (see Figure 2).

Figure 2: Average inflation rates, consumer price baskets

Sources: ONS and Davies, 2022

The key issue is that eventually, there are no cheaper options. At some point, the bargain-hunters will end up with much of their shopping taken from the cheapest possible value ranges. And while historically prices in this range have risen more slowly, with the UK’s latest bout of inflation, this is no longer the case.

Winter is coming

For now, at least, some of the pressure caused by rising energy bills may have been eased. But for families and businesses across the country, the months ahead will still be difficult. Prime minister Truss and her new cabinet will need to find a way to mitigate the worst effects of inflation, which Bank of England forecasts suggest could reach 13% by the end of the year.

There are also concerns that tightening monetary policy could plunge the country into a recession, which is likely to bring with it rising unemployment, lower investment and diminished tax revenue to fund public services.

Finding the balance between managing the cost of living crisis and protecting the economy presents a daunting task for UK policy-makers. Failing to rise to the challenge will have serious implications not only for Truss and the Conservative Party, but the country as a whole.

Observatory news

The Festival of Economics will be returning to Bristol on Monday 14 to Thursday 17 November. We’re delighted to announce a packed programme of talks and events, details of which can be found here.

And finally, as the nation enters a period of mourning, here’s a reminder of what’s changed and what hasn’t in the UK economy during the 70 years of the second Elizabethan age. John Turner (Queen’s University Belfast), one of our lead editors, wrote this piece to mark Queen Elizabeth’s Platinum Jubilee back in the summer.

Author: Charlie Meyrick

Image by pesian1801 for iStock

The post A matter of trust appeared first on Economics Observatory.

Like the Covid-19 pandemic, these are challenges that affect the whole country but not in the same way or to the same degree. A common thread is that they each affect individuals and households on low incomes far worse than those with more money.

As the temperature soared in July, the BBC released new analysis showing that people in deprived areas were disproportionately living in places far hotter than nearby, less deprived neighbourhoods.

The impact of this was exacerbated by pre-existing health inequalities, meaning that those on low incomes were more likely to have conditions that are aggravated by heat. They also tend to live in poor quality housing and lack the cash to spend on things that can help with the heat – such as a fan or an ice lolly.

Similarly, the high inflation driving the cost of living crisis is a global phenomenon, but the degree of exposure to it in the UK has been increased by policy choices. Before the pandemic, there were sharp rises in the numbers of people living in deep poverty (with incomes below 40% of median) and destitution (those with incomes so low they can’t afford the bare essentials such as food, shelter and clothing).

A decade of cuts and freezes to social security eroded support for people on low incomes, both in and out of work. Large numbers of workers were trapped in insecure, low-paid work with little chance of moving up to a better job. A dysfunctional housing market locked too many people into expensive, insecure, poor quality private rented housing. This is alongside a shortage of social housing and seemingly insurmountable barriers to ownership.

The economic impacts of the pandemic then fell most heavily on those who were already struggling. Many people on higher incomes were able to continue with well paid jobs, safely at home. Many were even able to build up savings as their leisure opportunities were curtailed by lockdowns and social restrictions.

By contrast, many on low incomes lost their jobs, saw their pay drop or were exposed to the higher risks of continuing with essential work in the community. Many also used up their savings and accrued debt trying to stay afloat.

The government’s decision to raise the rate of the main benefit – universal credit – gave significant protection to those receiving it during the pandemic. But the decision then to cut it again for those on the lowest incomes plunged many back into dire hardship. The universal credit cut imposed a drop in annual income of £1,000 for 5.5 million families – the biggest ever overnight cut to benefits.

As the cost of living crisis took hold, the ability of households to endure sharp price rises was therefore enormously unequal. The inflation rate they faced also varied.

Inflation has been driven up largely by the cost of essentials, particularly energy and food, on which poorer households spend far more of their budget than those on higher incomes. As overall inflation reached 9% in April, the effective inflation rate being experienced by those on the lowest income was already 10.9%, while those on the highest incomes faced a rate of only 7.9%.

The immediate impacts of this were evident in the numbers going without essentials such as food, heating or toiletries – seven million people, according to research carried out in May 2022 by the Joseph Rowntree Foundation (JRF).

There have also been spikes in the numbers turning to charities, such as food banks, to get by. The support package put in place by the government in May was very welcome, offering most low-income families additional support of about £1,200 (when added to previous announcements). This largely covered the rise in energy bills, but it is unlikely to be enough support for families facing many other cost rises and already in debt with average arrears of £1,600.

Going without daily essentials is, of course, appalling and can have long-term consequences for both physical and mental health. But the rise in debt and arrears, which has received less attention, is another deeply troubling consequence of the cost pressures bearing down on people.

Across the UK, 4.6 million people were already behind with bills in May, up a fifth compared with October 2021 (JRF, 2022). The average amount owed by low-income households in arrears was £1,600 and more than a million people were taking on debt just to cover essential bills.

Very worryingly, almost a fifth of low-income households were in debt to high-cost lenders including loan sharks, amounting to £3.5 billion in debt. Another £2.3 billion is owed to ‘buy now, pay later’ providers such as Klarna or Clearpay.

These debts will not disappear when inflation starts to fall and the economy returns to something closer to stability. The scope for many on low incomes either to save for future expenses or to pay off debt is severely constrained.

Debt and arrears also often have a significant impact on people’s mental health. Nearly half of people with problem debt also have a mental health problem and 40% say their finances have made their mental health problems worse, according to the Money and Mental Health Policy Institute. Financial difficulties also affect recovery rates, with people 4.2 times as likely still to suffer from depression after 18 months if they are in problem debt.

National crises and traumas always have long-lasting consequences that affect people across all income groups and parts of the country. But these are often disproportionately severe and long-lasting for those with fewer financial and other resources.

Children from low-income families experienced greater pandemic-related learning loss than those from better off areas. People in deprived areas are more likely to suffer from long Covid.

The current cost of living crisis is similarly likely to cast a deep shadow over people on low incomes, long after those who are better off feel that the sun has come out once again.

Where can I find out more?

• Not heating, eating or meeting bills: Managing a cost of living crisis on a low income: Report by the Joseph Rowntree Foundation.

• Going without: Deepening poverty in the UK: Report on the effects of deep poverty and forgoing essentials by the Joseph Rowntree Foundation.

• The facts – links between mental health and money problems: Money and Mental Health Institute.

Which organisations are experts on this question?

• Joseph Rowntree Foundation
• Citizens Advice
• Stepchange
• Resolution Foundation

Author: Helen Barnard

Picture by Richard Johnson on iStock

The post How might the cost of living crisis affect long-term poverty? appeared first on Economics Observatory.

Just under half of all people living in poverty in the UK are disabled or living with a disabled person. Prior to the recent and extreme increases in energy costs, disabled people are already more likely to live in a cold home during the winter months.

As a group, disabled people can expect to struggle to cover their food costs more than their non-disabled counterparts. Given that we are all likely to feel the crunch in the coming months, we can expect that the cost of living crisis is going to have a catastrophic effect on people who are already struggling to get by.

This article explores the two central and interrelated reasons for the relative poverty of disabled people in comparison with their non-disabled peers. These are the extra costs of being disabled (in a society that is organised for non-disabled people); and the exclusion of disabled people from full economic participation.

Why is it more expensive to be disabled?

There are several ‘hidden’ costs to being disabled (Smith et al, 2004). Disabled individuals and their families spend more on essential goods and services, such as heating, insurance, equipment, travel, food and therapies. Basics such as travel become more expensive when one has to finance a carer’s travel alongside one’s own, or when travelling by train or taxi rather than by bus for accessibility reasons (Schmocker et al, 2008).

Some disabled people – for example, those recovering from cancer treatments – will require additional heating in their house or have to buy more clothes to accommodate their fluctuating weight.

Others use assistive technologies, which need regular charging, or need to eat convenience food rather than raw or unprepared food. This comes with additional expense, as do condition-specific specialist diets.

Why can't disabled people just earn more money?

Disabled people often face economic exclusion. This results from long-held prejudices about disability and the ability of disabled individuals to participate equally in paid employment (Barnes and Mercer, 2005; Grover and Piggott, 2015; Remnant, 2019).

