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insight

A new approach to measuring the poverty premium

Evidence type: Insight i

Context

The term ‘poverty premium’ was first coined in 1960s to reflect the recognition that poor households were paying more for their essential goods and services because they were poor. There have been various estimates of the cost of the poverty premium in the UK in recent years, however these were hypothetical, and based on an assumption that low income households incur all of the individual elements of the premium, whereas research has shown that exposure to it can vary widely. These headline figures risked overstating the scale of the poverty premium, and potentially directing disproportionate amounts of policy attention to costly but relatively uncommon poverty premiums.
The aim of this study is to measure, comprehensively, the poverty premium as it exists in Britain today, by seeking an approach that better reflects people in low-income households lived experiences of it; something previous studies had not done.

The study

The study used a mixed-methods design, which included the following:

  • An extensive review of empirical literature on poverty, money management and the poverty premium;
  • A desk-based review of the sectors in which a poverty premium might arise
  • A costing exercise to identify representative nominal costs for each component in the final measurement framework.
  • Seven focus groups in England and Scotland with lower-income householders of working and state-pension age.
  • A nationally representative face-to-face omnibus survey, using a bespoke questionnaire, with a final sample of 947 lower-income householders in Britain, carried out in 2016.

The analysis included the following stages:

  • A conceptualisation exercise to identify the range of poverty premium components which exist today and to develop a new measurement framework, which was validated in the focus groups.
  • A costing exercise to identify a representative, nominal cost for each component in the final measurement framework.
  • A calculation of the average, lived cost of the poverty premium given the depth (the nominal cost) of each component and its breadth (percentage of households experiencing it), based on the survey data.
  • Cluster analysis of the survey data to explore the heterogeneity of the lower-income households’ experiences of the poverty premium, to identify significant variations in households’ experiences and highlight socio-demographic drivers.

Lower-income households were defined as those with incomes equivalised for household size of below 70% of national median income by life-stage (working age or state-pension age).

A stakeholder group of research, industry and charity experts convened especially for the study was consulted at all key stages of the research.

Key findings

  • The model: The study produced a new conceptual model of the behavioural pathways through which poverty leads to the poverty premium. The estimate produced by analysis of the 2016 research created a realistic estimate of the poverty premium, and highlighted important misconceptions about the sectors in which a poverty premium might arise. The study found the poverty premium to be smaller than previous research had identified, at £490 per household on average in 2016. The process-driven framework created allows for the continued measurement and monitoring of the poverty premium as the policy and practice landscape changes. For example, the premium has been updated to reflect regulatory changes to energy pricing.
  • Differences between households: There was significant heterogeneity in lower-income households’ experience of the poverty premium. While these differences were often underpinned by households’ different needs, choices and preferences, the apparent protection of some poorer households from some poverty premium components is more than likely due to their inability to afford the essential goods and services that carry a poverty premium; instead, they go without.
  • Conclusion: The authors conclude that the new methodology has not only produced a more accurate description of poverty premium, but it can also be used to monitor the poverty premium experience of households over time to assess how each market is evolving and the extent to which changes in policy and practice – whether business-driven or from regulation – have been effective in protecting the poor in society.

Points to consider

  • Methodological strengths/weaknesses: The details of the methodology aren’t included in this report, but can be found in the methodological appendix of a previous report which is referenced in this document. The fact that a (named) stakeholder group of research, industry and charity experts was consulted at all key stages of the research gives further confidence in the rigour and reliability of the approach.
  • Generalisability/ transferability: The study and costing are specific to Britain, however the principles could be applied to measuring the poverty premium in other countries.
  • Relevance: The original framework and costing was developed in 2016 but this report brings it up to date and demonstrates how the model has longevity. The topic of the poverty premium is highly relevant, especially in the light of the economic impact of the coronavirus pandemic.
    • This study is of interest to anyone involved in working with low-income households, or in regulating or supplying markets where poverty premium exists, such as utilities and financial products.

Key info

Client group
Year of publication
2020
Country/Countries
England, Scotland, Wales
Contact information

Andrea Finney and Sara Davies, University of Bristol