How the middle classes cope. The impact of the financial crisis on British households above average income

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1 How the middle classes cope. The impact of the financial crisis on British households above average income by Caroline Andow, Stephan Köppe, Traute Meyer 1 correspondence: Caroline Andow, University of Southampton, Stephan Köppe, University of Edinburgh, Paper prepared for the SPA 2011 Conference Bigger Societies, Smaller Governments?, 4th-6th July 2011 *** First Draft: Please do not cite without permission *** Abstract The crisis of the banking system in autumn 2008 had economic implications on a global level. This pervasive event had an impact on the whole of the UK population, but little is known about how households reacted to the crisis. This paper presents some preliminary qualitative findings of a wider study. We conducted 61 joint interviews with couples earning above average incomes in England and Scotland. Our research found that most households were largely unaffected by the crisis, however a significant group did experience a negative impact. Focussing on these two groups, we explore how couples affected in similar ways vary in their reactions. We illuminate key factors that appear to determine behavioural responses, demonstrating the complexity of the relationships between how couples with above average incomes experienced and reacted to the financial crisis. 1 Introduction The crisis of the banking system in the autumn 2008 shook societies around the world. Economic prosperity declined, unemployment rates rose, political leaders lost parliamentary confidence in Greece and Portugal because public debt reached unprecedented levels. The media discussed how people lost faith in financial markets and institutions such as banks and governments. However, apart from surveys and administrative data, we know little about how the crisis affected individual households. Using data collected as part of an ESRC funded project on middle class risk management strategies, in this paper we explore how the financial crisis affected British households with above average income and their planning for contingencies and investing in insurance against social risks. There are many reasons to assume that this pervasive event in British society had an impact: 1

2 1. Loss of confidence in banking system In 2007 many account holders were shocked when they saw their savings threatened by the possible collapse of banks such as Northern Rock and the Icelandic banking system, followed later by the crisis of the Royal Bank of Scotland and other retail banks. This initial shock was followed by prolonged insecurity as the banking system was struggling to gain stability. This insecurity had an impact on all households. 2. Poor performance of investments In British liberal capitalism many individuals assets are tied to market performance (stocks and shares, savings, property, endowments etc.). Pension funds have performed badly during the crisis and though members of pension funds contributed, their pension assets decreased. Savers saw their financial wealth shrink, although average household savings were protected as the government guaranteed the security of the first 50,000 in savings if a bank went bankrupt. As interest rates were reduced to levels unprecedented in post-war history, savings accounts performed below inflation. Thus, the relative wealth of savers declined. Moreover, property values decreased and access to mortgages became tight. On the other hand, low interest rates also meant lower rates for those on flexible mortgages. Overall many households were affected by these changes. 3. Insecurity of Employment The banking crisis made it harder for companies to access credit, a situation particularly difficult for small and medium-sized businesses, leading to slower growth and bankruptcies. In addition, the public sector has been under pressure to cut spending and was therefore less inclined to appoint new staff, while the financial sector shed labour. Thus, unemployment increased as a result of the crisis, particularly for the young. In addition to the threat of unemployment some employers reduced the scope of occupational protection for existing employees, for example by introducing less generous redundancy packages, freezing wages, cutting bonuses, suspending retention payments and retrenching pension schemes. 4. State retrenchment After the banking bailout in the autumn of 2008 it became clear that British taxpayers would have to finance this rescue of the financial system, and that the operation would cost an excessive amount of money and last for many years. It also became clear that deep cuts in public spending are likely, once the immediate threat to the banking system was averted. Even though it was not clear what this would mean in practice, everyone listening to the public debates would have known that public services, benefits and transfers would be scaled back in the future, affecting everyone in one way or another (NHS, schools, public/social services). 5. Higher taxes resulting in lower disposable income In addition to the retrenchment of public services, citizens had to pay higher taxes, reducing the disposable income of everyone. 2