As with other social systems, workplaces and stereotypes of what makes an ‘ideal worker’ have been developed in opposition to disabled people (Foster and Vass, 2013; Sang et al, 2015). Similarly, the legislative context of what it is to be disabled in the UK is predicated on an individual’s capacity to undertake paid work.

Historically, workers either recovered from illness and returned to work, or departed from the workforce permanently due to death or disability. Workplace policies were developed on this functionalist assumption: that disabled and ill workers would assume the ‘sick role’, whereby they were relieved of normal duties such as work while they recover or leave (Parsons, 1951).

Although this assumption is out of date, as it does not incorporate the more commonly experienced fluctuating or long-term health conditions found in the contemporary and ageing UK workforce, it can be identified in workplace assumptions about disabled people’s capacity to work (Remnant, 2019).

These issues manifest in what is known as the ‘disability employment gap’. This is the gap between the proportions of disabled working age people in paid employment compared with their non-disabled counterparts. This gap is around 20% for women and 30% for men.

Disabled people experiencing multiple conditions co-morbidly or those with mental health conditions face higher risks of being unemployed. This is alongside replicating issues faced by many in the wider population, such as not having qualifications, being older and living in areas with struggling labour markets.

The consistent gap between the employment rate of disabled people of working age and their non-disabled peers is layered with levels of ageism, which seem to be inherent in ‘ableism’ (van der Horst and Vickerstaff, 2021).

For example, research shows that for both disabled and older workers, employers deliver positive rhetoric but harbour negative views personally about the capacity of those workers (Hutton et al, 2012). In the current competitive and individualised labour market, older, ill or disabled workers are likely to end up competing against younger, non-disabled workers for scarce opportunities.

Although the proportion of disabled people in employment has started to increase again, this should be viewed critically. Changes in this statistic are driven both by disability prevalence within the working age population and by the overall employment rate of the working age population inclusive of non-disabled people.

This also requires us to reflect on the quality of work made available to disabled people. They are also likely to be under-employed. This can mean working in lower-skilled occupations, working part-time (and subsequently fewer hours) and/or working for themselves.

Even before the pandemic, the labour market context was increasingly defined by precarity, on-demand and self-employed work (Standing, 2014). This has only been exacerbated by the pandemic.

Lockdowns triggered major labour market changes, temporarily devastating sectors such as aviation and hospitality, while increasing demand for drivers, couriers and delivery services (Fana et al, 2020). These are occupations largely made up of casual workers who do not have recourse to sick pay, despite having faced the increased risks of being exposed to Covid-19.

The opportunities for economic participation available to disabled people are decidedly limited. This is relevant to our understandings of disabled individuals’ domestic budgets because if people are not in paid work, they are likely to require recourse to state welfare provision.

Can't disabled people get welfare benefits?

Although there are welfare benefits available in the UK to disabled people and people experiencing long-term ill health, there is extensive evidence to suggest that accessing them is increasingly difficult (Garthwaite, 2011).

This is in terms of how to navigate the complexities of the websites and forms necessary to claim, as well as understanding the nature of welfare distribution and the various types of welfare and related eligibility criteria. Research continues to find that people who become ill or impaired during their working life find it very difficult to identify what they are entitled to or how they can claim it (Saffer et al, 2018; Moffatt et al, 2012).

For disabled people of working age, there are two key welfare benefits available based on impairment and/or long-term ill health: personalised independence payments (PIP); and employment and support allowance (ESA).

PIP (which succeeded the disability living allowance, DLA) is paid in recognition of the additional costs of being disabled and is available to disabled people in and out of work. Qualifying for PIP – since it was introduced in 2013 – has become increasingly conditional, with one-third of people who had previously qualified for DLA having their claims rejected (Cross, 2013; Roulstone, 2015).

ESA is an income-replacing welfare benefit, designed for people unable to work due to impairment or ill health. Claiming ESA is also conditional: it is contingent on the outcome of medical assessments and, sometimes, participation in ‘work-related activities’.

An irony of ESA is that it can inhibit a disabled person seeking paid work that they can manage around their symptoms. This is because if they earn over a certain amount, it jeopardises their continuing receipt of the benefit.

Recipients can only work up to 16 hours per week before their ESA is reduced, which is further complicated if they work on a freelance basis. Freelance and self-employed work can often result in inconsistent payment amounts month to month, which can lead to continued benefit payments being withheld.

These issues are compounded by the widely evidenced view that UK welfare benefits have, for some time, not fully covered the cost of living. This was made apparent in the periods of lockdown and unemployment during the pandemic.

A £20 uplift was added to universal credit, which is paid alongside some ESA payments, on the basis that new claimants could not afford to get by on the standard payments. These are payments that disabled people have been living off for years.

Can it get worse?

In short, yes. Unless something changes, the situation will deteriorate for disabled people.

The windfall tax mooted by Rishi Sunak when he was chancellor would be used to provide targeted financial support to those who need it most. This included a £650 one-off payment to low-income households, £300 payments to pensioners and £150 payments to non-means-tested disability benefit recipients (Lea, 2022).

But these payments, which are not received by all disabled people, are likely to be insufficient, given the complexity of their work/welfare status.

High inflation has been outstripping both wages and benefit increases, resulting in a reduction in disposable income for UK households. Huge increases in energy bills are not sustainable for many low-income households, such as those with disabled and unwell members (Khan, 2022).

This is a disastrous time for disabled people, particularly as many feel unprotected now that the social restrictions imposed during the pandemic have been lifted. The virus is still in evidence, but masks are not.

We run the risk of entering an indefinite phase of eugenics-by-negligence by allowing the continued rise of poverty and health inequalities (Limb, 2022a; 2022b). Anyone can become disabled or impaired during their lifetime, temporarily or indefinitely. These issues are not a matter of ‘them and us’: it is we. We need to do something.

Where can I find out more?

• Disabled people: Resources and reports from the Joseph Rowntree Foundation.
• Nearly half of everyone in poverty is either a disabled person or lives with a disabled person: Article from Disability Rights UK.
• To those who wish to penalise poor people, cold and hunger are signs of a perfect system: Article by Frances Ryan in The Guardian

Who are experts on this question?

• Disability Rights UK
• Disabled People Against the Cuts
• Frances Ryan
• Tom Shakespeare
• Roger Stancliffe
• Chris Hatton
• Gwynnyth Llewellyn
• Tania King
• Vaso Totsika
• Zoe Aitken
• Anne Kavanagh
• Carol Thomas

Author: Jennifer Remnant

Picture by 24K-Production on iStock

The post How is the cost of living crisis affecting disabled people in the UK? appeared first on Economics Observatory.

Some claim that inflation is unavoidable and that it is inherently unequal since poorer households often have fewer options in terms of shopping and essential items take up a bigger share of their incomes. Others suggest that by looking around for bargains, even the cash-strapped should be able to avoid the worst price rises.

This article uses the latest data to test these two points of view: is inflation avoidable?

Figure 1: The UK's consumer price index, 1988-2022

Source: Office for National Statistics (ONS)

The UK’s three measures of inflation – the consumer price index (CPI), the consumer price index including housing (CPIH) and the retail price index (RPI) – are closely related. They are all currently over 10% in the UK.

These measures are the country’s most essential economic yardstick – since they are hard-wired into policy decisions. Inflation is used to uprate pensions, public sector pay and to set the pay-out on inflation-protected debt.

Inflation also influences the Bank of England’s decisions in interest rates, and the payments made and received by savers and borrowers across the economy. The official figures are based on records for over 100,000 prices, which are collected each month by the ONS. Knitting together these underlying historical files (known as ‘price quotes’) results in a database of over 40 million prices going back to 1988. (More detail on the data is available in this paper and the files can be found on my site, here.)

The argument that high prices can be avoided by judicious shopping rests on the common-sense observation that for any given item there will be many options – and many prices – on offer.

To take a late summer example, consider a trusted gardener’s tool: the garden spade. So far this year, the ONS has already collected almost 1,000 prices for garden spades across the country. These range from £5.99 to £44.99:  £14.99 is the most common (modal) price; £19.99 is the middle of the distribution (the median); and the average (mean) price is £21.73 (see Figure 2).

Of course, there is likely to be a difference in quality between a humble spade bought for less than £10 and a fancy one for over £40. But the basic economic function of the product is the same.

