How the recession is hitting low earning households hardest

The release of new ONS figures today is probably not giving the government or economists the headlines they were hoping for. Despite earlier predictions of growth over the last quarter, today’s figures show that the downturn is not going to become a meaningful recovery any time soon. What is more, the figures suggest that many of the existing patterns in where and how the recession is biting have been entrenched.

The white collar recession has not materialised. Instead it is the UK’s 7.2 million low-paid, low-skilled workers at the sharp end of a flexible and global service economy who are being hit hardest. Today’s figures show that the sectors of the economy where these workers are concentrated are sustaining larger declines in overall growth with “Distribution, hotels and restaurants” decreasing by 1 per cent compared to 0.4 per cent in the previous quarter.

This confirms analysis at the Resolution Foundation. Furthermore, if low earners do lose their jobs, they will find it harder to re-enter the labour market due to their low skills levels. Those who do hold on to their jobs are finding the recession is limiting their already slim chances of accessing training (see table below), with evidence that employers are cutting back on training budgets during the downturn.

This is a similar story to the last three recessions, despite the unprecedented origins of the current circumstances. What is different this time round is that low earners were already living on the edge. With average earnings growth at a historically low 1.9 per cent in 2009, wages are not keeping up with recent rises in the cost of living, in particular food and fuel costs. The table below shows that low earners are facing significantly higher levels of inflation than richer groups, particularly since 2008.

In an era of easy credit, low earners could bridge these gaps by supplementing monthly income with the use of credit. But since the meltdown in financial services in 2007, the tidal wave of credit has reduced to a trickle. Many of the sources of credit that low earners depended on evaporated, with the availability of sub-prime mortgage products tumbling by 71 per cent since last year. And remaining lenders are getting much tougher, making it harder for low earners to re-finance or to borrow in the first place. Nearly 4 million low earners are spending a quarter of their monthly income repaying debts, and one in eight are juggling mortgages with a 75-100 per cent loan-to-value ratio.

Given low earners were already living on the edge in the good times, the recession brings with it the very real risk that this group will be pushed from coping to crisis, with all the costs that brings to individuals and households, as well as to society and the economy at large. Protecting those who are most exposed to the lagging indicators of unemployment, repossessions and insolvencies may be difficult, but it must be the priority.