3 6. Increased anxiety and concern for everyone We would expect that the factors listed above would have led to increased anxiety for every British adult citizen, and that it would have affected most negatively. However, the extent of the impact is potentially very different in degree. Some households might only be affected marginally, others much more deeply. 7. Institutional resilience prevents major disruptions in the lives of the majority Everyone is affected by the crisis, but the majority of British citizens have continued to live their lives as before, by some important criteria: they will have kept their jobs and homes. This is because despite severe disruption the crisis did not lead to dissolution of core societal institutions. In fact, even during the Great Depression the economy did not totally collapse and the majority of workers kept their jobs. In the 21 st century, societies are much more resilient, their institutions can withstand shocks better than in the past, not least because the state has the institutional capabilities, political and financial power to support the economy and labour market (e.g. Castles, 2010; Fligstein, 2001: 89-94). So overall, despite the pervasive negative impact of the banking crisis, we also expect continuity and stability to have been dominant. In brief, we expect that the financial and economic crisis of 2008 had an impact on British households, but that the scope and level of impact depends on the circumstances of the households. Some households might have experienced disruptive negative effects on their household finances which forced them to respond quickly and profoundly, whereas for others the impact was only marginal or even positive. This paper aims to understand how households were affected by the crisis and how and why they responded differently to similar threats. It is structured as follows. The second section describes our data collection process and presents some hypotheses about behavioural responses to the crisis. Based on this we developed an analytical framework that organises our data according to type of material impact of the crisis and behavioural response. This framework enables us to show how households were affected and why they responded differently. Section four presents the findings of our analysis. The general findings are discussed in section five, which is followed by a conclusion. 2 Data and Hypotheses We interviewed 61 couples in households above average income. The selection criteria of our target households were income (30 above 40,000 p.a. and 30 above 60,000 p.a.), age (34-55 years), home owners (outright or mortgage) and children living in the household. Half of the couples were recruited in England and half in Scotland. Using the Family Resources Survey (FRS, ), we estimate that 9 percent of the British population share the characteristics of the sample. This means we have chosen households that are in paid work and who are therefore part of the stable majority, despite being affected by the crisis. However, for the reasons listed above we assumed that many of them would be affected in various ways, and our interest was what impact exactly the crisis has had on their material circumstances and on their decisions 3

4 and attitudes about risks and risk management strategies. Specifically, our analysis was guided by the aim to explore how the financial circumstances of households affect attitudes and decision-making. We wanted to understand better the different types of connections between material conditions and behavioural responses. To achieve this, our starting point was to group households according to the types of material changes they have experienced as a result of the crisis; we then explored what decisions were made, if any, in response to these impacts, and what reasons couples gave for changing their behaviour. Rational choice approaches suggest that individuals and households make financial decisions by calculating the possible gains and losses their decisions might have in order to work out the optimal course of action. Based on such a perspective, one might assume that because of the reasons listed above we would find that the four types of material impact on households we found as a result of the crisis would lead to changes in behaviour in the following four ways: 1. Negative material impact on household finances behaviour adjusts to loss 2. Neutral material impact on household finances no change in behaviour 3. Positive material impact on household finances behaviour adjusts to gain 4. Negative and positive material impact on household finances behaviour adjusts to loss and gain Firstly, those households that experienced a negative material impact on their finances due to the crisis would be expected to make decisions that help to adjust to this loss, mainly through compensation. Secondly, households who have not experienced financial loss would not be expected to change their existing risk management strategy. Thirdly, if households experienced mainly a positive impact of the crisis (e.g. promotion, better business performance due to the crisis), they would gain income or financial security and therefore household members would be expected to adjust to these change in circumstances. They might cancel an income protection insurance policy because they feel more secure in their job or they might top-up their insurance premium to reflect the increase of income for example. Fourthly, some households have lost in one area but gained in another, this is especially true for couples were both spouses can have contrary experiences, for example one partner might be promoted, while another is made redundant. In this situation a change in strategy is expected, but it is not possible to say what it might be. Our analysis of the data below suggests that responses to material change are more complex than the rational choice model assumes. In that regard our findings bear out those by critiques of rational choice approaches who have shown that individuals and households act rationally only in particular situations (Berezin, 2005; Kahneman and Tversky, 2000; Taylor-Gooby, 1999; Thaler and Sunstein, 2009; Weber and Dawes, 2005). More likely are situations of bounded rationality and emotional decisions. 4

