Economic growth

When does economic growth benefit people on low to middle incomes – and why?

Lane Kenworthy
Lane Kenworthy

For many of the world’s rich countries, the most important challenge at the moment is returning to robust economic growth. At the time of writing, there remains great uncertainty about the pace and path of recovery. Eventually, though, growth will return. This report asks a longer term question: when growth does return, to what degree will low-to-middle households benefit?

Key findings

  • Over the past generation, the world’s rich nations have differed markedly in their success at achieving the aim of rising incomes for people in the lower part of the income distribution. This owes partly to differences in the pace of economic growth, but more important in most countries has been the degree to which growth gets passed on to low-to-middle income households. In successful nations, rising incomes in households between the tenth and twenty-fifth percentiles have tended to be driven by increases in net government transfers, while in households between the twenty-fifth and fiftieth percentiles both earnings and net transfers have been important.
  • Is there an optimal route? The results in Ireland and Norway point up the value of very strong economic growth. However, in both of these countries key contributors to rapid growth were exceptional — oil in Norway, an unsustainable bubble in Ireland — and unlikely to be replicated by other countries. The Dutch case suggests that rising employment can do quite a bit of good, but the increase in the employment rate in the Netherlands was so massive that this too probably ought to be viewed as an exception. For most nations, in most circumstances, rising income in low-to-middle households is best achieved via a combination of increases in employment, wages, and net government transfers.
  • Over the long run, the United Kingdom has been one of the more successful affluent countries, particularly from the mid-1990s through the mid-2000s. The UK’s overall policy orientation seems to have been comparatively effective at allowing and enabling economic growth to feed through to low-to-middle income households. But significant challenges loom, even if we set aside the current state of the economy and the present government’s inclination to reduce public expenditure. Will employment growth continue? The US experience suggests reason for concern. Will wage growth resume? The fact that UK wage growth suddenly halted several years before the end of the mid-2000s upturn is troubling. Can taxation be increased any further? Even aside from the current fiscal squeeze, population ageing means a rising share of every pound of tax revenue will be directed toward the elderly.  In this context, there is a real risk of complacency. Future growth in living standards may well not flow automatically from economic growth, but instead depend heavily on decisions made by the UK government.

Further reading

Electric dreams
How can we decarbonise electricity without disadvantaging poorer families?
·
Emily Fry, Jonathan Marshall
Decent exposure
An overview of how Britain’s exposure to trade has changed
·
Sophie Hale
Local roots of trade routes
The UK’s regional services trade over time
·
Emily Fry, Will Barlow
Lane Kenworthy
Lane Kenworthy