Britain’s boom in ungrateful retirees

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Afternoon all,

Sorry TOTCs is slightly later than normal, this morning was taken up with some painful editing of our preview for the Autumn Statement. Painful because of the substance rather than the editing challenge obviously. We may have got a new PM, but the extent to which we haven’t escaped our underlying low growth/nasty choices trauma is painful to be confronted with. We’re heading for new tax rises, another round of spending cuts, and a horrible dose of déjà vu for anyone paying attention to British economic policy making for the past decade and a half. Softening up the public (and Tory MPs) for that reality is why you’ve got the Treasury engaging in an expectation management operation about as subtle as Putin this morning. If I haven’t put you off, the report is out on Tuesday. Come along to the event discussing it if you’re interested/free.

Have a great weekend, and fiscal event free Halloween.

Chief Executive
Resolution Foundation

Ungrateful geriatrics. British politics – it’s an age thing. That’s increasingly the story of the 21st Century as the Conservatives have come to rely on older voters (who have the benefit of actually voting) and Labour the youth (who don’t). Grateful for older voters handing them the keys to Downing Street, Conservative governments have prioritised the state pension over working-age welfare and formed the anti-growth coalition avoided building too much of anything from houses to wind turbines. But does the gratitude flow the other way? Nope is the surprising finding in a short article that asks different groups whether they think the different parties look after their interests. The young are very clear Labour better does so for them, but the retired think both parties are pretty rubbish at looking after their interests. Which is odd given we’ve basically built a country that only works for those immune from slow growth i.e. the retired, with assets, who don’t need social care.

Bad Baumol.. Have a read of a thoughtful new blog from Toby Nangle on the choices that face us in providing the kind of services that are high on human contact and low on productivity growth – think social care or schools. He starts with some theory, reminding us that Baumol’s cost disease happens in such sectors as wages are forced up in line with economy-wide productivity growth (otherwise workers leave the sectors). You can see exactly that happening in the (largely private) US health sector. But here (where many of these services are publicly funded) something different is going on: spending/wages have not risen in line with the wider economy. Basically the fact that they are provided by government means we choose to pay less, but Toby’s argument is that just shows up as lower quantity/quality of services. He’s right generally (although understates the fact that it can show up just as lower wages in so far as the labour market isn’t perfectly competitive/the state is the monopsonist employer). The effects are big: the typical social care worker has gone from earning roughly the same as the typical worker in the 1990s to just three quarters of the typical wage today – which in the real world has meant more junior staff doing care work, under more time pressure and with more vacancies. That’s definitely a disease of some sort.

Recently retired. What lies behind the recent rise in inactivity (i.e. people not in or looking for work)? Retirement more than ill-health argues a short note from the IFS. It shows that while headline data suggests a big rise in the number of inactive older people in ill health, it doesn’t automatically follow that’s driven the rise in inactivity. Instead they argue an increase in flows from employment into inactivity are key, and that those are made up of people becoming inactive because they retire rather than because of ill health. So, we’ve got two distinct issues going on: people becoming inactive as they retire, while those already out of the labour force may be getting sicker. In the real world this division is less binary than the piece implies, but it is important to hold onto both arguments: we should be a lot more relaxed about people choosing to retire early than those forced out of work because of ill-health.

Wanting work. It’s quite fashionable these days to be anti-work – some UBI fans think the goal is give people cash so they are free not to work. Now obviously we should all be pro-better work and having sufficient income is crucial. But the work is bad argument can get taken too far. Pushing back the other way is a new study (free version) that reminds us that work is about far more than earning some £. The authors conducted a field experiment in a Rohingya refugee camp in Bangladesh, employing some refugees to conduct surveys for eight weeks while giving cash payments equal to their wages to another group with no requirement to work. The results are stark. Both groups saw mental health benefits but “employment improves mental health at a magnitude four times greater than cash alone.” Maybe it shouldn’t be a surprise then that almost 70 per cent were happy to work another week for free after the eight weeks. The main lesson here is the high price that is paid when countries ban refugees from working, as is all too common. But there is a wider reminder that good work pays in ways far beyond pounds and pence.

Taiwanese take-off. If you want something a bit different to listen to this weekend check out the latest Trade Talks podcast (for those thinking this is too low brow for TOTCs fear not – there is an academic paper to go with it). It covers Taiwan’s export-led growth strategy from the 1950s and has the benefit of being interesting and accessible. While the main lessons are for other emerging economies it is relevant to the UK in one sense – it’s a joke that we make no attempt to link our trade strategy with any sort of wider economic strategy. And most importantly it’s nice to hear/read something about Taiwan that isn’t about semi-conductors or getting invaded by China.

Chart of the Week

Wages data doesn’t bring much good news these days. The ONS’ latest Annual Survey of Hours and Earnings’ headline didn’t buck that trend: typical real hourly pay fell by 3.5 per cent in the year to April (and even that’s flattered by furlough). But there was big good news too: the share of low-paid workers (earning less than two-thirds of typical hourly pay) fell to just 10.5 per cent – its lowest level since at least the 1960s. That’s what a swift rising minimum wage can do. COTW puts this great news in some wider context, to slay some myths about how we think about inequality. This is a bit more complicated than average, so stick with me:

  • The dotted blue line is showing the minimum wage at work, driving down inequality between individuals’ hourly wages. It didn’t fall in the 2000s despite the minimum wage because rich men were still pulling away from middle earners even as the bottom caught up.
  • The dotted yellow line tells you that hours worked not just hourly pay matters. Falling hours worked among lower earning men in particular has meant much smaller falls in weekly wage inequality (ie what matters for our living standards).
  • The dark blue line then moves us to inequality between families, showing earning inequality among those families that have any earnings at all. Some academics have focused on this to say the labour market got more unequal in the late 90s/2000s. They are wrong, ignoring….
  • …the purple line which tells you that lots of families were moving into the “having some earnings” group during this phase as worklessness fell. That is a very good thing, but because those now in work tended to enter as lower earners it pushed up inequality as measured by the blue line.
  • So, what we should actually care about in terms of the labour market’s impact on inequality is the red line – inequality of earnings among all families (including the shrinking number with zero earnings, which has pushed down on inequality). What does it show? That we have a long way to go and that tinkering with the status quo or another rise in the minimum wage won’t be enough, with earnings inequality stuck largely where it was in the early 1990s.

I can hear snoring at the back so I’ll spare you the other complications of housing costs, the growing number of (poorer) single households and assortative mating… another time maybe.