5 The following empirical analysis will demonstrate this complexity, and by focusing on the explanations that households provide for their response to changed material circumstances, we will attempt to illuminate why people chose certain paths. 3 Framework for data analysis According to the material impact they have experienced as a result of the crisis, we have allocated the couples to four groups. Due to the scale of the crisis, all of our 61 couples expressed feelings of concern and anxiety and they said that they had less disposable income due to inflation. We have not taken this type of loss into account when grouping couples, but only more significant changes affecting household finance. Also, where one partner was affected negatively and the other partner s economic situation was not affected was treated as overall negative impact, the same applies for positive material impact. The grouping was based on what the interviewees told us about the impact the economic downturn had on their lives; they are therefore based on the subjective assessment of people s circumstances. In a second step we created sub-groups from these four main groups, according to the decisions they made in response to the material change. The two sub-groups are no changes made (1) changes made (2) These two sub-groups created eight groups overall. Using this framework we then explore the reasons couples give for their behaviour facing the crisis; the analysis shows why couples affected similarly respond differently, for example in the case of negative material impact some couples made changes and others not. 4 Findings On the basis of 61 qualitative household interviews we show what types of responses to the crisis exist in the population. Which ones are most typical could then be established by a larger survey, because our sample is too small to be representative of responses to the crisis in the wider population. This notwithstanding, below we add the numbers of responses in each group; this is because large groups might indicate typical responses. To start our analysis we have grouped our couples according to the framework introduced above (see figure 1). Firstly we organised them according to whether the financial crisis had a direct material impact on their lives. For half of couples this was not the case (31 = 51%); the second largest group were those that felt they had been negatively impacted (19 = 31%), but there are also those for whom the crisis brought losses as well as gains (7 = 11%), which do not add up to an overall loss or gain, typically because they meant a loss for the one and a gain for the other partner. Finally, the crisis has also brought material gain to some households (4 = 7%). Before exploring what couples say in detail about how they cope with the impact of the crisis, we wanted to check how exogenous factors such as age, income, region (Scotland/England) or employment sector (public/private/self-employed) might influence how a couple was 5

6 affected. We used cross tables to find any interesting patterns or variance. We also checked for intervening influences such as region and income together. As we will show, overall, these factors seem to make little difference for couples responses, with only minor exceptions. To explore whether a reaction to the financial crisis may differ according to the maturity of the households and their investments, we grouped the respondents into two age groups, the younger group including all those aged 34 to 44 years (n=31), and the older group including those aged years (n = 30). The results show that younger and older households were affected very similarly: in both groups the majority of interviewees said that they were not affected by the crisis (16 = 52 % and 15 = 50 % respectively) and the second largest groups, again, were those who were negatively impacted (10 = 32 % in 34-44, 9 = 30 % in 45-55). The only difference between both groups is that none of the respondents in the younger age group reported a positive impact of the crisis, as opposed to four (= 13 %) in the older age group. We will keep this in mind when exploring the qualitative data but expect that such a variation could be an artificial result of our small sample. Regarding income, once more, we found that in every income group a large part of respondents were not affected by the crisis (4 = 57 % in high; 12 = 43% in medium; 15 = 58% in low income group), while the second largest groups were those negatively affected (11 = 39 % in medium, 8 = 31 % in low income). 2 The exception here is that none of the couples in the highest income group (n = 7) reported a negative impact of the financial downturn. Again, we will consider whether level of income might play a role for this pattern but do not expect to find any conclusive evidence for this. We also wanted to know whether Scottish and English couples have experienced the crisis differently. Our data suggests that a large part (35 = 58 %) has not, but that some differences might exist. Half of those reporting a positive impact were Scottish (= 2), the other half English. In the group not affected by the downturn we find the same pattern (15 Scots = 48 %). However, we found some differences regarding positive and negative impact. More Scottish couples speak about both a positive and a negative material impact of the crisis on their lives (5 = 71 %) and fewer Scottish couples have experienced a negative impact (8 = 42 %) than English couples (11 = 58 %). Once again, in our qualitative analysis of answers we will consider this observation. If we take income and region together, there is no consistent pattern of response. In the lower income group, there was an equal split between English and Scottish couples who felt no impact (53 % Scottish), a negative impact (50 % Scottish) and both a positive and a negative impact (50 % Scottish). However, income and region might have made a difference in the group of those who responded positively (n = 4) because the middle income group was purely Scottish, but no Scots were in the higher and lower income groups. The small size of the group makes it difficult to build a typology, nevertheless, we will explore the interviews further to see whether there is any more systematic explanation for this pattern. 6

