The generation that’s going backwards

Published on Incomes and Inequality, Intergenerational Commission

Falling incomes, rising prices, impossible debts … even before the crash some workers faced a suffocating squeeze

When John F. Kennedy declared that “a rising tide lifts all boats” he was encapsulating the postwar belief that growth would generate steady rises in living standards for all.

Even if richer households were sometimes the biggest gainers, there was at least the guarantee that every household would enjoy some advance. Sadly, even if it once was true, a rising economic tide no longer necessarily helps all individuals or households. Even in better times a large slice of working families were struggling to keep their heads above water. The link between economic growth and gain for ordinary households has long been broken in America. The fracture has been more recent and less marked in Britain. But the important truth about the squeeze on living standards is that it began before the global recession.

The wages of a typical worker stagnated from about 2003, even though the economy was growing steadily until 2008. Disposable income per head also stagnated across most English regions outside London. Tax credits became the largest source of income growth for families on low-to-middle incomes. The rise in women’s earnings that occurred at the same time failed to compensate for the decline in men’s.

Opinions differ on why. For most economists there wasn’t a single culprit. Among a familiar group of suspects are the impact of new labour-saving technology, the intensification of global competition, the declining power of trade unions and the inadequacy of many vocational qualifications.

It’s also the case that in those lean pre-crisis years some specific shifts took place that are highly relevant to the flatlining of living standards: a larger slice of the national cake was paid out in profit rather than to labour, the non-wage costs of employing workers rose, household debt exploded and increased immigration may have dented the pay of some people with low skills (although to a lesser degree than is often claimed).

Then came the crash that triggered the longest downturn in modern times and such an unprecedented fall in wages that typical pay has fallen back to its level at the start of the millennium. Many households have taken a great leap backwards.

What can be done?

When it comes to specific measures to address the fact that today’s growth does not automatically generate steady gains in living standards, all political parties are struggling to move beyond platitudes. Many issues are relevant to helping low-income families to make ends meet. These include better regulation of energy companies, cheaper, faster transport systems and more housebuilding. But when it comes to boosting household incomes, a few issues stand out.

The minimum wage Party leaders are on the hunt for something meaningful to say about pay, especially low pay. Britain is, after all, desperate for a pay rise. When it was first introduced the minimum wage generated years of strong earnings growth without costing jobs. Since then the Low Pay Commission has earned hard-won credibility; the question now is how to deploy it. It could, for instance, be asked to grapple with the problem that often besets minimum wages: that they rise only at the pace that the most fragile employers can bear.

Sectors of the economy that are capable of sustaining the higher basic wage without damaging employment could be pushed to do more.

Tax cuts Because boosting pay, particularly for those in the middle, is such a vexing challenge, party leaders will put great emphasis on their favoured tax cuts, despite austerity and tax cuts on their own not being a substitute for solid wage growth. Labour will have a 10p introductory rate of income tax, the LibDems will pledge once again to raise the tax threshold and the Conservatives won’t allow themselves to be outbid.

The issue that none of the parties will want to surface is the almighty collision about to occur between any future tax cuts and the new Universal Credit. This will result in two thirds of any gains from lower taxes instantly being clawed back from millions of working families (roughly half of all families with children are eligible); precisely the group that the leaders are courting. They all know this, but none dares to admit it.

Childcare The debate about how best to help families to balance work, or working longer hours, with family life will also intensify. For decades rising female employment has increased household prosperity, but this trend has petered out, partly because of exorbitant childcare costs. Rates of working poverty are strikingly high among single-earner families and low among those with two earners.

If the UK matched the performance of other leading nations, a million more women would be in work. Any party wanting to make a big increase in support for two-earner families should make childcare a national priority, even in a time of diminishing resources, and revise the Universal Credit (which currently points the opposite way).

Whether any of these policy debates measure up to the scale of the living standards challenge is open to question. We can be confident, however, that resuming the same pattern of growth that prevailed in the pre-crash years will result in a joyless recovery for a large swathe of Britain.

This article first appeared in The Times