Why Has in‐Work Poverty Risen in Britain?

ABSTRACT Is work a reliable route out of poverty, and what does that depend upon? In Britain, the headline relative poverty rate for those in working households steadily rose from 13.4% in 1994–95 to 18.4% in 2019–20. We study the drivers of this increase. Significant rises in earnings inequality observed over the period were a modest contributor, accounting for 1.3 percentage points (pp). Higher earnings growth for poorer families did not reduce working poverty more substantially, in part due to the higher effective marginal tax rates that low‐income families faced. A more important factor (1.8 pp) was rising housing costs for poorer working families compared with middle‐ or high‐income families, driven both by rents rising relative to mortgages, and by a shift away from homeownership for poorer working families. Growth in pensioner incomes, which raised median income and therefore the relative poverty line, also increased the in‐work poverty rate (1.7 pp). Reforms to the tax and transfer system—particularly the introduction of ‘tax credits’—served to slightly mitigate (0.6 pp) the rise in in‐work poverty. These results show that the effectiveness of employment for reducing poverty is dependent upon a broad range of other factors—many of which themselves can be shaped by other policy levers.