7 Finally, reaction to the financial crisis did not differ according to sector of employment. The most common response for all employment types was that the crisis had no impact on them, and this was equally true for public and private sector workers. Indeed, half of those households where the main income earner worked in the public sector (n = 10) and half of those in the private sector (n = 18) said the crisis had no impact on them. The latter category can be split into those working for small private employers where three (60 %) said they had not experienced any material impact, and those working for larger private employers where 15 (48 %) did not feel the crisis had an impact. In those households where the main income earner was self-employed, three (60 %) also reported no material impact as a result of the crisis. Once again, for all employment sector types, the second largest group was those reporting a negative material impact (public 8 = 40 %, private 9 = 25 %) and self-employed (2 = 40 %). However it is interesting to note that when the private employment sector is broken down into small and large employers, employees working for small private companies did not report a negative material impact of the crisis. The numbers are small as only five couples had a main income earner working for a small private company, but we will explore the data to see if we can find an explanation for this result. Along the same vein and of equal interest is that no self-employed main income earners reported a positive outcome of the crisis. Although interesting, this again is based only on five households and we can not expect to be able to suggest this would be the case in the wider population. Summing up, in line with our assumptions about the financial crisis at the outset, our sample of households is affected by inflation and all are concerned about the crisis, but they also display a lot of stability: the majority of respondents stated that they have not been affected considerably by the financial crisis; at the same time there is also a larger group who suffered losses. Whether someone loses, gains, or is unaffected by the crisis appears to depend little on their household income, whether they are Scottish or English, on their age or the employment sector they work in. 4.1 How did the crisis affect behaviour? After grouping our couples by nature of material impact, we divided them further by looking at whether they decided to change their income protection behaviour in response. We wanted to explore whether or not people with the same type of material impact respond in the same way, and how they explain their behaviour. Once again, across the board couples were very aware of increased prices and tighter budgets, and this was not taken into account when considering behavioural changes. In the following, we present these findings, drawing on the explanations that the couples gave for their behaviour. The findings are summarised in table 1 and a detailed overview can be found in the appendix table A Behaviour of group affected negatively Of those couples that reported having suffered a negative impact as a result of the crisis (19 = 31 %), most (14 = 74 %), changed their behaviour as a result. We have identified two main factors that influence changes in behaviour, namely the immediacy and the scale of the 7

8 impact, which we explore below. First we will look at the few couples who were negatively impacted but did not change their behaviour (5=26%) either because they felt that they did not have the capacity to react to the relatively marginal losses they faced or because their present employment security outweighed the need to react to prospective losses. Negative material impact but no change (A) In this group couples do not change behaviour despite having experienced material loss. The two subgroups are distinguished both in terms of the reasons they give for the continuity in their behaviour and the immediacy of the loss they have experienced. In addition, the type of impact is important; whilst the first group have all experienced income loss, those in the second group have seen declines in their investments and pension assets. A1 Immediate income loss and no means of protecting income - living day to day First, we identified couples where at least one individual out of the couple has suffered an immediate income reduction as a result of the crisis, either through effective salary cuts (no bonus, discontinued retention payments) or a decline in their self-employed business. In all cases the income loss can be described as marginal because it is a reduction in income as opposed to a complete loss. Despite consequent feelings of income insecurity amongst these couples, they did not change their income protection behaviour in light of their loss because they did not feel they had the resources. These couples describe their income as only just sufficient for day-to-day living and they say that they have no spare money to protect themselves against any future losses through savings or insurances. Generally, they present themselves as being more at the mercy of their situation rather than in control and as lacking the capacity to respond. ( I have to live for today and I can t always plan for the future. Robert). As a result, they have a fatalistic and often pessimistic attitude towards their futures. A2 Prospective property or pension loss compensated for by present employment security we feel comfortable for now and cross the bridge when we come to it In the second group couples had not experienced an immediate negative impact but rather were aware of a longer-term loss they are facing as a result of the crisis. These couples either saw their property decline in value or a tightening of their occupational pensions (scheme changes, higher contributions, lower assets). There was no immediate behavioural response because the loss would be experienced in the future rather than the present and because the loss is considered fairly negligible when compared with something like the loss of current income. In addition, these couples feel secure overall because if needed they would be able to cut expenditure, they have equity in their properties, their employment is stable, they expect to be entitled to redundancy pay, and they have insurances and/or savings. This security appears to them as sufficient compensation for a long term loss. For example Daniela said We had insurances, we haven t changed anything and according to Hamish There is an element of uncertainty about pensions, again because of our personal circumstances our attitude in terms of what we ve got in place hasn t changed. Couples in this group do not 8

