Why the ‘squeezed middle’ is here to stay

by

Sitting in their living room in Mansfield, Karen and Darren put on a brave face about the future. They are phlegmatic about their situation – they know they are doing better than many others. Both work full time, Karen for a children‘s centre and Darren for a software company, each earning a bit less than the average wage, making for a decent household income. The proud parents of four children, who run them ragged, they nurture high hopes for their futures.

But scratch the surface and there is palpable frustration. Life has not panned out how they thought it would: in their mid-30s, they still can’t afford to buy their own home, the cost of running a family is escalating, the constant grind of financial insecurity takes its toll, and – underneath all this – is their entrenched belief that their living standards are flatlining, and will continue to do so. “My mum’s and dad’s generation saw their wages go up ahead of prices, with us it’s the other way around,” says Darren.

They are not alone – indeed, in many ways theirs is an ordinary tale. Millions of people are coming to terms with the sense that their living standards are falling short. Until recently, there was a predictable rhythm to our relationship with late 20th-century capitalism: sometimes there are recessions and incomes fall, but then recovery comes and with it rising wages and shared prosperity. It has long been safe to assume that national economic growth begets personal gain. Now we aren’t so sure – and it’s not just because of the recession. It is for this reason that the Resolution Foundation, as part of its Commission on Living Standards, is publishing a major study setting out the extent to which the living standards of low- to middle-income Britain were already faltering during the “boom years”; and thus, the true scale of the challenge ahead.

The group

Karen and Darren are at the top end of a large group of 11 million adults living on low-to-middle incomes: on or below the national average, but not the very poorest. They are overwhelmingly in work and live largely independent of means-tested benefits, though they lean heavily on tax credits. Characterising the lives of such a vast number of people is fraught with risk but on some issues the statistics speak clearly enough: household incomes are far lower than many in the upper middle classes realise, at £12,000-£30,000 for a couple (rising to £20,000-£48,000 for a couple with three kids). Six out of 10 say they are struggling to pay bills. Savings are pitifully low – half have less than a month’s salary to fall back on – and two-thirds aren’t contributing a penny to a pension. Rising prices are an acute problem – particularly for food and fuel.

 

This article first appeared in The Observer

Wider context

There will always be people who do less well, so what has changed? It’s this: for millions of working people, there has been little or no improvement in their living standards for years. Median wages were flat from 2003-2008. Given subsequent falls, it will be 2015 before they recover even to their 2001 levels. Real disposable income per head fell in every region outside London from 2003-2008. People are going backwards, falling far behind where they thought they would be, and even further behind where they see the affluent are going.

A trend of less than a decade doesn’t put us on an ineluctable path towards longer-term stagnation. But it should be enough to shake us out of the cosy assumption, dripping in complacency, that we are suffering no more than a post-recession hangover, and that when steady growth returns these problems will evaporate. The living standards problem began before the recession and reversing it will be more complex than reducing the deficit.

The American experience illuminates how it is possible to get stuck in a cycle of growth without shared prosperity. The typical US worker today is doing little better than their parents, with anaemic growth in median incomes since around 1973. In the same four decades, US gross domestic product more than doubled. The link between rising productivity and median wages ruptured, and with it the economic prospects of the American middle class: they were left behind as the payoff to higher-skill levels greatly increased and, above all, as the richest 1% extracted an ever larger share of all the growth in the US economy. There are many nuances in this tale: but the overall trend is clear and alarming.

This is not just a case of American exceptionalism, of hyper-capitalism finally getting its comeuppance. Median wages have stagnated in countries as diverse as Canada, Britain and Germany. By no means all advanced economies are affected, but in a number of leading nations something has gone badly wrong.

A rising tide

To get some perspective on the challenge we face in the UK, we need to cast back to the long postwar boom and the successive waves of social and economic change – some progressive, others not – that have since powered the upward march of living standards.

The first postwar transformation arose from the influence of new technology on the types of jobs that were created. This led to creative destruction, as some sectors declined and unskilled labour was made redundant, but overall it generated rising wages as new skilled manufacturing jobs and associated roles in the services sector were created.

This was succeeded by another wave of social change that lifted household incomes: the rise of mass female participation and the corresponding growth of dual-earner households. At the start of the 1970s, female participation was below 60% and climbed steadily to around 75% over the past decade. As these gains started to slow in the late 1980s and 1990s, we saw a further structural shift – a wave of financial deregulation that gave rise to the exponential growth in personal debt that propped up living standards and fuelled the housing boom. Finally, over the past decade, came the strategic decision to expand the role of the state – mainly via tax credits – which, together with the minimum wage, lifted the incomes of millions of working families.

The reversal

And then the tide turned. The financial crisis will be seen as the defining moment, but to varying degrees, and at different points in time, the forces behind a rising tide of prosperity stalled or went into sharp reverse.

The largely benign postwar relationship between technological change and job growth turned out to be time-limited. The rise of mass automation and the digitalisation of production, twinned with greater globalisation, had harsh consequences for millions of workers, particularly those in mid-level jobs in administration and manufacturing, who have seen their roles displaced. In contrast, many low-paid jobs – in retail, hospitality and care – have been less vulnerable to the same forces, while high-paid roles have grown; resulting in so-called “lovely and lousy jobs”.

The next change has been the levelling-off of the growth in female participation in the labour market, not least as the punitive cost of childcare took its toll. Many economists now expect families gradually to run down their debts in the years ahead, reversing the trend of the last two decades, so another prop for today’s living standards is removed.