If all we cared about in the economy was spades, then the ‘thrift’ argument would be right. Massive savings are possible if you go for bargain basement goods.

Figure 2: Price of different garden spades

Source: ONS

But we care about more than garden tools, and so to measure the cost of living in a meaningful way, we need to track a bundle of items. To simplify comparisons over time, I focus here on the prices of goods that were included back in the 1988 CPI and are still used today. There are 106 of these perennial items and a table summarising them is available here.

This bundle includes a range of products – food and drink, tobacco, homewares, clothing, healthcare products and services – that people across the UK have been buying for the past 34 years.

To follow how shoppers of various types – from those that opt for the cheapest options, to those that pay for luxury – we can track the distribution of prices over time. Figure 3 identify nine spending levels, corresponding to evenly spaced points on the price distribution.

In 2022, the group opting for the lowest priced bargains (buying at the 10^th percentile) could get the entire bundle for £1,650. Those buying the highest-priced options (the 90^th percentile) would need to spend over £7,000. Those in the middle group (the 50^th percentile) would spend £3,500.

The fact that the bundles include one-off purchases – pushchairs, for example – that have a wide range of prices magnifies the spread. There is a wide range of prices for many goods, and so there are savings from ‘trading down’ to comparable, but lower priced, items.

Over the long run, the lower end of prices has risen less quickly, as might be expected, with the long-run inflation rate for our best bargain bundle close to 2%. Again, this seems to support the intuitive thrift argument: over the long run, the price of the cheapest goods tends to rise slowly. (This price distributions for all of the goods can be seen in this visualisation).

Figure 3: Consumer bundles by price decile, 1988-2022

Source: ONS

High costs for low prices

So, should the spread of prices in the economy make us less worried about inflation? There are three reasons why not.

The first is that for many goods, inflation is impossible to avoid. We can see this by comparing the plots below for garden spades and driving lessons (Figures 4A/4B).

Over the past 30 years, the spread of spade prices has changed very little: you could buy one for £15 in 1990 and you can today. But for driving lessons, the pattern is different. As time passes, prices rise at the top and disappear at the bottom. So, while driving lessons priced at £11 per hour were common in 1990, the cheapest today is closer to £20.

Learning to drive can be an economic and social necessity – if you live rurally, for example – and the only option is to pay higher prices. Energy markets, covered extensively on the Economics Observatory site, are another example of this.

Figure 4: Price evolution, 1990-2022

Panel A: Garden spades

Panel B: Driving lessons (one hour)

Source: ONS and author's calculations

The second problem is that you can’t keep switching to ever cheaper options. At some point those driven to find bargains will end up with much of their shopping the bargain bucket. And while historically, prices here have risen more slowly, that pattern has evaporated with the UK’s latest bout of inflation.

In fact, those that buy goods in the cheapest three buckets of goods (the 10^th, 20^th and 30^th percentiles) are seeing higher rates of inflation than those at the top (the 70^th, 80^th and 90^th percentiles). Families that shop at the bottom now face higher inflation than those that shop at the top.

Figure 5:  Average inflation rates, consumer price baskets

Source: ONS and author's calculations

Note: Buckets defined as average across inflation rates for decile groups (Bottom = 10^th, 20^th, 30^th; Middle = 40^th, 50^th, 60^th, Top = 70^th, 80^th, 90^th).

The third problem is volatility. To see why this matters, step back and consider why inflation matters. In part, it is due to the costs that workers and shops face – often referred to as ‘shoe-leather’ and ‘menu’ costs – when trying to keep up with rising prices.

But it is unexpected shifts in inflation that are especially damaging, since these undermine plans in the economy – from wages rates to investment decisions. This is why John Maynard Keynes saw unanticipated inflation as the most malign type, writing about the ‘precarious life of the worker’ and ‘excessive windfalls’ to profiteers (Keynes, 1956).

As the UK’s inflation targeting regime was set up, volatility and the violation of expectations were seen as a vital target. Useful, and very readable, articles from this period include Leigh-Pemberton (1992) and Briault (1995). Price rises are supposed to be low, and predictable.

Assessed over short windows of time, prices are highly volatile, as a series of seminal studies focused on US data by, Emi Nakamura and Jón Steinsson (2008), Pete Klenow (2010), and Virgiliu Midrigan (2011) have shown. Some of the reasons why are intuitive – firms offer temporary sales and when multiproduct companies decide to change prices, they often change them all.

The important point here is that prices, as well as trending up with inflation, are in constant flux. And the problem is that the price bundles for the perennial goods shown here seem to have a lot of volatility at the bottom. The long-run standard deviation (the distance from the average) of the cheapest food prices is around 11% higher than for the most expensive, for example.

Other categories, including services, show volatility at the top and bottom, but less in the middle. The concern is that those shopping at the low end are likely to pay a high price in terms of inflation uncertainty.

In summary, there are elements of truth in both perspectives on prices. A capitalist economy provides choice, and we have seen a huge ‘fanning out’ of prices in the UK over the past 30 years. So, many families will be able to make savings by trading down – opting for bargain basement options and forgoing luxury. Indeed, this intuitive response to higher prices seems to be playing out across the economy, as evidence from supermarkets and consultancies shows.

But this does not reduce the problem, nor ease the headache for the Bank of England and HM Treasury. You can’t scrimp forever, and the analysis here shows that, once you reach the bargain basement, prices are rising fast and are volatile. The latest inflation in the UK, the worst since the 1970s, is one in which those at the bottom are paying some of this highest costs.

Technical notes/data access

The data used in this essay were first published as Davies, 2021. I update the databases each month and make them openly available via my website here. Please get in touch if you have questions related to a research or policy project.

The specific numbers used in these figures, together with the JSON spec that draws the charts (using Vega), are all available on my GitHub page, here.

Where can I find out more?

• Inflation and price indices: Latest data and updates from the ONS.
• How is inflation affecting your household costs? ONS inflation calculator.

Who are experts on this question?

• Jagjit Chadha
• Richard Davies
• Huw Dixon
• Michael McMahon
• Xavier Jaravel

Author: Richard Davies

The post Is inflation avoidable? appeared first on Economics Observatory.

The rise, alongside the general increase in prices across the economy, has prompted government ministers to consider what can be done to help families facing a cost of living crisis.

In reality, when talking about the cost of childcare, there’s no ‘one-size-fits-all’. Some families face extraordinarily high bills, which eat up a large share of their income.

But in England, the majority of families with pre-school aged children don’t have any childcare costs at all, either because they are not using formal childcare or because they are benefitting from government or employer support.

Teasing out which families are struggling with childcare costs is an essential first step in developing policy options that can help those most affected.

Use of childcare

Families use many different arrangements to look after their young children. We can group these into formal arrangements – such as nurseries, childminders or playgroups – and informal ones, including care from grandparents and other family and friends.

Across the European Union, just over a third of children aged two and under are in some kind of formal care, and another quarter are in informal care only. Just under half of children are looked after exclusively by their parents. But formal childcare use can be much higher – for example, two-thirds of young children in Denmark and the Netherlands are in formal care.

As children get older, their families are more likely to use formal care – in England, data from 2019 suggest that a third of one-year-olds were in formal care, rising to almost 60% of two-year-olds and 85% of three- and four-year-olds. Families also vary quite a bit in how many hours of formal childcare they use.

Childcare costs

These different patterns of use contribute to large differences in costs. Choices about whether to use formal childcare, what type of setting to pick and how many hours to pay for are the principal drivers of families’ weekly childcare bills.

But childcare spending is also affected by factors that are less directly within families’ control. The existence and extent of government involvement in the early years market – through providing settings, regulating prices or subsidising families’ childcare directly – has a huge impact on choices and costs.

Children’s ages are also an important driver: prices for younger children are usually much higher, partly due to tighter staff-to-child ratios in younger age groups.

This is borne out in data from England. Among all families, the median amount spent by households on childcare, irrespective of the child’s age, is £0 per week. In other words, more than half of all families with children under school age paid nothing out-of-pocket towards the cost of childcare in 2019. This is either because the child did not attend a formal provider or because the family used government or work-based support to pay for the care.

Among families using formal childcare, the median weekly spend for a one-year-old was £90, falling to £45 per week for those with a two-year-old. This reduces to less than £5 per week for families with a child aged three or four.