9 worry excessively because they already have the resources available to respond to a future more immediate loss. As a result, they have a sense of control over their own situation and have a relatively relaxed attitude. All couples in this group were in the middle income bracket. Negative material impact and change (B) This group includes those couples who experienced a negative material impact as a result of the financial crisis and did change their behaviour in response. In this case it is possible to identify three different groups which depend on the factors immediacy and scale of material impact. The three groups are those that responded to immediate losses by increasing their protection, those who try to increase their protection in light of prospective losses and current feelings of employment insecurity, and those who feel compelled to react immediately to substantial income losses. Once again, the perceived immanency and scale of the impact are the main distinguishing factors, but in this group employment sector and age are also significant. B1 Immediate loss but means of protecting income In this group couples are facing an immediate although relatively marginal income loss as a result of the crisis, but respond to protect themselves against any further losses. It is possible to further divide this group into two subgroups distinguishable by employment sector. B1.1 Self-employed Hard grafters There are couples within this group who have one self-employed partner. Both, Quentin and Uilleam, have experienced an income loss related to their business. It is a reduction in income as opposed to a loss of revenue altogether. In response, the self-employed partner has either taken additional work as an employee (Quentin) or increased the hours they work on a selfemployed basis (Uilleam). There seems to be little choice in terms of changing behaviour in this way, but the interviewees in this situation seemed accepting of the need work additional hours to achieve the same level of income in the current climate B1.2 Public employees Not losing hold of the Golden Handshake The couples in this group have one partner employed in the public sector who is very concerned about policy changes to their occupational pension. To protect the value of their current pension fund, they will take early retirement. The couples in this group were in the older age group (50+) and therefore had the opportunity to respond in this way. 9

10 B2 Prospective pension loss and no employment security - Making attempts to protect for the future In this group couples had experienced or anticipated prospective losses of their pension investments. However, although their immediate income had not been affected, they felt generally insecure about their incomes, either because they worked as self-employed or were aware of discussions about redundancies within their organisations. These couples took steps to protect themselves, not least by reducing their household expenditure and saving more. In addition, most couples in this group increased their pension contributions and lowered the risk level of their pension assets. However, other couples withdrew from saving for retirement. For instance, Brian and Betsy, after seeing a substantial decline in their fund lost confidence in their personal pension scheme altogether and decided that they would instead invest in an ISA for their retirement. A different strategy for Niamh and Niall was to try to reduce the amount of household debt by Niall taking a part-time job in addition to her fulltime employment. These couples were very actively trying to protect their income even though the actual material impact they had suffered would not be tangible for some time. The breadwinner of all these couples was in the younger age group and noteworthy more specifically in the age group. B3 Immediate and substantial income loss forces behavioural change - The unemployed In these couples at least one partner will have completely lost their income as a result of being made redundant during the financial crisis. This is experienced as an immediate and substantial loss that disrupts the household economy. These couples thought they had no choice but to seek new employment and they were successful, except for Rhiannon, who chose to study full-time as part of a career change, relying on her redundancy payment and her partner to fund this, and Tina, who was still seeking work at the time of the interview and was solely reliant on the income of her partner Ted. All of these couples have a negative attitude about the labour market, the shortage of jobs and the insecurity of temporary and fixed-term contracts and less occupational protection with new employers. Gavin who lost his job at a private company describes the loss of control in the following way: I worry a lot more about things. I don't want to get down that road again when I was unemployed. It is a scary thought but there is not much I can do about it if it does happen. Just to get on with it (Gavin). 4.3 Behaviour of group unaffected materially Of those couples who reported no material impact as a result of the financial crisis (31 = 51 %) the majority (28 = 90 %) did not change their income protection behaviour because they said that they felt no impact of the crisis and so felt no need to change the way 10

11 they protected their income. We will also consider the three couples (= 10 %) who did change their behaviour in light of the performance of the financial markets. Neutral material impact and no change (C) C1 What crisis!? - The stable core For these couples, material circumstances have not changed as a result of the crisis and although their risk awareness may have increased, they are not concerned enough to make any significant changes. Generally, they can be referred to as an economically stable core, despite some increased concerns and slightly less disposable income due to higher inflation. This makes them feel fortunate. We can identify three factors responsible for the confidence these households show: they have confidence in their capacity to change, a secure income (through insurances and employment sector) and other experiences in their lives hold a greater significance for them than the financial crisis. If more than one of these factors was present in one household, then the concerns were lowest and the couples felt more fortunate. Firstly, some couples see themselves in a position where they have the capacity to respond to a potential negative material impact without making specific arrangements in advance. Should it occur, they would reduce their expenditure, increase their working hours, rely on the partner s high earnings, find alternative employment or set up a small business. Interestingly, specifically those in the middle and higher income brackets suggested that if they were to lose their jobs, they could become self-employed to secure an income. Secondly, couples often feel that they do not need to make any changes because their current income is protected. One way in which they felt protected was through income protection insurance, which was relevant, however, only for couples in the lowest income bracket Lindsey/Lawrence, Tia/Tay, David/Davina). Job security either in the private or public sector also generated feelings of stability and confidence. In the private sector, those who worked in businesses that could benefit from the crisis were most likely to feel secure. For instance, Carl works as a legal aid criminal solicitor funded by the government. He expects that his work may increase because of social security cuts that could lead to an increase in criminal activity. In the public sector, despite widespread knowledge of government cutbacks and potential redundancies, having at least one partner employed in this way provided a feeling of security. Even in couples were both partners worked in the public sector there was no fear of redundancies. Finally, some couples had already changed their behaviour towards income protection because of other experiences in their lives and the financial crisis did not prompt any further changes. They attribute any changes they had already made rather to a) their age, b) having a child, c) pre-existing debt and/or d) previous economic shocks to their businesses. a) Those couples who mentioned that getting older was more relevant than the economic crisis tended to be around forty years old. The big forty threshold (Harry, but also Greer 11

