Growth is Still the Best Way to Raise Living Standards

March 5, 2015

Yesterday, the IFS published research showing that living standards are finally back to pre-recession levels. Growth in the UK remains the fastest in the G7, while inflation is at historically low levels.
But despite this seeming surplus of good news, many worry about the long term of the economy. Have ordinary wages decoupled from growth, so that only those at the very top benefit? Are we seeing the rise of a new oligarchic 1%, capturing many of the gains of growth? Is a new wave of automation – the ‘rise of the robots’ – coming to take many of today’s jobs? While those at the top see more pleasant, meaningful and flexible work, are those at the bottom doomed to demeaning, monotonous and insecure trades?
In short – is there something fundamentally broken with our current model of the economy?

To get a better idea of what is going on, here are ten charts looking at the relationship between growth and living standards:

1)    At first glance, there seem to be a lot of scary charts going around, such as this one seemingly showing a breakdown between ordinary growth and average wages. Even before the financial crisis, the early years of the last decade saw ordinary wages growing slower than growth as a whole.

2)    Or this one, showing the top 1% of income earners taking up an ever larger share of the economy in Anglosphere countries. By contrast, other countries like France, Germany, Japan or Sweden have seen much smaller rises in the share of the top 1%.

3)    Or even this one, seemingly showing a seemingly inexorable rise in the proportion of zero hero contracts. At the same time, self-employment is at historic highs, suggesting that many people aren’t able to find a good quality permanent contract.

4)    But the good news is that once you look past the short term impact of the financial crisis, most of these trends have been massively overstated. While the share of the top 1% continued to grow up to the financial crisis – since which, it has been falling – overall inequality has been flat on most measures for twenty years.

5)    Neither is the proportion of low pay workers in the UK going up. On a slightly different measure, the number of low-skilled jobs has also been roughly static since 1997 – but if you look just at workers born in Britain, the number of low-skilled jobs has been falling and the number of high-skilled jobs rising. (Up to 2008, overall employment rates were also rising).

6)    Wages are still going up at every level of the income distribution, and there is no sign of a decoupling between pay and productivity. Wages have grown at minimum by 79% in real terms since 1975, and often by much more than this. The most significant reason for the seeming breakdown between growth and wages in the early part of the last decade wasn’t inequality, but a higher proportion of employee compensation going to pensions and National Insurance Contributions. Even in America, according to the CBO median household income before taxes and transfers went up at least 26% between 1979 and 2007.

7)    Neither is there much evidence that the quality of jobs is really decreasing. According to data from the UK Household Longitudinal Study, job satisfaction has been flat, if not rising for over a decade. It has hard to tell how much the growth in zero hour contracts comes from an actual increase in their use and how much “due to greater recognition of the term “zero-hours contracts” as the ONS puts it – but even taking the whole rise literally, they still only represent about 2% of the labour market, and only around 9% of those on an exclusivity contract. Much of the rise in the self-employed has come from long term structural changes in the labour market, such as workers working longer and part-time, while in any case the majority of the self-employed claim to have chosen it out of personal preference.

8)    While more money is obviously better than less, employment seems to matter for happiness much more than income… When you sort occupations by their mean income, there is basically no correlation for incomes below £30,000 between the amount earned and happiness. Lollipop men and women (“school midday and crossing patrol occupations”) report roughly as high life satisfaction as hairdressers (who earn three times as much), or IT technicians (who earn ten times as much).  By contrast, unemployed and discouraged workers suffer real and lasting impacts to their welfare.

9)    … and since the beginning of the welfare reform agenda in the mid-1990s the increase in long term unemployment tapered off. There will always be individual tragedies, and while policy makers collectively could no doubt have done a better job of getting people back into work, the run-up to the recession did not see a continual increase in unemployment – despite the economy continuing its long run shift away from manufacturing from the early 2000s.

10)    The rise of the 1% doesn’t come at the expense of ordinary living standards. There is no obvious correlation between changes in the share of the top 1% and changes in median incomes. The increase in the share of the 1% is more than overshadowed by quicker growth and more generous welfare transfers. More broadly, in a recent article Lane Kenworthy surveys the evidence and finds little to no correlation between increases in inequality and – deep breath – economic growth, employment, financial stability, income growth for poor households, happiness, college completion, life expectancy, infant mortality, teen births, homicides, trust in political institutions, voter turnout, or party polarisation.

So, does all this mean that’s there nothing to worry about at all?
No. While inequality and long term unemployment might not have seen much increase in the decade or so leading up the financial crisis, they really did go up during the necessary but difficult economic transformation of the 1980s. As a back of the envelope estimate using Frey and Osborne’s judgement that 35% of jobs are at high risk of automation in the next twenty years and 23% medium risk, this would represent a 30% bigger shift in the economy than we have seen towards services since 1971.

Growth is the best way to improve the living standards of everyone, but it doesn’t necessarily pass on its benefits automatically. It took active decisions to make the welfare system better targeted towards work, increase the generosity of tax credits and keep improving the efficiency of the economy to cut the cost of living. There is no reason to be frightened of the future, but we should still think hard about what changes it might bring.

In our report out today No Worker Left Behind, we look at what some of the next stages of reform could be: from ensuring every full-time worker earns a Living Income to an education system designed for a culture of lifelong learning.

Given the current fiscal situation, these aren’t changes you could implement tomorrow – but then neither is the shape of the labour market likely to flip overnight. As the economy starts to return to normal and the budget gets closer to balance, we need to start thinking more about what should come next.

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