These variations across ages reflect differences in government support as well as in prices and hours. In England, all families with a child aged three to four are eligible for 15 hours of free childcare per week – and families where all parents are in work get 30 hours free each week.

As a result, parents of children in this age group tend to pay less for formal care on average. Around two-thirds of these families did not exceed their childcare entitlements and so didn’t have to pay fees out-of-pocket during term-time.

Families with the highest weekly childcare costs also tend to be those with higher incomes. These families are more likely to have both parents working full-time and therefore use more hours of formal childcare per week.

They also tend to be more willing to pay higher childcare prices. But among families using formal childcare for their one- to two-year-olds, high childcare costs are common even for those on lower and middle incomes.

Figure 1: Mean and median weekly cost of formal childcare in England by age group, 2019

Source: Institute for Fiscal Studies (IFS), 2022
Note: The median family with a child aged one, two, or three to four (left panel) does not pay anything out of pocket for formal childcare.

What can be done to ease childcare costs?

The cost of living crisis has drawn more attention to the high cost of childcare that some families face. In response, the UK government has set out proposals aimed at reducing parents’ costs by reforming the childcare market in England.

These include relaxing staff-to-child ratios for two-year-olds from one staff member per four children to one to five, and a series of changes aimed at supporting more people to become childminders.

Childcare ratios for two-year-olds in England are currently tighter than in most European countries. These legal limits also tend to bind, particularly at younger ages, where around four in five providers are operating at the legal limit.

But comparing ratios internationally can be difficult since countries have different requirements for the training and qualifications of their staff. Even within the UK, Scotland has slightly looser ratios for two-year-olds – one to five, as the UK government is now proposing – but also a somewhat different qualification framework.

Whether any change would affect parents’ costs depends on whether settings will relax their limits, whether they will be able to do this without significantly increasing wages (at a time when recruitment is difficult) and whether any cost savings would feed through into lower prices for parents.

A survey of childcare providers, carried out by the Early Years Alliance, found that 87% of providers reported that they were ‘opposed to the principle of relaxing ratios’ and just 2% believed the changes would result in lower fees for parents.

Another option for the UK government to ease the impact of childcare costs is to increase knowledge and take-up of support that is already available. Awareness and take-up of the universal part-time entitlement for three- to four-year-olds is very high already. But around 60% of families entitled to a 30-hour place, and 65% of entitled two-year-olds, take up less than their full offer.

Programmes outside the free entitlement fare even worse. In 2019, only 40% of pre-school parents reported being aware of the tax-free childcare programme that provides a 20% childcare subsidy and is the main source of support for working families with children aged between one and two.

Working families on low incomes can get generous childcare subsidies through the benefits system, but recent statistics suggest that only a quarter of eligible families with pre-school aged children received anything at all through this programme.

Figure 2: Awareness of the main programmes of government support for childcare in England, 2019

Source: IFS, 2022
Note: For two-year-old entitlement, the figure shows the share of parents of two-year-olds aware of the programme (rather than the share of all parents of a zero- to four-year-old). Identification of eligible families is detailed in the original report.

Are childcare costs an issue?

A child’s first few years of life can be an expensive time for families, particularly in countries where there is relatively little public funding for childcare. Prices in England are high by international standards, although government support reduces them for some families – especially those with three- and four-year-olds.

But those with younger children often face a double hit from higher prices and less access to government support. This is probably part of the reason that they are less likely to use (much) formal childcare.

As a short-term solution to the cost of living crisis, increased public funding for childcare may not be the answer. Most people do not have pre-school aged children and most families that do have young children pay nothing for childcare.

But in the longer term, high childcare costs can shape families’ decisions and make it more difficult for parents (mainly mothers) to return to work. International evidence from countries including Canada, Germany and Spain suggests that providing more affordable childcare can significantly boost mothers’ labour supply. This is especially the case in places where few mothers work or where childcare availability is low.

On the other hand, childcare policies do not always affect labour supply. For example, an expansion of subsidised childcare in Norway had little impact on work decisions.

In the UK, the best available evidence suggests that full-time care for four- and five-year-olds modestly boosts mothers’ labour supply, but the part-time universal free entitlement had no effect. There is little evidence for the impact of childcare subsidies on mothers with younger children.

And there are reasons to support childcare that stretch beyond families’ costs and their work decisions. High-quality early years provision can support children’s development and close early inequalities – although the short, structured days in this sort of provision can be less helpful for parents seeking to work.

The childcare system supports children and their parents through a critical period, with consequences for child development and parents’ working patterns as well as family budgets.

While the childcare system is unlikely to be the source of significant short-term wins to address wider cost of living pressures, longer-term policies that recognise these multiple aims can help the sector to deliver better outcomes for all families.

Where can I find out more?

• The changing cost of childcare: Institute for Fiscal Studies report by Christine Farquharson and Harriet Olorenshaw.
• How can we fix the childcare system? IFS Zooms In podcast with Christine Farquharson and Neil Leitch.
• What is childcare for? BBC Radio 4 podcast with Charlotte McDonald.
• Can universal preschool increase the labour supply of mothers? Review by Sarah Cattan.
• The role of early childhood education and care in shaping life changes: part of a series on ‘the changing face of early childhood in Britain’ by Carey Oppenheim and Nathan Archer.
• Childcare and early years survey of parents 2019: Department for Education
• Coram family and childcare survey 2022.

Who are experts on this question?

• Christine Farquharson (Institute for Fiscal Studies)
• Jo Blanden (University of Surrey)
• Carey Oppenheim (Nuffield Foundation)
• Kitty Stewart (LSE)
• Sarah Cattan (Institute for Fiscal Studies)

Authors: Harriet Olorenshaw and Christine Farquharson

Photo by Halfpoint from iStock

The post Rising costs of childcare: which families are struggling most? appeared first on Economics Observatory.

But as the cost of living is going up, workers’ wages, especially those on the minimum wage, are being squeezed. In real terms – in other words, adjusted for inflation – pay excluding bonuses dropped by 2.8% in March to May 2022 compared with the previous year, according to new data from the Office for National Statistics (ONS). This was a record decline.

Why do countries have minimum wages?

Two reasons: economics and politics. On the economic side, a minimum wage can help to prevent the exploitation of vulnerable workers by unscrupulous employers. It can also help to reduce wage inequality and poverty.

A minimum wage cannot be used to eliminate poverty on its own. It is an hourly wage and many people are in poverty because they work few or no hours. Whether a household is in poverty also depends on the number of people in the household and how much they earn. Nevertheless, it is a useful part of the policy toolkit to address poverty.

Politics also matters. The minimum wage is popular with the public, and so political parties tend to support it. For example, a September 2021 opinion poll found that two-thirds of people in the UK supported a policy of ‘the minimum wage rising gradually over the next few years to £15 an hour’. Even though the minimum wage is often thought of as a ‘left-wing’ policy, majorities of Conservative voters also support rises in it.

Many people think there is something very wrong with an economic system in which someone who works hard is still unable to provide an adequate standard of living for themselves and their families.

Are there downsides to the minimum wage?

The main concern that economists have is that there may be job losses if the minimum wage is set at too high a level. Firms will only employ workers if they think that the value of what they produce is greater than what the worker costs. If the minimum wage makes labour too expensive, there will be fewer jobs.

But how high can the minimum wage go before we start to see job losses? Economists disagree on the answer to this question. Thirty years ago, most economists would have said that any level of the minimum wage inevitably costs jobs as they believed that it is a basic principle of economics that the demand for labour always falls as wages rise.

Today, many – though not all – economists think that this view is over-simplistic and that appropriate levels of the minimum wage need not cause job losses. What changed minds was partly the research of two economists in the United States: David Card and Alan Krueger.

They argued that the empirical evidence linking the minimum wage to job losses was weak. The influence of this work was one of the reasons that Card was a co-recipient of the 2021 Nobel Prize in economics. But there has also been a change in how many economists view labour markets.

The view that the minimum wage has to cost jobs is rooted in the view that the labour market is well-approximated by what, in economists’ jargon, is called ‘perfect competition’. In a perfectly competitive market, jobs are freely available so competition among employers for workers is intense and this drives wages up until they are equal to productivity. So any attempt to legislate higher wages makes some workers unprofitable.

