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Poverty and Income Inequality Scotland: 2011-12

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Chapter 1: Introduction

Figures presented here are taken from the Department for Work and Pensions' Family Resources Survey - Households Below Average Income (HBAI) dataset. Comparable UK income and poverty figures are published on the same day by DWP. See the DWP website for further details. http://statistics.dwp.gov.uk/asd/index.php?page=hbai

Further analysis of these figures will be published later in the year on the Scottish Government income and poverty statistics website. This will include figures on the Gini Coefficient, interaction between income, poverty, disability and housing tenure. http://www.scotland.gov.uk/Topics/Statistics/Browse/Social-Welfare/IncomePoverty

1.1 What does the HBAI measure?

Households Below Average Income (HBAI) uses household disposable incomes, adjusted for the household size and composition, as a proxy for material living standards. More precisely, it is a proxy for the level of consumption of goods and services that people could attain given the disposable income of the household in which they live.

The unit of analysis is the individual, so the populations and percentages in the tables are numbers and percentages of individuals - both adults and children.

The living standards of an individual depend not only on his or her own income, but also on the income of others in the household. Consequently, the analyses are based on total household income: the equivalised income of a household is taken to represent the income level of every individual in the household. Equivalisation, a technique that allows comparison of incomes between households of different sizes and compositions, is explained section 1.2 below. Thus, all members of any one household will appear at the same point in the income distribution.

See Annex 2 for a detailed definition of net disposable household income.

1.2 Equivalisation

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

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

More detail on the equivalisation factors used can be found in Annex 2.

1.3 Housing Costs

It could be argued that the costs of housing faced by different households at a given time do not always match the true value of the housing that they actually enjoy, and that housing costs should therefore be deducted from any definition of disposable income. However, any measure of income defined in this way would understate the relative standard of living of those individuals who were actually benefiting from a better quality of housing by paying more for better accommodation. Income growth over time would also understate improvements in living standards where higher costs reflected improvements in the quality of housing.

Conversely, any income measure which does not deduct housing costs may overstate the living standards of individuals whose housing costs are high relative to the quality of their accommodation. Growth over time in income before housing costs could also overstate improvements in living standards for low income groups in receipt of Housing Benefit, and whose rents have risen in real terms. This is because Housing Benefit will also rise to offset the higher rents (for a given quality of accommodation) and would be counted as an income rise, although there would be no associated increase in the standard of living. A similar effect could work in the opposite direction for pensioners: if a shift from renting to owning their housing outright leads to a fall in Housing Benefit income, because fewer low income pensioners are paying rents, then changes in income before housing costs may understate any improvement in living standards.

Therefore, this publication presents analyses on two bases: Before Housing Costs (BHC) and After Housing Costs (AHC). This is principally to take into account variations in housing costs that themselves do not correspond to comparable variations in the quality of housing. A definition of housing costs can be found in Annex 2.

1.4 Sampling Error and Confidence Intervals

The poverty estimates presented in this publication are based on a sample survey and are therefore subject to sampling error. Confidence intervals are a measure of sampling error. A 95 per cent confidence interval for an estimate is the range that contains the 'true' figure on average 19 times out of 20 if sampling error were the only source of errors.

Many of the changes referred to in this publication are within the width of the confidence limits and caution should be exercised when looking at year on year comparisons, with longer term trends often giving a clearer picture. More information on the confidence intervals that surround the estimates in this publication can be found on the income and poverty website via the following link: http://www.scotland.gov.uk/Topics/Statistics/Browse/Social-Welfare/IncomePoverty/Methodology#a6