Britain's recession: Harsh but fair?

 
Job centre plus sign If the economy had behaved as it did in the 1980s there could be a million more people out of work

Britain's latest labour market statistics have again provided happy news - in an environment that would otherwise be rather grim.

Economists have spent a lot of time pondering the jobs puzzle. So have I (sigh). But one consequence of the surprising strength of employment is both welcome and hard to dispute. It may have been an unusually difficult period for our economy but it has also been a surprisingly equitable one.

You might think that sounds mad. How can it be fair that so many people have had their incomes squeezed in real terms - and often nominal terms as well? Or that so many people - young people especially - have been left out of work?

But I didn't say it was less painful than past recessions. In fact, by some measures this has been the worst four-year period for the economy since at least the 1920s. Real household incomes may not be much higher in 2015 than they were in 2001 - that would be unprecedented.

There has been no shortage of economic pain since 2007. What is striking is that the pain has been much more evenly distributed than when we have lurched from boom to bust in the past. For that we can thank the curious strength of UK employment - and the weakness of UK earnings. Put simply: pay packets have been squeezed instead of jobs.

The Institute for Fiscal Studies pulled together the key figures in a report published in the summer.

There's been so much talk of city fat cats and the soaring incomes of the top 1%, you might be surprised to hear that the latest figures show the largest one-year fall in income inequality in nearly 50 years.

The most widely used measure of income inequality - the Gini coefficient - fell from 0.36 to 0.34 in 2010-11. (The coefficient ranges from 0 to 1. Roughly speaking, a coefficient of zero would mean everyone was getting the same income. A coefficient of one would mean everything was going to one person.)

That fall to 0.34 may not sound like much, but it takes the level of inequality back to where it was in the late 1990s - and it occurred in a year in which average household incomes went back to where they had been in 2004-05.

Average incomes have fallen in large part because earnings across the economy have fallen. No surprise there: that's what usually happens in a recession. What is not so usual is that the fall in earnings has mainly come through everyone in work being paid less - not from a relatively small fraction losing their jobs.

Incomes in 2010-11 fell in every part of the income distribution - and inequality fell across the board as well. Whether it's the gap between the top tenth and the bottom tenth, or between the middle and the bottom - they all got smaller in 2010-11.

graph

Of course, there have been job losses. There are now around 55,000 more people unemployed than there were in May 2010.

But if the economy had behaved as it did in the early 1980s or 1990s, there could easily be a million more people out of work today. And employment would certainly not be 750,000 higher than it was at the start of the parliament. In fact, we might well not have seen any rise in employment at all.

It's worth mentioning that the fall in inequality also owes something to the government's decision to continue uprating benefits in line with consumer prices - at a time when inflation was well ahead of target, and most working people's incomes have been failing to keep up. Famously, that led to a 5.2% increase in the level of most benefits this April, at a time when average earnings have been rising by around 2%.

The fall in inequality may well be a short-term phenomenon. Earnings at the very top were affected by the introduction of the 50p rate, because a lot of people had tried to shift income into the previous year to avoid paying the higher rate.

As the IFS also point out, there are welfare cuts now under way worth £18bn a year by 2014-15 which cut incomes relatively more toward the lower end of the income scale. And after this year's large increase in benefits, George Osborne might push for a below-inflation increase in benefits in 2013.

People will continue to debate the fairness of these and other government efforts to cut borrowing. They will also continue to debate what a "fair" distribution of economic pain might be. There will, rightly, also be discussion of the long-term implications of employing 750,000 more people to make the same amount of national output.

What we can say for sure is that the past few years have been different. Instead of the costs of recession being concentrated among the people unlucky enough to lose their jobs, the pain has been shared by nearly every household in the land. That sounds like a good thing. Even if there is, unfortunately, more than enough pain to go around.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 46.

    44

    The argument would be that by investing less in the public sector, you free up cash to give cuts to the private. If the private sector has cash, it invests in growth. Thats just what it does.

    Thats the theory. Is it working? Hard to say...

  • rate this
    -1

    Comment number 45.

    One of the most renowned economists in the world stated the large public sector and government deficit have nothing to do with each other!
    Many countries have very large public sectors and no deficit.
    Privet sector= low pay and tax avoidance!
    Raise the minimum way for anyone who hires more than 200 people to £10.

  • rate this
    +7

    Comment number 44.

    28

    Is there any evidence to back the claim that shrinking the public sector workforce creates jobs in the private? And, more importantly, why?

  • rate this
    0

    Comment number 43.

    41

    Absolutely, but I blame the regulations.

    The pressure top exec are under to grow the profit is extraordinary. They don't do it, they don't have jobs.