In the hypothetical world of perfect competition, losing a job is no big deal because finding an identical job is no harder than discovering that the local Sainsbury’s is out of milk and going to Tesco instead. But that is not most people’s experience of labour markets.

The reality is that competition for workers is not as strong as many economists would have you believe. An employer who cuts wages will find that most employees are unhappy, but that few will just walk out the door.

It therefore follows that it makes economic sense for employers to pay workers less than the marginal worker adds to revenues. Now a minimum wage will not necessarily price the marginal worker out of his or her job, although most economists think this could happen if the minimum wage is too high.

What is the appropriate level of the minimum wage?

Even once we have decided to have a minimum wage, we need to decide on its level and what, if any variation, it should have.

The UK has taken a largely empirical approach to this question. Recommendations about the level of the minimum wage in the UK are made by the independent Low Pay Commission (LPC) and the recommendations are mostly, though not always, accepted by the government.

The LPC spends a lot of its time considering whether there is evidence that current levels of minimum wages cause job losses and, to date, they have found very little evidence that they have. As a result, the minimum wage has increased over time.

This is not just in nominal terms – the adult rate today is £9.50 per hour compared with £3.60 when it was introduced in 1999. This is almost 2.5 times as high. Figure 1 shows how it has changed over time.

In reality, this is a meaningless comparison; both prices and average wages have a risen a lot in the past 20 years. But the real value of the minimum wage – its purchasing power or the amount of goods and services that can be bought with it – has also increased as it has risen at a faster rate than prices over the past two decades.

But in July 2022, the rise in the minimum wage was lower than the rate of inflation. The real value of the minimum wage today is 1.5 times the level it was in 1999. And its real value has risen faster than average earnings, which have grown by only 25% over the same period.

Figure 1: Wage progression, 2000-2022

Source: Low Pay Commission report, 2021

This means that the minimum wage has risen as a percentage of average earnings from to 42% in 1999 to close to 60% today. Since 2016, the government has given the LPC a target for the minimum wage of two-thirds of average earnings by 2024, taking economic conditions into account. To date, we are on track for this. If we meet the target, the UK will have one of the highest minimum wages in the world as a percentage of average earnings.

Others want to go further and faster. In Autumn 2021, there was a debate over whether a £15 minimum wage was feasible. If introduced now, this would be very close to median hourly earnings, affecting 50% of workers. The minimum wage is the main reason that wage inequality at the bottom end of the distribution is lower now than it has been for over 40 years (the top of the distribution is another story).

What is the difference between a minimum wage and a living wage?

When first introduced, the UK’s minimum wage was called the National Minimum Wage. Since 2016, the adult minimum wage has been called the National Living Wage. What is in the name change from ‘minimum’ to ‘living’ wage?

There are two main traditional differences between minimum and living wages. First, there is the way in which they are computed. The idea behind the living wage is a simple one: to determine the wage rate necessary to ‘ensure that households earn enough to reach a minimum acceptable living standard as defined by the public’.

Currently the living wage computed by the Resolution Foundation for 2020/21 is £11.05 inside London and £9.90 outside (reflecting differences in the cost of living). The living wage need not be the same as the highest minimum wage that does not cause job losses. This is because market economies do not, on their own, guarantee that all people will be able to find an employer prepared to pay them a wage that gives them the opportunity to earn a decent standard of living for them and their family.

The second difference between the minimum wage and the living wage is that while employers are legally obliged to pay the minimum wage, the living wage is intended as a voluntary minimum wage for employers who feel able to pay their workers more. Currently in the UK, 9,000 employers are formally accredited as living wage employers, covering over 300,000 workers. A voluntary living wage can raise wages for workers who do not directly benefit from the lower minimum wage.

But the difference between minimum wages and living wages was blurred by George Osborne’s 2016 decision to call the main adult minimum wage a living wage even though this living wage was neither voluntary nor based on an assessment of the income needed to live.

As a result, what was the living wage is now known as the real living wage. It is confusing, but testament to the view that minimum and living wages, once very controversial, are here to stay and everyone wants to claim some of the credit.

Where can I find out more?

• A minimum income standard for the United Kingdom in 2021: Report from the Joseph Rowntree Foundation
• National minimum wage and national living wage rates: Details from GOV.UK
• Low pay Britain: Resolution Foundation report by Nye Cominetti and Hannah Slaughter
• What is the optimal minimum wage? Blog from the LSE Business Review
• Designing a minimum wage to reduce poverty and wage inequality: Article by Alan Manning
• Low Pay Commission report, 2021

Who are experts on this question?

• Alan Manning
• Jonathan Wadsworth
• Steve Machin

Author: Alan Manning

Photo by Andrii Lysenko from iStock

The post Minimum wages and living wages: what happens in times of inflation? appeared first on Economics Observatory.

Inflation has been rising for several months and has now reached a 40-year high, climbing to 9.4% in the year to June 2022 (see Figure 1). This is due to irregularities and disruptions in demand and supply, and to increasing energy prices. Demand patterns have been inconsistent as the Covid-19 pandemic waxes and wanes, affecting production and distribution, and disrupting global supply chain availability and costs.

In the UK, Brexit has increased costs and difficulties of obtaining labour and of importing and exporting products. It has also had an indirect impact on exchanges rates, with the pound falling against the dollar substantially since 2016. But it is energy prices (mainly internationally priced in dollars) that are driving current inflation. Increasing wholesale gas and electricity prices are feeding into rising domestic and commercial energy bills. The cost of petrol has almost doubled in the UK since May 2020. These issues predate, but have been exacerbated by, the Russian invasion of Ukraine.

Figure 1: Inflation (June 2012 to June 2022)

Source: Office for National Statistics (ONS), 2022
Note: CPIH – consumer price index including owner occupiers’ housing costs; CPI – consumer price index; OOH – owner occupiers’ housing costs

Consumer costs have been rising for some time. Government increases in tax and national insurance, as well as the removal of pandemic-related universal credit and other benefit increases, have exacerbated the escalation. This situation also comes on the back of a decade of austerity and wage restraint for much of the population, which resulted in stagnant incomes and decreased spending power for many. Further, inflation concerns have resulted in the Bank of England raising its base rate from an all-time low of 0.1% (held between March 2020 and December 2021), through five increases to 1.25% in June 2022, impacting the costs of consumer and business borrowing.

How are consumers being affected?

Everyone is hurt by inflation, but the impacts are not felt evenly across society. Low-income consumers are more adversely affected as they spend a larger proportion of their income on food and energy (see Figure 2). The effects of rising energy, housing and transport costs have a differential and significant impact on lower-income consumers, as do food and other consumer goods prices (see Figure 3). There appear to be spatial implications from this, with the Centre for Cities calculating that inflation rates are higher in northern and poorer cities, due to their demographics, infrastructure and economic makeup.

Inflation has resulted in many (but not only) lower-income households cutting spending and/or switching the products they buy, as well as wider use of food banks and greater reliance on debt for regular spending. The problems facing low-income consumers have been highlighted by the food poverty campaigner Jack Monroe, who focuses on both the increasing prices and low availability of products typically consumed.

Figure 2: Inflation rate by income decile

Source: Institute for Fiscal Studies (IFS), 2022

Figure 3: Household spending on food and energy, 2019-2021

Source: House of Commons Library, 2022

These wider impacts on consumers can also be seen through the Growth from Knowledge (GfK) consumer confidence index. The index – which presents changes in sentiment arising from consumers’ views of their finances and the economy now and in the next 12 months – is now at its lowest level since the series began in 1974, with an exceptionally rapid decline in the last year (see Figure 4). It shows that consumers are experiencing their own financial issues but are also concerned about the general economic situation ahead and how this might affect them.

Figure 4: GfK Consumer Confidence Barometer June 2022

Source: GfK, 2022

This has also been identified in the ‘abdrn Financial Fairness Trust/University of Bristol 6^th Coronavirus Financial Impact Tracker Survey’ (June 2022), which showed the largest decrease in financial wellbeing since the study began. An additional 1.6 million households are estimated to be in ‘serious difficulties’, as well as an increase in those ‘struggling’. These impacts are focused on lower income households and describe a precarious financial existence, with reductions in retail spending, including on food, one consequence.