12 and Emily) seems to be a milestone when couples start to think about long term protection and consider taking out insurances or protecting their income more strategically. For these couples, changes during the last three years were associated with crossing the age of forty rather than the economic crisis. b) Having a child had a much greater impact on the household finances than the economic crisis. Generally, all couples suggested that children changed their attitudes and behaviour towards income protection, but in this group it was mentioned by four couples, three of whom gave birth to their first child when the financial crisis started: Hannah: I think we ve put everything in place because of the children, I think (over spoken) Hugo: Rather than the economic downturn (Hannah: Downturn) Gordon and Greer illustrate that the combined effect of age and children are more relevant to their attitudes and behaviour than the economic crisis: Gordon: The kids are the biggest eye-opener in world. As soon as you have kids you start thinking about... (01:09:30) Greer: So three years definitely changed because of my age and because of my children s age. (01:09:34) c) In one case, attempting to manage pre-existing debt was more significant than responding to the economic crisis. In spite of feeling very secure in her employment, Mhairi has taken an additional part-time job. This was to pay down pre-existing debt and have more disposable income rather than as a result of the economic crisis. d) Finally, for some, other economic shocks within their industries were by far more consequential than the financial crisis of 2008/09. For instance, Andy and Anna, both working in the aviation industry, were more affected by the 9/11 terror attacks and the subsequent decline of the business than the recent downturn. In the same way, Ben reports that the dotcom crash of 2000 had a much bigger impact on him than the present financial crisis. In brief, for the couples in this group the financial crisis created no additional material pressure to change their behaviour and therefore they were less concerned. Three complementary factors supported this feeling of comfort with the status quo, namely their capacity to implement changes if needed in the future, their feeling of being protected (either by insurances or their employment sector) and their experience of other personally more consequential events. 12

13 Neutral material impact and change (D) D1 No loss but changes made in light of financial market performance - Proactive investors Some of the couples did change their behaviour despite not having suffered a negative material impact as a result of the financial crisis. All of them changed their behaviour in response to the declining performance of the financial markets. These couples appear to have made a calculated judgement about both the short-term security and longer term performance of their investments and reacted in response. They gave an impression of active management and control and generally felt quite secure. For instance, Osla and Odhran took the opportunity to enter the rented property market after the crisis because they wanted to capitalise on lower property prices: We bought it when houses were cheap which just like now. So I think if you do have the opportunity to buy, you could buy now, buy now while it's low. And then hopefully you keep it as long term investment for like ten years until house prices start go up and things get a wee bit better and then make a profit then. But that area was Odhran's idea so, it was a good idea (Osla). For Liam the crisis was the reason to change his investment strategy to less risky accounts: I don t think circumstances, the economic circumstances have really changed my whole outlook on financial matters generally, apart from say specifics such as investments or where I invest, how I invest, erm, purely and simply because that s been a poor area for the last five or six years and so that decision was made three or four years ago that I wasn t going to invest any money in financial markets anymore because they are just so risky so 5 Summary of Main Findings We interviewed 61 couples with above average incomes and asked them whether they had been materially affected by the financial crisis and how they had responded. In our analysis we began by looking at whether factors such as age, income, region or employment sector could be used to explain behavioural response to material impact and throughout our analysis found these characteristics to be largely irrelevant. We then focussed on whether the nature of the material impact could determine behavioural response. This initial paper discusses only the couples that reported a negative and neutral material impact. Our main findings at this stage are as follows: 1. Most of the couples that we interviewed felt materially unaffected by the financial crisis. Their job remained stable, though the salary did not increase with inflation. They were worried about inflation and often suggested, without much conviction, that they had made some fairly minor expenditure cuts in light of increasing prices. Moreover, although they expected their pensions may have performed poorly, they were not aware of the actual 13

