Squeezed Middle: a wake-up call

Published on Incomes and Inequality

This blog originally appeared on Public Finance

In the UK, low and middle income families face flatlining or falling living standards. But the so-called ‘squeezed middle’ is under even greater pressure in the US. What can we learn?

New analysis of the ‘squeezed middle’ in America and Britain, launched today by the Resolution Foundation, raises some important pointers for the future here in the UK.

You may well wonder what we can take from a country where the crisis in living standards is so great that it’s not an exaggeration to talk of America’s ‘lost generation’.

Productivity has risen threefold since 1970 but barely a dollar from this buoyant economy has made its way into the average person’s pay packet. Even the recent return to moderate growth in the US has not eased the challenges most families are facing.

The US is an outlier in the sense that the historic link between pay and productivity was brutally severed forty years ago. The conventional economic model of ‘trickle down’ – namely that growth is good on any terms, and will benefit the entire population – has simply not been true for Americans for over a generation. A rising tide has not, in their case, lifted all boats.

Our analysis of the US situation, by some of America’s leading thinkers in the field of living standards, shows that the baby boomers were the last generation who did better than their parents.

Thankfully the UK does not exactly mirror this glum picture. However, as we highlight, there has been a deeply worrying development. Since the early 2000s, wages and household income have flatlined for British low and middle income families, and since the recession they have in fact declined.

This suggests that, despite important differences, at a fundamental level the US and the UK share a problem: while our nations have got richer, low and middle income households have suffered a stagnation and even a decline in living standards.

There are other alarm bells that should be ringing too. As in the US, we have seen inequality rise sharply in recent years. Living costs continue to rise faster than inflation, significantly reducing the spending power of low and middle income households.

Furthermore, from tax credits to workers’ rights, many of the policies that have historically protected Britain from looking more like the US are either under threat or are being watered down.

So a key message is that we can and must look to America – not to copy or to emulate it, but rather to see the country as a cautionary tale that we must learn from in order to avoid treading the same path.

But there is also a message of hope hidden within this wake-up call. The US experience also shows us that the fate of everyday workers in America is a product of economic and social policy choices, rather than the inevitable result of globalization, technological change and immigration.

In other words, we too have a choice: it is possible to reverse the trends in living standards that are beginning to emerge here in the UK.

Of course, these choices are not easy. The prescriptions offered by the Resolution Foundation contributors – taking action to improve market wages; raising the employment rate, particularly for women; ensuring that the fruits of growth are more fairly shared – are not easy options or quick fixes.

Indeed, shifting the UK towards a model of broader-based growth will take a level of political commitment and courage that is not yet apparent in any of the three political parties.

But without it, we had better look to the US now and prepare ourselves for a very unequal future.