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.


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 Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 66.

    Agreed. Tax reform is long overdue. I suspect there is a considerable saving to be made by rolling NI into income tax and setting DWP employees who are willing to retrain to work for HMRC chasing tax evaders.

    We also need to move away from the crazy indirect taxes on transport that push up the cost of everything.

  • rate this

    Comment number 65.

    I think everyone is waiting for a recovery that is not coming. Companies have cash to hire talent (cheaply) and keep skills / capacity through part time work. Public sector has tried to maintain headcount on lower wages to deliver services. BUT public sector faces further cuts and not enough domestic (or foreign) demand for private sector growth. Beginning of recovery or eye of the storm?

  • rate this

    Comment number 64.

    SF 'Economists have spent a lot of time pondering the jobs puzzle.'
    Have you & they considered migration as a factor?

    There is continuing flow into UK & this is likely to be increasing from Ireland, Greece, Portugal & Spain. In addn, could previous unrecordeds & 'illegals' be finding they are forced or able to take more legit pt-time wrk & are keen to do so to become eligible for benefits?

  • rate this

    Comment number 63.

    # 61 Aardvaarkandnoplay
    But the problem is that we have read the article and found it wanting. Looking back to a time when the technology did not support the massive gaming of the system and there was still the semblance of ethics in the financial world provides no useful mirror on today's situation. This is not politics - it's survival of civil society that is on the line.

  • rate this

    Comment number 62.

    It is not fair to make the poorest and most vulnerable in society pay for a crisis they did not create.
    We should put a levy on the vast corporate reserves (£750Bn+) and use that money for a massive program of public works.

    Making the rich richer doesn't seem to get them to invest... so how about we make them poorer and use that money ourselves?

  • rate this

    Comment number 61.

    I sometimes wish people would read the article before getting angry and wasting our time posting aggressive comments simply to pamper their political ideology

  • rate this

    Comment number 60.

    It's only 'happy news', and not 'rather grim', if you're a lying toad, or refuse to see beyond the end of your nose because you're no more a journalist than I'm Mahatma Ghandi.

  • rate this

    Comment number 59.

    It's probably just the biggest coincidence of the millennium but, the only part of the UK not to face 'austerity measures' does so amidst an economy that is continually collapsing as each day goes by. Even lame duck Spanish banks won't touch our banks with a barge pole. That says a lot for the protection measures our banks receive.

  • rate this

    Comment number 58.

    Fair is not a word that comes into any discussion on wealth.

    If Fair amounts of taxs were actually collected there would be little or no Government Austerity needed, however tax avoidance among the rich and major companies is endemic.

    But the people at the bottom are only required at voting time the rest of the time they are irrelevant .

    I truly hope they understand the need to vote and why

  • rate this

    Comment number 57.

    To increase employment the government should reduce the tax on jobs. Since every employer pays the 13.8 % of its wages bill to HMRC in the form of employers national insurance contributions. In addtion 12.0% of employees wages are deducted and paid over to HMRC. Simply reduce it to 5%.

  • rate this

    Comment number 56.

    With current stucture of the tax and benefit systems recession reduces inequality (it happened under Major in 90s) -booms over reward the better-off. However, I could not describe falling real wages and 8% unemployment as happy news - as a teenager in the early 60s I was used to 3% unemployment being described as failure by Government to meet promise of 1944(full employment).

  • rate this

    Comment number 55.

    'Economists have been pondering the jobs puzzle.....So have I (sigh)'

    As you say, economists (including you - sigh) have been unable to find a link between 'recession' and employment levels. Is economics a sham profession built on false theses of mistaken gurus? If economists were doctors, most of you would be struck off. Or do you actually contribute something to society?

  • rate this

    Comment number 54.

    If this is a recession, I would suggest you try living through some of the so called boom years of the last few decades. The majority of people still have far more now than most people had when times were good in previous booms. Stop letting the media constantly tell you things are so bad. Wake up, smell the coffee and get on with your life!

  • rate this

    Comment number 53.

    @8 Absolutely. The UK has a dynamism in recruitment that you won't find elsewhere in Europe. The labour laws are flexible enough to ride storms. If people are in part-time then so be it. Better than no-time. The UK is also a good place to start a business, incredibly uninviting in other countries. We will be ok.

  • rate this

    Comment number 52.

    Very simplistic. This is as much about a designed shift in the power balance between the hierarchy and the rest of society. A decline in the quality of work available, pay, full-time work, security, employment rights, safety net etc creeps along because we are just "happy to have a job", and government policy continues towards resoring a discredited right wing economic system for their own ends.

  • rate this

    Comment number 51.

    I'm afraid as an analysis this really does not cut it. What ails the country is deeply structural and systemic and rooted in a corrupt and failing financial and political system that concentrates wealth and reward into entirely useless - and now endemically bankrupt - financial organizations on a global scale. We are still at the start of the decline not the end. Major reform is needed now !

  • rate this

    Comment number 50.

    How can market forces ever be fair?
    They are based on growth at any cost, and the proceeds are not fairly distributed in proportion to the individual's contribution.
    Avarice rules, and it is being encouraged.
    Yes there are scroungers, but there are also the genuinely poor. Can't humanity rise above survival of the greediest?

  • rate this

    Comment number 49.

    So we really are all in this together?

    In one fell swoop, the Tory chancellor has returned Britain to a level of income equality last enjoyed before Labour came to power in the late 1990’s. I wonder, can incomes only converge when they are falling. If so, is a recession a price worth paying?

  • rate this

    Comment number 48.

    What is fair?

    Inflation has more impact on the lower and middle incomes!

    The transfer of wealth from prudent savers/pensioners/youth to the reckless is not fair.

    BoE has failed and has not even reformed the banks yes. It is all a big mess which they want to continue going on!!!
    Let the banks fail, let the zombie companies and reckless individuals (BTL) fail. Allow the market to correct and grow

  • rate this

    Comment number 47.

    Our lives our confused by the carrots that are constantly dangled in front of us and the actually reality of them becoming tangible. In real terms the vast majority of us are not living in a depression, the problem is that we are led to believe that we can all grow economically and materially. And when that promise is thwarted, as it invariably is, adverts on the TV don't quite ring true.


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