Received wisdom says household income has stagnated since 2008. Actually the problem goes further backby Jonathan Cribb / August 9, 2018 / Leave a comment
It has become commonplace to describe the period since the Great Recession with lots of dramatic words—not only referring to the financial crisis itself, but how the economy and household living standards have stagnated. Growth in average living standards has been described as “terrible” or “disastrous,” while there has been much talk of a “cost of living crisis” and a “squeezed middle.”
There are good reasons to think that household income growth has been very poor since the crisis. Between 2007-08 and 2011-12, real average household income (measured after taxes have been paid and benefits received) in the UK fell by 2.3 per cent, or by £600 per year. Then, as the recovery started, growth was weak at first but then strengthened. Household income rose by 8 per cent in the five years between 2011-12 and 2016-17—in other words it grew at 1.6 per cent per year.
Growth in average living standards of 1.6 per cent per year (remember, this is after accounting for inflation). Is that good or not? It really depends what you compare it to. In the 40 years before the financial crisis, average household income grew by 2 per cent a year. So, comparing to that, growth doesn’t look great. On the other hand, if you compare it to the five years before the recession, when growth averaged only 1.1 per cent per year, the recent trends look a lot better.
And for those of you who think that these don’t sound like big differences—they aren’t in the short term. But in the long run even small differences in growth can cause really big differences in living standards. If average income grows at only 1.1 per cent per year, it will take 63 years for incomes to double. But if growth is 1.6 per cent it only takes 44 years for incomes to double, and at 2 per cent it only takes 35 years. So we will be a lot better off in the long run if growth is only a little bit higher each year.
So the key point here is that actually, we haven’t just had poor growth in living standards in the decade since the recession. Instead, we’ve had over 15 years of relatively slow growth in living standards and nothing like the rapid growth seen in the late 90s/early 2000s (around 4 per cent per year) or the mid 80s (5 per cent…