14 performance. It should be noted that the stability reported by these couples is no doubt influenced by the fact that we were researching those households who were still earning more than the British average household. The second largest group consisted of couples who reported negative material impacts. 2. The nature of the impact of the financial crisis (positive, negative, neutral and positive/negative) does not determine behavioural response. In both the negatively affected group and the group that reported no material impact, there were couples who changed their behaviour and couples that did not. This means that our original assumptions about how material impact would influence behavioural response do not stand. Rather we observed that behavioural responses to material impacts are more complex. 3. For those who report a negative material impact, the severity and immediacy of the impact are very important factors in determining behavioural response. Indeed, in the negatively affected group, only those who had experienced immediate and substantial losses (B3) changed their behaviour consistently. Couples in this group had at least one partner who had experienced a total income loss, through redundancy. In other words, we have found that whether the impact is considered marginal or substantial and whether it will be felt in the short or longer term are very important in shaping behavioural response. 4. Feelings of job security are important when responding to prospective losses. Groups A2 and B2 both reported a negative material impact that would be felt in the longer term. Group A2 felt they did not need to respond to these changes, primarily because their feelings of job security compensated for these long-term, relatively insignificant losses. Those in B2 did not have these same feelings of job security which might explain why they felt they needed to react to the impact of the crisis. 5. Finally, the negatively impacted groups who had felt they had no capacity to respond to the immediate income loss they faced (A1) and those who were forced to change because of immediate and substantial loss (B3) are similar in the sense that they felt a loss of control with regard to their household economy and constrained in terms of their actions. Either they feel they cannot respond (A1) or they are forced into making changes they wouldn t otherwise have made (B3). These groups are arguably most negatively impacted by the crisis in attitudinal terms because they are more at the mercy of their situation than any of the other groups. Outlook In this paper we presented the first analysis of the impact of the financial crisis on the behaviour of households with above average incomes. Further analysis will consider those groups that felt either positively impacted or both positively and negatively affected by the crisis and their behavioural responses. We learn from this paper the importance of considering not only the nature but also the severity and immediacy of the impact of the financial crisis. 14

15 Endnotes 1 The paper is part of the ESRC project Welfare Markets and Personal Risk Management in England and Scotland (RES ), Jochen Clasen (PI), Traute Meyer & Alison Koslowski (CoI). The data and analysis presented here is based on the collaboration of the research team, with essential contributions by Jochen Clasen and Alison Koslowski. The main aim of the project is to understand how and why above average income households protect themselves against the risk of unemployment, sickness, retirement, long term care and higher education costs. The interview guide was designed around these issues but questions regarding the impact of and the attitudes towards the financial crisis were asked consistently throughout the guided interviews. 2 We differentiate between high (above 90,000 annual household income), medium ( 60,001-90,000) and low ( 40,000-60,000) income groups. The low income group earns above average income, but within our sample design they earn relatively low income compared to the other interviewed households. References Berezin, M. (2005), 'Emotions and the Economy', in N. J. Smelser and R. Swedberg (eds.), The Handbook of Economic Sociology. Second Edition, Princeton: Princeton University Press. Castles, F.G. (2010), 'Black swans and elephants on the move: the impact of emergencies on the welfare state', Journal of European Social Policy, 20: 2, Fligstein, N. (2001), The Architecture of Markets. An Economic Sociology of Twenty-First- Century Capitalist Societies, Princeton: Princeton University Press. FRS ( ), Family Resources Survey, in Department for Work and Pensions, National Centre for Social Research and Office for National Statistics (eds.), Colchester: UK Data Archive. Kahneman, D. and Tversky, A. (2000), Choices, values, and frames, Cambridge: Cambridge University Press. Taylor-Gooby, P. (1999), 'Markets and Motives. Trust and Egoism in Welfare Markets', Journal of Social Policy, 28: 1, Thaler, R.H. and Sunstein, C.R. (2009), Nudge. Improving Decisions About health, wealth and happiness, London: Penguin. Weber, R. and Dawes, R. (2005), 'Behavioural Economics', in N. J. Smelser and R. Swedberg (eds.), The Handbook of Economic Sociology. Second Edition, Princeton: Princeton University Press. 15