Consumer confidence in the UK is thus very low despite measures by the government to moderate the impact of household energy bills from spring 2022. An initial Council Tax Rebate of £150 for households in A-D Council Tax Bands has been followed by a package of UK Government assistance payments, to come in between spring and autumn 2022. This covers 8 million low-income households on benefits (£650 per household), 6 million individuals on disability benefits (£150), 8 million pensioner households (£300) and £400 for all households through an energy bill payment. More might be needed in the autumn as energy prices are now predicted to rise even further.

How is the retail sector affected?

The retail sector is beginning to see the impacts of these trends. Food products such as pasta, bread and crisps have seen large price increases, but consumers report rises across the entire product range. A particular recent example is the price of Lurpak and other spreadable butters, leading to reports of an increase in security tagging of food products. They also report cutting back on food purchases, switching to cheaper brand products, shopping more frequently for less, switching to discounters and managing budgets closely, even at the checkout tills.

In non-food markets, people are also postponing spending on large items, such as household and white goods or cars. For retailers this may lead to unsold stock accumulating in the supply chain, especially where orders were placed a while ago. There is also some evidence that clothing companies are being affected by consumers returning items, even those that have already been worn. The British Retail Consortium sales data for July 2022 showed a third consecutive month of falling sales, even before inflation was accounted for.

This slowdown in spending is picked up in official retail sales figures. There has been a fall in retail sales volumes, mainly resulting from a decline in fuel and non-food store spending, according to ONS data for Great Britain for June 2022 (see Figure 5). Online sales have continued to decline as a proportion of retail sales but remain above pre-pandemic levels. June saw food and drink sales rise due to the Queen’s platinum Jubilee, but the broad trend is for declining food sales.

These figures show a steady downward trend in retail sales volumes since summer 2021. Affordability is increasingly affecting purchasing decisions, leading consumers to buy fewer food and household items. As more consumers report difficulties in paying bills and a lack of financial resilience and savings, income to spend on retail goods (including essentials) is further squeezed.

Figure 5: Retail sales volumes (2019-2022)

Source: ONS, 2022

The location and type of shops that people use may also be changing. With high transport costs (especially petrol), local stores may benefit from consumers avoiding costly travel. In contrast, larger car-dependent stores may see a decline in footfall and spending.

Increasing costs may also affect how much online retailers charge for delivery, potentially hurting online sales (although consumer perceptions of delivery costs versus petrol prices remain uncertain).

Concerns about the cost of living have led to workers demanding wage increases and some industrial action. Retailers have had to offer staff pay increases – often linked to the minimum and/or living wage or levels above these – and have faced other difficulties in the labour market, where retail vacancies remain high, and labour is in short supply.

Retailers are also affected by rising operating costs. Businesses’ energy costs are rising and are not capped (unlike for consumers). Similarly, purchasing and transporting or delivering products to stores or to consumers is becoming more expensive. Retailers are also vulnerable to other government and administrative costs such as rates, rent and various levies, which compound the pressures on retailers’ outgoings, even at a time that sales are falling.

What is the outlook for retailers?

The Bank of England and the UK government argue that the current cost of living issues (and especially inflation) are temporary. They are hopeful that pressures will ease in 2023, and that inflation will return to its 2% target by 2024.

But international geopolitical tensions – from pandemic-hit supply chains (particularly in the supply powerhouse of China where covid continues to impact production and distribution) to the war in Ukraine (which is affecting food, energy and fertiliser supplies) – do not show signs of easing. As a result, the prices of various commodities and products are predicted to remain high. Energy prices, for example, have been pushed up by the war and a lack of storage and do not yet seem to have stabilised. This means price pressure on consumers is set to continue in the short term, at least.

Figure 6: Anderson’s ‘Agflation’ and UK consumer price index (2015 to 2023)

Source: The Andersons Centre, 2022
Note: Andersons’ Agflation index builds on Department for Environment, Food and Rural Affairs price indices for agricultural inputs and weights each input cost (for example, animal feed) by the overall spend by UK farmers. Andersons then provides a more up-to-date estimate of the price index for each input cost category.

Product prices also look set to remain high or even increase. The Anderson ‘Agflation’ index – which looks at the price of inputs to farming – stands at over 30% and points to the difficulties that farmers and other producers are having in controlling costs (see Figure 6). These issues will inevitably have a knock-on effect on the prices of food in the coming year. Climate change, including record heat in continental Europe, is likely to hinder food supply further.

This is leading to tensions between retailers and manufacturers. Whilst there are always tough price negotiations in these relationships, disagreements are becoming more common and extreme., leading for example to a Kraft Heinz/Tesco public disagreement and refusal to supply by Kraft Heinz. Tesco said they would not pass on ‘unjustifiable price increases’ while Kraft Heinz said they would ‘not compromise on quality’. Supply tensions across retail sectors continue to simmer as retailers and manufacturers are squeezed in turn by reducing consuming spending and increasing input prices.

For consumers (especially those with lower incomes), the situation and outlook are particularly worrying. This is driving changes in shopping behaviour, affecting retailer performance. If current trends continue, an increasing share of the population will be affected, leading to more widespread effects on the retail sector.

But there will be some winners as well as losers. Retailers focused on value and low prices, perhaps through their own private retail brands, can benefit from the switching underway. Those with a local presence, allowing consumers to avoid costly travel, will also stand to gain. While many consumers and retailers are finding life very difficult, others are relatively unaffected, and some groups clearly have money to spend. Ultimately, how long the current inflationary surge lasts will affect how well, or badly, different parts of the retail sector perform.

In the short term, it is going to be tough for consumers and retailers. Worries about inflation and impact of price rises across the economy are leading to reduced spending and personal hardship. Retailers are experiencing this slowdown and until inflation falls and/or consumers see increases in their disposable income, spending will continue to struggle impacting retailers in turn.

Where can I find out more?

• The Office for National Statistics (ONS) publishes regular updates on their data series and a range of analyses of the trends and directions. They are adding to their standard data series with a range of experimental data sets.
• The House of Commons Library contains a range of reports and briefing papers on topics mentioned in this article.
• A wide range of academics, consultants, NGOs and other formal bodies and pressure groups report regularly on the economic background and implications of many of the issues discussed here. These include the Office for Budgetary Responsibility (OBR), the Institute for Fiscal Studies (IFS), the Institute for Government, the Resolution Foundation, the Institute for Public Policy Research (IPPR) and the Trussell Trust.

Who are experts on this question?

• Lotanna Emediegwu
• Michael McMahon
• Leigh Sparks

Author: Leigh Sparks

Photo by Alexey_Fedoren from iStock

The post How is the cost of living crisis affecting retailers and their customers? appeared first on Economics Observatory.

Indeed, even before the inflationary pressures of this year had emerged fully, the pandemic had increased demand. Over half (57%) of charities reported a growth in demand for their services in a survey published in November 2021, of which only 4% expected this to decline (National Council for Voluntary Organisations, NCVO, 2021).

Charities themselves also face rising costs of energy and other essentials – and potentially increasing wage pressures. Those that rely on public donations may also be concerned that people will cut back on their giving as their own budgets are squeezed.

Looking at the effects of past recessions on charitable giving can provide some insights into what might happen to donations in the coming months.

Giving and the economy: recessions in the 1980s, 1990s and early 2000s

In the 1980s, 1990s and early 2000s, giving in the UK appeared to be largely recession-proof (Cowley et al, 2011). The value of donations increased in times of economic growth and did not fall at the same rate as the economy during periods of recessions.

Total giving was positively correlated with GDP growth over this period, but the positive relationship was driven by boom times (particularly the 1980s boom). Further analysis shows that the boom caused givers to give more, rather than increasing the number of donors.

Evidence from the United States shows a similar pattern. Analysis of data for the period from 1968 to 2007 found that overall donations were affected by fluctuations in the economy. But they were more sensitive to economic upturns than to economic downturns (List and Peysakhovich, 2011). In other words, economic booms were more likely to lead to an increase in donations than recessions were likely to reduce them.

The study also found that donations were more sensitive to changes in the stock market – movements in the S&P 500 – than to changes in GDP, and that donations were more responsive to stock market upturns than downturns (List and Peysakhovich, 2011). Negative changes in the S&P 500 did not affect donations significantly.

