Whose recovery is this? And who will reap the benefits?

Mark Carney, governor of the Bank of England, gave his blessing to the recovery last week, proclaiming that it had “taken hold” in the wider economy. He didn’t, and couldn’t, take a similar stance on what’s likely to happen to the living standards of low- and middle-income Britain, where there are still few signs of an upturn.

What the recovery will mean for living standards is the issue of our times. Will we see a return to the type of barren growth that fails to translate into steadily rising real wages and incomes, as occurred in the years preceding the crash? Or might we see the reappearance of the benign growth that characterised the mid-1990s to the early 2000s, when prosperity rose rapidly for the great majority?

This is obviously a pressing question for the millions of households who have been on the end of the biggest fall in incomes since the war. It also hangs over Westminster; the answer will play no small part in determining the outcome of the next election.

It’s been given further impetus after another week of good economic headlines that sit uneasily with voter sentiment. The labour market figures were positive – strongly so. At the same time, polls show that the recovery is far more reported than experienced: for the overwhelming majority it’s happening somewhere else, to someone else. How long this disjuncture between an improving national economic story and personal experience remains is all-important.

That will depend upon whether the structural break in the link between growth and household gain that occurred from 2003 until the crash represents a blip or the new normal. Until growth was restored this was viewed as a largely academic question. No longer. The recovery is strengthening and, according to nearly all forecasters, is set to accelerate next year. The question is: who gains?

To get a clue we need to look at what really happened during the downturn. The headline is that average wages have fallen every month for four years; the pay of the typical worker has dropped back to around the level it was at the turn of the millennium.

Yet these statistics cloak many diverse tales: the bad years have played out very differently across Britain. Young people have fared terribly, with those in their 20s seeing their incomes fall by more than 12% on average since the crisis, while those in their 60s have typically enjoyed steady gains. London performed well, further detaching itself from the rest of the country. Relatively high-paying sectors such as business services boomed through the downturn (adding 460,000 jobs). Low-paying sectors such as hospitality and care also grew markedly. Manufacturing and public administration took a battering.

The immediate past is, of course, a highly imperfect guide to the future. But whatever surprises are in store, there are already familiar headwinds affecting the UK economy that make it less likely the recovery will rapidly reach low- and middle-income households. The jobs market still has plenty of slack, austerity has years to run, the eurozone looks precarious, business is sitting on cash rather than investing it, and millions of stretched homeowners are badly exposed to the risk of higher interest rates.

The standout question is what will happen to wages and unemployment in the recovery. And here economists are divided. Some, like the Bank of England, expect productivity to bounce back and with it pay: companies will get more out of their existing workforce as demand picks up, enabling wages to climb while unemployment gently falls.

Others see it differently. They point out that, despite the recovery, productivity remains on the floor and with it wages. Leading economists such as Professors Paul Gregg and Steve Machin suggest we can trace a key part of the explanation for what has recently happened to wages to the stagnation of the early 2000s. It was around this time that a given level of unemployment started to have a more powerful, chilling effect on earnings than was the case in the past.

There were probably several reasons for this – from “active” welfare policies that made the workless a better substitute for those in work, to the cumulative impact of declining collective bargaining. But whatever the cause, the consequence is that unemployment may now have to fall further than many expect before steady pay increases return (especially in the bottom half of the jobs market). Prepare for a prolonged wage-poor, job-rich recovery.

This debate is of direct consequence to when interest rates rise – itself of massive importance to the stability of the recovery – not to mention the outcome of the next election. If unemployment falls below the Bank’s 7% threshold sooner than expected, while house prices accelerate, there will be strong pressure for pre-election rises in interest rates. This isn’t just an alarming prospect for struggling families – if mortgage rates look like they will go up significantly before wages have sparked back to life then we should all be afraid. They certainly will be in Downing Street.

What of the politics of this? As of now, Labour is on a roll. It has shown renewed vigour in its push on the “cost of living” whereas the Conservatives have looked unsure of themselves, dismissing Ed Miliband for being gimmicky at the same time as they’ve felt moved to compete on his ground.

But dangers abound for both leaderships. For Labour, which has thrown everything at this issue, the risk is that momentum dissipates as the economic outlook improves. No one knows exactly when wages will stop falling but at some point they certainly will – we’re not going to get permanently poorer, even if subsequent wage-growth is anaemic. Crucially, the end of the fall is quite likely to happen before 2015. If Labour inadvertently gives the impression they are betting against this eventuality they risk being seriously wrong-footed.

It would also be folly to imagine that today’s focus on living standards is going to squeeze out a massive election battle over fiscal choices and the deficit. The fact that there is nearly £40bn of further fiscal tightening to take place after 2015 is the central fact of the next parliament – and it is one that the Tories look far more at ease with than their opponents.

For the Conservatives there are also some flashing red lights. If it turns out that 18 months of growth fails to generate meaningful gains for households, David Cameron will be incredibly exposed. Promises of better times ahead would ring hollow, just as the inevitable boasts about rising GDP would boomerang. His discomfort would be compounded by any premature interest rate increases, spooking mortgage holders and choking off consumer optimism in the runup to the election. Elections tend to come down to narratives about the future: endless austerity twinned with flatlining living standards is unlikely to lift the spirits.

By contrast, if it turns out that the Conservatives are able to point to nearly two years of growth plus some steady, even if modest, increases in wages and incomes, they will feel confident making their electoral pitch: “Stick with us and bigger gains will find their way into your pocket while we finish the job on the deficit.” For many it would be a potent message.

Fully restoring the link between economic growth and living standards won’t be achieved through one policy, nor necessarily in one parliament. It will require structural change in our economy. Achieving this amid spending cuts and tax rises, and in a nation of debt-drenched households, only adds to the task. This is the unenviable challenge facing our next prime minister.

This article originally appeared in The Observer