16 Table 1: material impact of the financial crisis and behavioural response NEGATIVE IMPACT NO CHANGE A1 Immediate loss, no capacity to react (= 2) CHANGE B1 Immediate loss, capacity to respond (= 5) B1. Self-employed - Hard Grafters (= 2) - work more B1.2 Public employees - Golden Handshake (= 2) - receive early retirement A2 Prospective loss, job security (= 3) - employment protection - relatively marginal impact but capacity to respond B2 Prospective loss, no job security (= 5) we feel comfortable for now and cross the bridge when we come to it B3 Immediate, substantial loss forces change (= 5) Unemployed NEUTRAL IMPACT C1 The stable core (= 28) - low level of concerns - inbuilt flexibility to respond - income security / insurances / employment protection - other events more significant D1 Proactive investors (= 3) - management of investments 16

17 Figure 1: Tree of material impact and behavioural response (all interviews) Material Impact Behavioural Response Behavioural Response Groupings 17

18 Appendix Table A.1: Detailed grouping and couple characteristics NEGATIVE IMPACT NO CHANGE A1 Immediate loss, no capacity to react 32 Ian and Isabella (40-60) (E) (O) 53 Robert and Rebecca (60-90) (E) (Y) CHANGE B1 Immediate loss, capacity to respond B1. Self-employed 51 Quinn and Quentin (40-60) (S) (Y) 58 Una and Uilleam (40-60) (S) (O) B1.2 Public employees 38 Karen and Karl (40-60) (E) (O) 39 Keith and Katherine (60-90) (E) (O) A2 Prospective loss, job security 13 Daniela and Dale (60-90) (S) (O) 31 Hayley and Hamish (60-90) (S) (Y) 35 Jack and Julie (60-90) (E) (O) B2 Prospective loss, no job security 21 Felix and Felicity (60-90) (E) (Y) 37 Justin and Jasmine (60-90) (E) (Y) 18 Edine and Elliott (60-90) (S) (Y) 45 Niamh and Niall (60-90) (S) (Y) 6 Brian and Betsy (40-60) (E) (Y) B3 Immediate, substantial loss forces change 11 Cheryl and Colin (40-60) (E) (Y) 28 Gwyneth and Gavin (40-60) (S) (Y) 52 Rhiannon and Roy (40-60) (S) (O) 53 Simon and Sarah (60-90) (E) (O) 56 Ted and Tina (60-90) (E) (O) NEUTRAL IMPACT C1 The stable core - low level of concerns 33 Iona and Iain (60-90) (S) (O) 36 Jemima and James (40-60) (S) (Y) 48 Osmond and Orla (40-60) (S) (Y) 50 Polly and Peadar (40-60) (S) (O) 54 Selma and Scott (90+) (S) (O) 61 Wanda and Wallace (40-60) (S) (O) -inbuilt flexibility to respond 3 Alice and Aaron (40-60) (E) (Y) 44 Mike and Mary (40-60) (E) (O) 10 Catherine and Clark (40-60) (S) (O) 16 Drew and Donald (60-90) (S) (Y) 12 Coira and Cedric (90+) (S) (O) 23 Fran and Faing (60-90) (S) (Y) 49 Paul and Pippa (90+) (E) (O) - income security insurances 42 Lindsey and Lawrence (40-60) (S) (O) D1 Proactive investors 41 Liam and Lucy (40-60) (E) (O) 46 Nigel and Nina (60-90) (E) (O) 47 Osla and Odhran (40-60) (S) (Y) 18

19 57 Tia and Tay (40-60) (S) (Y) 14 David and Diana (40-60) (E) (O) employment protection 15 Derek and Davina (60-90) (E) (Y) 9 Carl and Cerys (60-90) (E) (Y) 2 Aileen and Alistair (40-60) (S) (O) 25 Gareth and Gail (60-90) (E) (O) - other events more significant 30 Harry and Heather (60-90) (E) (Y) 20 Eric and Emily (40-60) (E) (Y) 4 Andy and Anna (60-90) (E) (Y) 24 Fred and Fiona (60-90) (E) (O) 26 Greer and Gordon (60-90) (S) (Y) 29 Hannah and Hugo (40-60) (E) (Y) 43 Mhairi and Manny (60-90) (S) (Y) 5 Barbara and Ben (90+) (E) (Y) Income group = (40-60k) (60-90k) (90k+). Region = (E) English, (S) Scottish. Age = (Y) 34-44, (O) =

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