What might explain these different effects of macroeconomic conditions on donations? One explanation is that the increase in need during economic downturns leads to a ‘substitution effect’ – donations are more valuable – that can partly or fully offset the ‘income effect’ that would tend to reduce giving. This might be amplified by charities increasing and intensifying their fundraising activity. 

Another factor behind the strong positive effect of boom times, particularly the rise in the stock market, is that people may be more likely to donate windfall income – that is, unexpected increases in income that people may feel that they haven’t earned.

Evidence from laboratory experiments confirms that people are more likely to donate bonus income rather than similar amounts of earned income. Further, research shows that this behaviour may reflect a social norm about what is the morally appropriate thing to do (Drouvelis et al, 2019).

Giving and the economy: the global financial crisis

More recent research, which examines the effects of the global financial crisis of 2007-09, paints a more negative picture for charities.

In the UK, data on aggregate donations produced by the Charities Aid Foundation show a small fall in nominal donations in 2008/09, with signs of a recovery in 2010. But more striking than any short-term recession effect is the fact that the value of donations has steadily declined since 2010 both in real terms (2021 prices) and as a share of GDP (see Figures 1 and 2).

This fall was briefly halted in 2020 – a positive effect of the pandemic – but in 2021, donations as a share of GDP were at 0.48% compared with 0.62% in 2004 (and 0.68% in 2005). This is consistent with previous evidence that the number of households donating to charity has been in long-term decline (Cowley et al, 2011).

Figure 1: Total donations (direct donations to charity and sponsorships)

Source: UK Giving, Charities Aid Foundation; various years

Figure 2: Total donations (% of GDP)

Source: UK Giving, Charities Aid Foundation; various years

In the United States, giving also fell during the global financial crisis, according to analysis of data from the Panel Survey of Income Dynamics between 2001 and 2013 (Meer et al, 2017). The research shows that the fall was driven mainly by a reduction in the share of households making a donation.

Further, the decline in giving could not fully be explained by reductions in income and wealth, and giving had not recovered by 2012. The study concluded that other factors, such as changing attitudes towards donating or increased uncertainty, may be at work and that these could permanently lower charitable giving.

The finding from survey data – that the financial crisis negatively affected donations beyond an income effect – has been mirrored in a laboratory experiment. This study compared the outcomes of what are known as dictator games – in which people decide how much of a pot to keep for themselves and how much to give away – played before and after the global financial crisis had begun (Fisman et al, 2015).

The researchers found that people who took part in the dictator games prior to the economic downturn were significantly more altruistic than those who took part in identical experiments after the onset of the recession.

The economic slump made people behave more selfishly and this was true even when they themselves had not been directly affected. The study also found that participants exposed to recessionary conditions were more likely to favour efficiency (choices that maximised total resources) over equity (fair outcomes) when there was a trade-off (Fisman et al, 2015).

A related study discusses possible reasons for the mixed evidence on the relationship between inequality – specifically, changes to inequality levels within a country – and support for redistribution (Stantcheva, 2021).

In principle, one would expect higher inequality to increase support for redistribution, but this is not always the case. Indeed, this research concludes that people’s perceptions of inequality matter more than the reality (Stantcheva, 2021).

This includes perceptions about the degree of inequality and social mobility in a society, but also about the identity of welfare recipients and beliefs about immigration. Even priming people to think about immigration may reduce their support for redistribution and welfare spending. People’s beliefs about the effectiveness of policies to tackle inequality and help recipients also matter.

Although these findings relate directly to redistribution by government, they may have important lessons for charities. In times of recession and rising inequality, a clear narrative is likely to be important for maintaining donation levels.

What are the implications of these findings?

Charities are right to be concerned about donations over the coming months and years. Taking a long-term perspective, the evidence shows that recessions do not automatically reduce giving, but UK charities appear to be facing a decline in the real value of donations, at a time when their costs will be rising.

A big caveat to this analysis is that most of the studies referred to in this article focus on donations made by typical households, while total giving is becoming increasingly concentrated in the hands of the very wealthy.

In the United States, for example, an estimated 1% of the population gave close to 40% of total donations, while the top 0.01% accounted for a striking 14%. Many of the wealthy elite saw their wealth increase during the pandemic and they are likely to be immune to the cost of living crisis.

The wealthy have the resources to help those in rising need, but many may prefer to take direct control of their philanthropic activities. They may choose to direct their resources through their own foundations rather than to long-established charities, which will have implications as the cost of living crisis continues.

Where can I find out more?

• UK Giving Report: from the Charities Aid Foundation.
• The new state of donation: three decades of household giving to charity.
• New research shows increased charity demand for services and support from sector infrastructure organisations during the pandemic: Report from the NCVO.
• Perceptions and preferences for redistribution: Report by Stefanie Stantcheva for the Institute for Fiscal Studies (IFS).

Who are experts on this question?

• Sarah Smith
• Kimberley Scharf
• Johannes Lohse

Author: Sarah Smith

Photo by fizkes from iStock

The post What happens to charitable giving in a recession? appeared first on Economics Observatory.

Dobbs hands the decision of access to abortion back to individual states. The ruling set in motion a series of anti-abortion legislation – known as ‘trigger bans’ – in a number of states across the country. It is estimated that at least 25 states will move to ban abortion as quickly as possible (Guttmacher Institute, 2022).

This is despite the majority of US adults believing that abortion should be legal in all or most circumstances (61%), according to a recent survey (Pew Research Centre, 2022).

Some of these state laws will prohibit abortions, allowing exceptions only in cases where the life of the mother is at risk or if the foetus has a fatal abnormality (New York Times, 2022). Nevertheless, there have already been reports that restrictive laws may delay treatment for pregnancy complications, putting women’s lives in danger (Texas Tribune, 2022).

Figure 1: US abortion policies and access after Roe

Source: Guttmacher Institute, 2022

In submitting the Dobbs case, the state of Mississippi claimed that ‘there is simply no causal link between the availability of abortion and the capacity of women to act in society’, and thus that access to abortion has not affected ‘the ability of women to participate equally in the economic and social life of the Nation’ (Supreme Court of the United States, 2021).

In reality, the ruling will directly affect the lives of millions of women in the United States and will have a profound impact across society. This is backed up by a large body of research evidence on the impact of abortion access, not only on births but also on the economic wellbeing and health of those who are affected.

This research makes use of the fact that abortion access has varied across US states and compares what happened in states that expanded (or restricted) abortion access with what happened in states where abortion access stayed the same.

For example, five states and one district had already revoked their abortion prohibitions many years before the Roe v. Wade ruling (Myers and Welch, 2021). This allowed researchers to compare changes in outcomes related to fertility, education and wellbeing in the ‘repeal’ states at the point at which they removed abortion restrictions to changes in the rest of the country.

The states in which abortion access did not change act as a ‘control’ to account for alternative confounding effects that may have affected fertility and women’s lives at the time of Roe v. Wade. Using this approach, the researchers can be more confident that they have identified the causal effect of abortion access.

The findings from this research provide evidence that there is a causal link between the availability of abortion and the capacity of women to act in society – and gives an insight into what may happen as a result of the Dobbs ruling in states that ban or further restrict access to abortion.

Who is most likely to access abortion?

In 2020, 930,160 abortions took place in the United States (14.4 per 1,000 women), an 8% increase from three years previously. Accompanied by a 6% decline in births, these patterns indicate that fewer people were getting pregnant and among those who did, a greater proportion chose to have an abortion (Guttmacher Institute, 2022).

Of the 6.1 million pregnancies in the United States in 2011, 2.8 million were unintended, which equates to roughly 45%. Of these, 27% were ‘wanted later’ and 18% were ‘unwanted’ for other reasons (Guttmacher Institute, 2019).

Although these figures convey a relatively high demand for abortions across the US population, there are clear demographic disparities in the incidence of unintended pregnancies. Recognising these differences enables informed decision-making by policy-makers and underlines any inequalities that may be present in the context of abortions in the United States.

These inequalities reflect differences in social, economic, ethical, institutional and political landscapes, which in turn affect women’s choices, abortion access and, ultimately, outcomes related to fertility, education and wellbeing (Guttmacher Institute, 2019).

