Blog

Squeezed middle: all pain, no gain

Matthew Whittaker

Date: 30. January 2012 / Category: Commission on Living Standards

This article originally appeared in Public Finance Magazine

Average incomes in the ‘squeezed middle’ group will take until at least 2020 to return to their 2007 level – a trend made even worse by public sector cuts

With two out of three British workers facing pay freezes, inflation running at an annual average of 5.2% and widespread cuts to government spending on services and benefits, it is no wonder that the Oxford English Dictionary declared ‘squeezed middle’ to be its Word of the Year in 2011.

It is a phrase which is evocative enough to capture the pressures bearing down on all sides, while also being vague enough to allow just about everyone to feel that they’re entitled to membership. But it is more than a passing fad: the squeeze on living standards isn’t a temporary condition of an economic crisis that will eventually run its course, rather it looks like being here to stay.

Last week, the Resolution Foundation published Squeezed Britain, its fourth annual snapshot of life on a low-to-middle income. It shows that, while large swathes of society can rightly lay claim to having been hit by the economic and financial crises that started in 2008, the nearly six million working households in the bottom half of the income distribution are facing particularly acute pressures.

Crucially, the report also shows that the squeeze on these households is not simply a product of the downturn. The recession undoubtedly made things much worse, but it was a hit coming on top of an existing problem. Earnings within the group fell even during the growth years of the mid-2000s, with an increase in the income coming from female employment of £300 per household being more than offset by a drop of £610 in income from male employment.

So what happened? No one knows for sure, but it is likely to reflect a variety of changes in economies around the world. Look to the US and you’ll see a much longer-established trend, with median wages flatling from the 1970s onwards. Experts highlight the importance of technological change and growing educational premiums, while a decline in unionisation has undoubtedly also played its part.

Whatever the root cause, this decade-long squeeze left low-to-middle income households particularly exposed to the consequences of recession. Fast-forward a few years and we find that incomes in this group have fallen by 7.5 per cent from their pre-recession level. Two-thirds have inadequate savings and two-thirds say they are struggling to keep up with day-to-day bills. Aspirational goals that once seemed to go hand-in-glove with work appear to have moved out of reach: nearly half of the group say they can’t afford an annual holiday, while it is now expected to take 22 years for these households to save for a typical deposit on a first time buyer home, up from just three years in 1997.

Casting forward, the picture appears gloomy at best. Even under the relatively optimistic scenario in which a return to economic growth results in earnings in the low-to-middle income group growing at the strong rates we saw in the 1990s, average incomes in this group would take until 2020 to return to their 2007 level – a lost decade and then some.

We also need to brace ourselves for the not-unrealistic possibility that future income growth in the group will instead match the pre-recession trend. Public spending cuts are set to hit particularly hard. One-in-five low-to-middle income households rely on the public sector for more than half of their income, and job losses in the public sector combined with cuts to childcare support could push the growth in female earnings observed in the mid-2000s into reverse. Moreover, unlike in this earlier period, incomes will no longer be propped up by ever more generous tax credit payments, with spend in this area set to fall sharply over the coming years. Under this scenario, average household incomes in 2020 would remain 8 per cent lower than before the recession and still no higher than the level they were at in 2001: the economic shock will have effectively resulted in two lost decades for living standards.

So, while we’re all feeling the pinch right now, the real ‘squeezed middle’ is about more than recession. Plotting a return to economic growth should rightly be the priority for policy-makers, but growth alone may not be enough to address the pressures faced by those at the sharp end of recent shifts in the very structure of the economy.