Finally, recent cuts to the system of tax credits and benefits brings to a screeching halt the growing role of the state in lifting household incomes.

Some view these reversals as the harbinger of a new and bleak era in which the inevitable consequence of late capitalism – characterised by post-industrial economies, technological breakthroughs that generate fewer jobs and flexible labour markets spawning massive inequalities – is a plateau in the living standards of a large swath of workers. If so, the implications are vast, long-term and as yet hard to glean. As a society, and as individuals, we are hard-wired to expect steady material improvement for ourselves and our children.

If growing numbers fail to realise these ambitions, then the reckoning in the decades ahead will be not just economic and political, but cultural and emotional. It is far too early to say whether this view will be borne out or if it is overblown and fatalistic doom-mongering – but what is already apparent is that a number of advanced societies in the early decades of the 21st century are struggling to widen the circle of prosperity.

Closing the gap?

As yet, there is no emerging political response, nor even a shared sense of which elements of this challenge are reversible and which need to be accommodated. Our political class hasn’t been here before: none of us has. Which is perhaps why they still rely on their familiar tunes – economic growth will automatically give rise to shared gain; high-skills jobs will become the norm; home ownership should be extended to all; or high employment twinned with progressive taxation will once again lift all boats. All of these well-worn claims are now at the very least contestable. Some are risible.

It is correct that without strong growth there is no prospect of rising living standards. But this challenge cannot just be resolved in the realms ofeconomic policy. There are more prosaic areas where the immediate gap between the daily experience of hard-pressed families and prevailing political assumptions risks becoming a chasm.

Take housing. In the run-up to the crisis, one in three low-to-middle-income households who bought a home did so with a 100% mortgage. Those days aren’t coming back. Even in the era of easy credit, the proportion of those under 35 on low-to-middle incomes owning their own home halved, while those renting (often inadequate) housing in the private sector trebled.

These societal shifts are being met with a near total absence of candour across the political spectrum: there is no response to the crying need to build new family accommodation to rent, with secure tenancies, for people on low-to-middle incomes who are as unlikely to get to the top of the social-housing list as they are to ever buy their own home.

Or the nature of work. The notion that low-skill employment will increasingly dry up as we move to the sunny uplands of a high-skill, hi-tech economy rings hollow to those whose only job choice is between different low-skill sectors. Rather than hope that higher living standards will trickle down to low-productivity sectors, we would be better served by politicians grappling with the gritty task of achieving higher pay, basic security and some prospect of career progression for those working in them.

Or childcare. Endlessly repeated mantras like “making work pay” elicit little more than eye-rolling from the likes of Karen who, like millions of others, depends above all else on affordable childcare to make ends meet. According to the OECD, the cost of provision in the UK means that the effective tax rate on a typical second earner on low pay is a punishing 88%, and that was before the recent budget’s deep cuts in support. These barriers to earning fuel the economic despondency felt by families already reeling from falling wages.

Conclusion

If family living standards continue to flatline once steady growth returns, it will shake the foundations of our politics. The basic deal in liberal democracies is that working people share in national economic success. Many working families have begrudgingly grown accustomed to the idea they will fall further behind the rich in relative terms. But they are now stagnating in absolute terms, too.

A normally upbeat Karen says: “You can only take so much. I’ve always been patriotic, but this really affects the way you feel about your country – you just feel so undervalued when you work hard but don’t get on.”

Growing numbers will ask why they should support a flexible and open economy if they don’t benefit.

And the already souring nature of our politics could easily degenerate into a populist search for scapegoats to blame and demagogues to laud. These sentiments already exist in Britain but, by and large, they remain at the fringes. Another decade of stagnant living standards and all that would change. They’d go mainstream.

Case study: Andrew and Katharina

Andrew, 46, remembers his childhood fondly. His mother, a cleaner, and factory worker father had a council house, which they later bought. The family enjoyed regular holidays and his parents’ working hours allowed them plenty of time with their children. Money was never an overriding problem. Andrew describes their lifestyle as “comfortable” and he expected a similar life, perhaps an even better one.

Although Andrew, a human resources manager for the charity Family Action, and his wife, Katharina, 40, an author, have a joint income of between £40,000 and £50,000, life is not comfortable. In fact, with two boys aged three and eight to care for, making ends meet is frequently a strain, and he fears things will get worse.

“My wife is German and we only recently moved back to the UK. We couldn’t afford a home in London so we moved to Sevenoaks, Kent, and I commute from there. I initially thought our income would be enough for a decent life. We expected to be able to even save up and buy, but we can’t do that. We are stuck.

“At the end of the month, what with the rent and the extortionate costs of travel, we have nothing left, in fact less than nothing, which is a bit of a shocker. At times we have had to dip into the children’s savings, which is obviously quite distressing.

“We had a similar income in Germany, but things are a lot worse here. We are not extravagant people, but we now buy nothing beyond the essentials. And I can only think things are going to get worse: banks aren’t lending, we don’t have a massive deposit, and there will be inflationary pressure on the rent so that will go up while our pay does not keep pace.

“So our actual income will decrease in real terms. My wife could do more writing, but we can’t afford the childcare costs for her to have the time to do that work.”

He adds: “Comfortable is not even a word I would use for the future. We will probably go back to Germany, where a positive future for our family is easier to imagine.”