Traditional estimation methods to find the rate of unintended pregnancy among different groups of women factor in all women in the population, irrespective of whether or not they are sexually active.

Using these methods, rates of unintended pregnancy are found to be highest among women aged 20-24 – 81 per 1,000 women. But when women who are sexually inactive are excluded, the age group with the highest rate of unintended pregnancies is 15-19 year-olds (Finer, 2010).

Cohabiting women have a higher rate of unintended pregnancy – at 141 per 1,000 women – compared with unmarried non-cohabiting women – 36-54 per 1,000 women – and married women – 29 per 1,000 women (Finer and Zolna, 2010). In 2016, over half (59%) of women who had abortions already had a child (Guttmacher Institute, 2016).

Non-Hispanic black women are more than twice as likely to have an unintended pregnancy – 79 per 1,000 women – than non-Hispanic white women – 33 per 1,000 women (Finer and Zolna, 2010).

Three-quarters of abortion patients in the United States are poor or low-income, and nearly half live below the US federal poverty line (Guttmacher Institute, 2016). This is striking as only one in seven women aged 15-44 (the childbearing age range) in the United States live in families with incomes below the federal poverty line (March of Dimes, 2022). 

Figure 2: Abortion patients who are poor or low-income

Source: Guttmacher Institute, 2016

It follows that ease of access to abortion services may be an important determinant of the trajectory of women’s reproductive, economic and social lives. 

How does abortion access affect women’s reproductive, economic and social outcomes?

Birth rates

Using the analytical method discussed above, one study estimates that legalising abortion (Roe v. Wade) resulted in a 4-11% reduction in births in the repeal states relative to the rest of the United States. It showed that the effects on fertility were around three times greater for adolescents and women of colour (Levine et al, 1999).

Further research indicates that legalising abortion resulted in a 34% decline in the number of women who become teen mothers, with even larger effects for black teenagers (Myers, 2017).

Researchers have also looked at the effect of practical restrictions on access to abortion in the United States, particularly variations in travel distance as a result of facilities closing. This work suggests that, on average, a travel distance increase from 0 to 100 miles cuts abortions by 20.5%, consequently raising births by 2.4%. An increase from 100 to 200 miles lowers abortion rates by 12.7% and increases births by 1.6% (Myers, 2021).

Other studies also show that travel distance is a significant factor in seeking abortion among all ages and ethnic backgrounds, particularly young and black women (Myers, 2021; Venato and Fletcher, 2020; Lindo et al, 2020).

In light of the Supreme Court decision, stricter abortion legislation may also appear in the form of mandatory waiting periods between consultation and procedure. One study finds that requiring two appointments reduces abortions (by 8.9%) and delays those that still occur, causing second-trimester abortions to rise by 19.1%. This also increases births by 1.5% (Myers, 2021). As of June 2022, 27 US states had enforced mandatory waiting periods, 13 of which require two in-person visits (Guttmacher Institute, 2022). 

These outcomes vary considerably across different groups of women. Those in their twenties are roughly three times more likely to be affected by waiting periods requiring two trips than women in their thirties. Similarly, non-Hispanic black women experience greater effects (2.5 times) from providers requiring two trips than non-Hispanic white women (Myers, 2021). County-level data indicate that these results are notably larger in low-income areas and they are amplified by longer travel distances. 

Marriage

Several studies show that having access to abortion delays both first births and first marriages (Myers, 2017; González et al, 2018; Brooks and Zohar, 2021). In particular, abortion access without parental involvement decreases the probability of ‘shotgun’ marriages by approximately 50% among young women, according to US data (Myers, 2017). 

In addition to reducing the number of women who became teen mothers, the legalisation of abortion also led to a 20% decline in teen brides. This effect was larger for black teenagers (Myers, 2017).

A recent study from Israel – where abortion is legal – looked at the effects of expanding free abortion: it found that early unintended parenthood fell by 11-14 percentage points and subsequent marriages dropped by 11 percentage points among young women (Brooks and Zohar, 2021).

Economic outcomes

The Israeli study also found that the expansion of free access to abortion led to a shift from full-time to part-time employment and to better paid part-time jobs among the women who were previously working part-time (Brooks and Zohar, 2021). This could be explained by the reported increase in the share of mothers who entered an academic institution as a result of the policy reform and therefore needed more flexibility.

In addition to higher college enrolment, the researchers also observed increases in post-high school professional training and a higher probability of sitting the Israeli matriculation exam in a given year. Despite the observations being short-term, the study also reports that the new policy resulted in around a 17% increase in annual income regardless of the woman’s employment status (Brooks and Zohar, 2021). 

Research that captures the long-term effects of the 1970s abortion legalisation in the United States on educational attainment, labour market participation and earnings for female adolescents offers similar results.

While the results for white women are minimal or insignificant, increases in the employment rate, high school graduation rate and college enrolment due to the abortion reform are more pronounced among young black women (Angrist and Evans, 2000).

Albeit imprecisely measured, one study finds that access to abortion increased college enrolment by 100%, college graduation by two to three times and employment status by 44% for black women (Jones, 2021).

Another study finds an increase of around 2% in the probability of a woman being employed in states that legalised abortion prior to Roe v. Wade (Kalist, 2004). Again, these results show a particularly strong effect among black women.

Impacts on children

Women’s access to abortion services can also affect the average conditions into which children are born. Although evidence on the effect of abortion access on child abuse and neglect is limited, one study that examines variations in the timing of abortion legalisation across US states following Roe v. Wade finds that the legalisation reduced the number of recorded cases of child maltreatment by approximately 10% for every subsequent cohort (Bitler and Zavodny, 2004). It nevertheless reports an inconsistent relationship between the number of reported cases and abortion restrictions imposed after the legalisation.

Another study finds that a child born due to poor access to abortion would have faced a 50% higher risk of living in poverty, a 60% higher probability of being raised by a single parent and a 40% higher chance of dying before reaching the age of one (Gruber et al, 1999).

This research indicates that abortion access improves overall outcomes of entire generations (Ananat et al, 2009).

Health

As has been highlighted by medical professionals and pro-choice campaigners, safe access to abortion is also vital for women’s health. According to the United Nations, unsafe abortions result in approximately 47,000 deaths every year. These are primarily in developing countries and among members of socio-economically disadvantaged and marginalised populations (United Nations, 2021).

But limiting access, as has happened in the United States, will be likely to increase the incidence of unsafe procedures. Research shows that following Roe v. Wade, pregnancy-related death and hospitalisation due to complications from unsafe abortions plummeted (Cohen, 2009).

Indeed, other research has shown that access to legal abortion reduced maternal mortality among non-white women by 30-40%, although this had little impact on overall or white maternal mortality (Farin et al, 2021).

In addition, a recent study estimates that banning abortion in the United States would lead to a 21% rise in the number of pregnancy-related deaths overall, and a 33% increase among black women (Stevenson, 2021).

Conclusion

Access to abortion directly affects the birth rate and has significant ripple effects on the social and economic outcomes of women and their families. 

The effects – on education, employment and health – are felt more acutely by certain groups. Black, young and poor women are much more likely to be negatively affected by a lack of access to abortion.

Evidence tells us that restricting abortion access – whether through laws or creating financial or other obstacles – can have harmful effects on society’s most disadvantaged women. Conversely, research shows that legalising access to abortion can lead to women gaining higher education levels and better employment.

The Supreme Court decision to revoke Roe v. Wade is both an issue of women’s rights but also of racial and socio-economic inequality.

Where can I find out more?

• How banning abortion affects the economic lives of women: Ones & Tooze podcast from Foreign Policy.
• Reproductive policy: by Caitlin Knowles Myers.
• The economics of abortion: Pitchfork Economics podcast.
• Reversing Roe: 2018 documentary film directed by Ricki Stern and Anne Sundberg.
• What can economic research tell us about the effect of abortion access on women’s lives? Brookings Institution report by Caitlin Knowles Myers and Morgan Welch.
• Planned Parenthood.
• Guttmacher Institute.

Who are experts on this question?

• Caitlin Knowles Myers
• Morgan Welch
• Ana Langer

Authors: Alicja Kobayashi and Madeline Thomas

Photo of Stop Abortion Bans Rally from Wikimedia Commons

The post How will the reversal of Roe v. Wade affect American women? appeared first on Economics Observatory.