From the TUC

Growth and living standards – the big disconnect

09 Aug 2013, by Guest in Economics

The economy is recovering and yet living standards remain squeezed. Those are the two key facts about the British economy today.

A useful article in today’s Economists sets out the scale of the squeeze. The key chart is the one below:

Economist living standards picture

Further evidence of this odd breakdown in the link between GDP and household incomes comes from today’s ONS Economic Review.

It notes that real household disposable income per head is now 1% below where it was in 2006.

It also notes that:

The profile of RHDI [Real Disposable Income] growth during recent years has been different from that of real GDP. Whereas real GDP fell sharply during 2008 and 2009, RHDI continued to grow, albeit slowly. In 2010 and 2011, growth in RHDI was weaker than that in GDP.

In other words the squeeze eon living standards as tightened since the end of the recession.

This is an unusual state of affairs – as the Bank of England noted on Wednesday , real incomes in Q1 2013 were below their pre-recession peak whilst at a comparable point in the 1990s recovery they were up 12%.

We are currently undergoing the longest squeeze in real wages since the 1870s, GDP per capita looks set to have a lost decade and the beginnings of the great wage squeeze can be found before the crash.

Furthermore the Bank of England expects unemployment to remain about 7% until 2016 – implying containing weakness in the labour market and hence earnings.  Research from the Resolution Foundation found that unemployment now has a bigger impact on real wages adding to this picture.  

So what are we to make of this? Should we even be talking about an economic recovery when household incomes remain under pressure? This certainly isn’t what a ‘recovery’ is meant to mean and nor is it what the government originally expected. OBR forecasts of June 2010 real household income per head picking up in each year and real wages growing by 0.5% in 2013, 1.0% in 2014 and 0.9% in 2015.

I’d offer three points. First it is not sensible to think of this as a meaningful recovery, a real recovery will be measured by rising incomes and more and better jobs.

Second, this trend confirms that there was only so much mileage in the ‘growth vs the deficit’ debate. Whilst deficit has always been something of a red herring, growth alone was never enough.

Finally, it seems likely that simply boosting demand in the economy will not be enough to sustain living standards. Instead we need a wider programme of economic reform – industrial policy, corporate governance reform, banking reform and what I think of as practical predistribution.  Reversing these trends wouldn’t be easy – but there is precedent for it.

2 Responses to Growth and living standards – the big disconnect

  1. Nick McCarthy
    Aug 10th 2013, 12:04 pm

    Public sector wage restraint affects 6 million employees and has a mathematical impact on average earnings, but also impacts on the behaviour of the market as a whole.

  2. Our living standards crisis can only be solved by boosting wages | Liberal Conspiracy
    Aug 14th 2013, 2:58 pm

    […] blogged Aslast week, the squeeze on living standards has tightened since the end of the […]