The Resolution Foundation at 20

Morning all,

Last week we warned that more bad economic news could mean Britain hitting unlucky 13 on the ‘bloody miserable index’ (unemployment + inflation + interest rates). I’m pleased to report that none of these rates moved in the end, keeping the UK at 12.5. There were mixed signals behind the no change headline. The good news is that the worrying deterioration in the labour market in early 2025 seem to be abating. The bad news is that food price inflation continues to tick up and is now at its highest rate in 18 months.

Obviously this all pales in comparison to the really big news this week – the Resolution Foundation turning 20! We thought we’d celebrate this milestone with a TOTC special (full report here).

Some of you may have noticed that Top of the Charts’ content – great reads, one chart – doesn’t fully fit with its job description. Well, for one week only, we intend to put that right. From a cast of tens of thousands, we have pulled together a list of the ten greatest charts in the history of RF, and we want you to vote for our GREATEST CHART EVER! Please scroll through the shortlist and vote here. And please, there is a lot riding on this vote at RF towers so use your democratic privilege responsibly…

Have a great weekend,
Ruth

Chief Executive
Resolution Foundation

The big picture – £20,000 of lost living standards growth

Looking back over the 20 years, the founder of the Resolution Foundation Clive Cowdery summarises things nicely – delight and fear. Delight at the work RF has done to put living standards at the centre of political debate. Fear that the problem we were set up to resolve – raising living standards – has got worse. The extent of Britain’s living standards slowdown is unprecedented in modern times. Between 1994-95 and 2004-05, median incomes for working-age households grew at a respectable 3.0 per cent per year on average. Since 2004-05, that figure has plummeted to just 0.3 per cent. Had incomes continued to grow at their trend rate at the time when the Resolution Foundation was founded, a typical household today would be £20,100 a year better off. Britain would look and feel completely different. As our first chart shows, we have indeed “all been in this together” – the pain has hit rich and poor – though only the poorest have seen incomes actually fall (on average).

Britain’s living standards slowdown has been driven by an unprecedented pay depression 

So how do we account for the twenty year living standards slowdown? The most important change has been the collapse of real earnings growth after the financial crisis. Most working-age families get the vast majority of their income from work, so what happens in the labour market is of critical importance to living standards. That’s even true among lower income households, where wages are still three times as important as income from the social security system. As our next chart shows, in the 20 years running up to the Foundation’s creation in 2005, average earnings grew by 68 per cent in real terms. In the 20 years since, they grew by just 6 per cent. Had earnings continued to grow in real terms at their 1985-2005 pace, average earnings today would be £394 per week higher. No that’s not a typo – per week.

The root cause of Britain’s pay depression? Weak productivity.

The ultimate cause of this all-round living standards disaster has been the collapse in productivity growth. The UK is far from unique here, but its productivity slump has been more pronounced than its peers. We’ve fallen behind further, rather than catching up – leaving us 20 per cent behind Germany and 24 per cent behind the US. While leaving the EU has played a role – recent estimates suggest it may be responsible for a five per cent reduction in the size of the UK’s economy – Britain’s productivity woes are far bigger and deeper rooted than Brexit. The biggest reason has been a decades-long failure to invest, by both the state and by businesses. To its credit, this is something the Government is acting on – changing the fiscal rules to increase capital spending and reverse the trend of low public investment.

Good policy can make a huge difference to people’s living standards

But wait, it’s not all doom and gloom. Now firmly in its mid-20s, the minimum wage has arguably been Britain’s greatest policy success in a generation. But it too suffered some teenage angst in the early 2010s – losing its sense of purpose in the wake of the financial crisis. In response, the Foundation convened a year-long review of the minimum wage, and in 2014 made the case for a more ambitious wage floor. Two years later our proposal was adopted and announced by then Chancellor George Osborne, with the new National Living Wage coming into place in April 2016. Three years later, Philip Hammond (six Chancellors ago!) committed to ‘ending low pay’ through further increases. And that pretty much is what has happened. For much of the past 30 years, one-in-five workers across Britain has been low paid – earning less than two-third of the typical hourly wage. By 2024, the share had fallen to just 3 per cent. The 1.9 million workers currently paid the minimum wage earn 37 per cent more in real terms thanks to the policy’s success. That’s £125 more per week for someone working a 37.5-hour week.

Income stagnation + rising wealth = growing generational divides across Britain

While incomes have stalled over the past two decades, the value of the country’s wealth has continued to rise. Rising wealth is no bad thing. But when combined with income stagnation it leads to wealth gaps and generational divides. Increasingly in Britain, your life chances are shaped less by what you can earn, and more by what you (or your parents) own. The impact of booming asset prices is nowhere more salient than home ownership. Between 1970 and 1997, earnings and house prices both grew in tandem. But since 1997 they have diverged, with house prices increasing by 152 per cent in real terms, and earnings by 36 per cent. If house prices had tracked earnings growth, an average house would cost about half as much today. This has delivered a wealth windfall for (older) homeowners and priced out younger generations. Unsurprisingly then, millennials are substantially less likely to own a home than previous generations. By age 35, 46 per cent had made it onto the housing ladder, compared to 66 per cent of ‘baby boomers.’ It will take far more than mass abstinence from frappuccinos and avocados to tackle this generational divide – and we should certainly avoid making it worse by tilting the state further towards wealthier cohorts through policies like the Triple Lock.

The state has got bigger, not better

The last 20 years have seen a multitude of events that required big state intervention – none more so than the pandemic which seemingly triggered a more permanent shift to a bigger state. What we’re spending taxpayers’ money on has also changed a great deal over twenty years. Debt payments now eat up 4 per cent of GDP each year (double pre-pandemic levels) while health has grown from 5 per cent of GDP in the mid-2000s to 7 per cent now. So, despite a significant rise in the size of the state, day-to-day budgets of departments (outside of health, education and defence) are still being squeezed. At the same time the public are increasingly dissatisfied. Public services matter for living standards too; we estimate that English households receive an average of £13,000 of ‘in kind’ benefits’ from public services in 2025-26.

The task of lifting living standards across Britain is bigger and more important than ever

So, what lessons can we draw from the last 20 years as the Foundation looks ahead to the future? The first is that Britain’s living standards slowdown has been broad-based. The Foundation helped to define the ‘squeezed middle’ in the early 2010s, and we will continue to strive to ‘unsqueeze them’ in the future. We will focus on low and middle income households; those on low pay or in precarious work; and those vulnerable to financial shocks.

Second, there is no way out of this mess without productivity-driven economic growth. That was the key message from our Economy 2030 Inquiry – and it is now a core part of the Foundation’s work programme.

Finally, let’s not be nihilistic or unrealistic. Yes, Britain is stuck in a rut living standards-wise. But it is perfectly capable of getting out of it. Equally, we have to be honest that the resources available to fulfil our mission are less than they were, and solutions will need to be more creative as a result. The National Living Wage proves that policy can achieve great things even in tough times.