    I think most people would take a loophole if it was there an begging. Those of us on the outside can look in and tut dissaprovingly, but I don't think I'd do differently. Would you?

    Close the loopholes. Problem solved.

  • rate this
    +1

    Comment number 42.

    @18 - no credible alternative - how about getting money circulating again by increasing the product of the number of people in jobs times their average income, by the means of highly insightful stimuli and regulation of unproductive activities (such as take-overs).
    Impoverished people don't spend money, just as unemployed people don't contribute to the economy.
    Money is just a token of work done.

  • rate this
    +2

    Comment number 41.

    @39 Great...

    Fair point if all play the game.
    Example public sector paid by taxes, Joe public PAYE tax collected at source, job done. Starbucks, Vodafone, Barclays etc... Avoiding tax, no tax goes to public sector.
    Play the game please 'we're all in this together'?

  • rate this
    +1

    Comment number 40.

    Depending on their family income: Part-time workers would qualify for both council tax benefit and housing benefit, and working tax and child tax credits.
    They may well be better-off than working 40 hours.

  • rate this
    0

    Comment number 39.

    31

    A bit of perspective. What do you think was paying for the public sector for all of the years before the banks were bailed out? And is paying for a healthy chunk of it again now? They were bailed out because to not bail them out would cost us more.

    I'm all for giving the bankers a bit of a bashing, but try for a bit of balance.

  • rate this
    0

    Comment number 38.

    @25
    Depression...more people were being affected by job losses and relationship breakdowns in the current economic climate.


    Minimum wage: £2.65 to £6.19 depending on your age and honesty of your employer. Good luck paying for food, rent, transport council tax
    etc..

    Food banks: figures have doubled every year for the last 4 years to 500,000 by 2013. This is charity, look up the word !

  • rate this
    +8

    Comment number 37.

    These figures have to be good news! Anyone who disagrees should look at what is happening in the Eurozone. Sure,we are in trouble in this Country, but at least we are in economic control of our own destiny. Not wrapped up in the crazy capers across the Channel.Lets all just pause and cheer a little. Plenty more bad news ahead for the moaning fraternity.

  • Comment number 36.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +8

    Comment number 35.

    Intersting that inequality has significantly fallen, This gives the lie to Labour's constant classwar ranting about the Tories unduly favouring the "rich". What Osborne has done in fact has been to give Labour a lesson in treating everyone equitably.

  • rate this
    +1

    Comment number 34.

    so incomes are at 2001 levels, shame prices are at 2012, yes most people are worse off but the top few are much better off.

    ToDoList: Get a title, or marry one.

  • rate this
    -1

    Comment number 33.

    30

    Okay, that is news to me, not something I have encountered. The briefest research tells me that this is mostly prevailing in the public sector.

    But it doesn't appear (again, from the briefest research) that employers are allowed to withhold normal employee rights. Those contracted are still employees. They are entitled to min wage, holidays etc. as normal.

  • rate this
    0

    Comment number 32.

    As income shifts from the richest to the next richest the Gini coefficient falls.
    Print us the Lorenz curve with the 45 degree line as tangent.
    CURRENTLY it's tangential at about 68 per cent of the population.
    Ie over 2/3 of the population is below the mean average income.
    Flanders, this crisis justifies TOTAL equality.
    Join me in pro-equality demos from Chiswick to Hyde Park this Sat 20 Oct.

  • rate this
    -3

    Comment number 31.

    I see the myth of the private sector being the 'wealth creators' emerges again. It might create wealth for a tiny minority of individuals at the expense of mass poverty for the majority but, was the financial sector not bailed out to the tune of £1.3 trillion? Check out the private sector pension black holes £89Bn and £57Bn for starters. How about the tax they avoid paying, don't you want that?

  • rate this
    +1

    Comment number 30.

    @19

    The new model for employment is the zero hours contract - which I assume is classed as part-time rather than full-time work. With such a contract there is no guarantee of work and no employment rights (other than those relating to health & safety). These are no longer limited to occasional low paid work & are especially popular with companies moving into the NHS and similar areas.

  • rate this
    0

    Comment number 29.

    27

    1.3 trillion wasted? Really? Who told you that?

  • rate this
    +16

    Comment number 28.

    @5.
    The rebalancing that is needed most and has been happening is not so much between services and manufacturing but between the public and private sector. More jobs being created in the latter creates more wealth and fewer jobs in the former helps reduce government debt.

  • rate this
    -3

    Comment number 27.

    @18 thetubbster
    but no other creditable alternatives put forward to cut the deficit.

    How about not waisting £1.3 trillion on the financial sector? And what happened to the 'swift juctice'' promised by Cameron and his vile cronies? Does it not apply to the pigs in the city of London?

 

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