Picture: C Dempsey
How much did your parents earn when they were your age? Unless you buck the trend, the answer is less than you earn. But now, for the first time in decades, it’s not clear if the same will apply to your children. From the US to Germany, living standards for typical households had stopped rising long before the economic downturn. It is time to step back from the anxieties over cuts to ask: have we stopped getting richer?
Even posing that question may feel counter-cultural. Our expectations have been shaped by the rhythm of late 20th-century capitalism: occasionally there are recessions and incomes fall, but then recovery comes and wages rise. Put simply, it has long been safe to assume that national economic growth leads to widespread personal gain.
But recent economic history complicates that assumption. In the five-year period before the downturn, while the overall British economy grew by 11 per cent, average wages were already flatlining. Disposable income per head fell in every English region outside London from 2003 to 2008. During a supposed national boom time, Britain’s households were drawing a bust. A half-decade trend doesn’t, of course, put us on an ineluctable path towards longer-term stagnation. But it should shake us out of complacency.
We only need to look at America to see how it is possible to get stuck in a cycle of growth without prosperity. The average US worker today is doing no better than their parents, with little or no growth in incomes since around 1973. In the same four decades, US GDP more than doubled. In fact, if incomes had kept track with GDP per capita—as they did from 1945 to 1973—the average American household would not now live on $50,000 but $80,000. Of course, numbers like this hide many complexities: overall employee compensation, including health insurance, shows a slightly better picture than wages, and women have done better than men. But the overall trend is as clear as it is alarming.
Some respond to such statistics by comforting themselves with a tale of American exceptionalism; of hyper-capitalism finally getting its comeuppance. The evidence suggests otherwise. The supposedly gentler Canadian system has seen a similar stagnation in middle wages since around 1980. Nor is this just an Anglo-Saxon phenomenon; in Germany—the bastion of the continental model—the real wages of ordinary workers have been flat for nearly ten years.
Many economists are only just waking up to these trends. This year’s zeitgeist book in the US is The Great Stagnation by Tyler Cowen, an economics professor at George Mason University. Its central claim is that, having used up the easy wins of free land, educational improvement and major growth-enhancing innovations, the US economy has run out of the “low-hanging fruit” that spurred prosperity in the modern era. The task of securing rising living standards has now become a much taller order.
Whatever you think of Cowen’s arguments (and there are good reasons for querying some of them) he has dragged the issue out of the dusty confines of academia and into fresh air. Some still dispute his claims about the malaise facing US workers. But most economists are now turning their minds to a search for explanations.
In that hunt, broadly speaking, economists have tended to gather at the doors of two different culprits. The first group focuses their ire on headline trends in in-equality. Their guiding question is simple: if the economy has grown, and the average worker is no better off, where has all that missing GDP gone? The figures are, of course, striking. In the decades that saw incomes stagnate for millions, the very richest enjoyed a rapidly rising share of national income. In the US, the market leader on inequality, the richest 1 per cent of the population accounted for a staggering two thirds of all the income growth that occurred during the George W Bush years. In Britain, 22p of every extra pound earned since 1979 has gone to the top 1 per cent.
It’s not just between people that shares have changed, but also between wages and profits. Across almost every OECD country the share of the national economic pie going to labour in the form of wages, rather than to business in the form of profit, has fallen. In the mid-1970s, Britain’s workers took home 64.5 per cent of GDP as wages; by 2008 that had dropped to 53.2 per cent.
But an account based solely on inequality has failed to satisfy some economists, and a second group has gone in search of deeper explanations. They have come to focus on the kinds of jobs we’re now creating—and specifically the role of technological change. They highlight the contrasts between today’s era and that rosy, postwar period in which technological growth was such a positive force for living standards. In these earlier decades, new manufacturing processes may have made unskilled labour redundant, but they also helped create a new tier of more skilled manufacturing jobs and associated roles in the services sector. The modern middle classes were born, and new technology—along with widening educational opportunity—was the midwife.
Today, all that has changed. Low-paid jobs—in retail, hospitality and social care—aren’t amenable to automation or digitalisation. Computers aren’t much help when it comes to cleaning, catering and caring for the elderly. But they do displace a wide swathe of mid-level jobs, from administration to high-skilled manufacturing. The result? Over the last few decades the share of middle-skill jobs has fallen dramatically, while those at the top and bottom have expanded. Economies have polarised between so-called “lovely and lousy jobs.”
To understand what’s happening to living standards, we need to take into account both headline inequality and these deeper dynamics. The worry is that our body politic deals poorly with long-term trends like these. There remains a lazy consensus that our economy is suffering no more than a post-recession hangover. But our malaise began before the slump—and reversing it is likely to prove much harder than reducing the deficit.
In the short term, political battles over the cuts will continue, and we are likely to see further tax-tweaks to soothe the pain. But the fundamental economic question of our times is harder: have ordinary working people stopped getting richer—and if so, what can be done about it? Without an answer to that question, no party can claim to own the future.
Gavin Kelly is chief executive of the Resolution Foundation; James Plunkett is secretary to the Commission on Living Standards