The referendum, living standards and inequality

Published on Wages & Income

Today’s result is what earthquakes in politics look like. It will have big long term impacts on the future living standards of the British people – impacts on employment, pay and prices that will matter much more to people than today’s falls in the value of Sterling or the stock market, bad though those are.

But as well as the impact on future living standards, there’s a lot of noise around about how changing living standards in the past affected voting intentions. Hypotheses out there include the idea that areas hardest hit by the financial crisis, or those where migration is said to have held down wages, voted heavily to leave. Most of these ideas don’t match up to the evidence from last night.

Now partly that’s because this isn’t just about the numbers – it’s about culture, outlook, lifestyle and what we feel a sense of belonging to. That might not be the normal thing for an economic research organisation to say, but it’s true. And it’s also, as many people noted last night, a function of the coalition that underpinned the leave vote – shire Tories combined with Britain’s industrial heartlands.

But it’s also because something more complicated is going on. It runs far deeper than the financial crisis and predates the impact of large increases in European migration.

So back to those numbers. Given lots of people – from politicians and policy makers, to businesses and the media – have lessons to learn from what’s happened in the last 24 hours, we should do our best to learn the right ones.

Clearly the unprecedented squeeze on living standards since the early 2000s has played a big part in underpinning the loss of faith many people feel in both British politics, and in the idea that our economy has much to offer them. And they’ve got a point – earnings in the UK still lie well behind levels seen before the crisis.

brexit3

But the recent past can’t explain everything. Here’s the relationship by area between strength of a vote to leave the EU and the level of wage rise (or fall) since the beginning of the earnings slowdown and subsequent squeeze that started in 2002 (before the large increases in European migration).

a

As you can see there is no relationship between how an area’s prosperity changed in recent years and how they voted. That is to say some areas with big pay boosts voted to leave (such as Christchurch in Dorset) and some that have done very badly out of the last decade and a half still voted to stay in the EU (such as Rushcliffe in Nottinghamshire).

Now what is true is that the relative levels of pay in an area do matter for how people voted. Areas that voted to leave the EU weren’t those that did badly in recent years, but areas in which people simply earn less. Contrast, for example, a leave vote of 76 per cent in Boston (the local authority with the lowest pay of all last year), to a leave vote of 31 per cent in Richmond-upon-Thames (the highest paid area).

b

Indeed the graph above looks pretty similar even if we look at pay levels back in 2002 – meaning we need a longer sense of history to understand what is going on here.

So it’s not the unequal impact of the recent recession driving voting patterns – or indeed as some argue the impact of migration driving down wages in some areas. Instead, in so far as economics drove voters’ behaviour last night, it is areas that are, and have been for some time, poorer. Or to put it another way, it’s the shape of our long lasting and deeply entrenched national geographical inequality that drove differences in voting patterns.

The legacy of increased national inequality in the 1980s, the heavy concentration of those costs in certain areas, and our collective failure to address it has more to say about what happened last night than shorter term considerations from the financial crisis or changed migration flows.

Those looking to draw lessons for the future should therefore focus on some of our underlying failures – ones which we should be addressing in or out of the EU and which require us to rethink the ease with which a flexible, globalised economy can generate prosperity that is widely shared. Some of that is hard, in fact much of it is. All parties will now be rethinking their policies on huge topics, from immigration to trade. But some of this is not hard, and on those topics the lack of action only reinforces the anger people feel.

If we have the will we can build more houses to reduce rising cost pressures families across the country face. If we have the will we can provide decent routes into careers for those that don’t go to university. And if we have the will we can spend less time marketing devolution, and more time supporting and delivering the real economic leadership geographies need to change their destiny.

Clearly these are just a small sub-set of what a less divided Britain would need – and non-economic issues deserve equal prominence – but they could be a start. And they have a big advantage – they could be done if we willed them.