Can a tide rise - with all boats?

wage slip For many households, incomes in 2020, could be no higher than they were in 2000, says the report

There has been a lot of hand-wringing about the squeeze in household incomes in the UK - especially for the lower half of the income distribution.

But the final report of the Commission on Living Standards stands out as a serious effort to get behind the gloomy numbers, to the long-term forces that are driving them. Unlike some, it also has concrete proposals for making things better, including ideas on how to pay for them.

Ministers have not rushed to dismiss this report as left-wing hand-wringing - instead, their officials have been greeting it as a "serious" contribution to the debate.

Some will find that surprising; the think tank that convened the Commission, the Resolution Foundation, is run by a former senior adviser to Tony Blair and Gordon Brown.

But the report does not lay into the government, and it isn't a diatribe against fiscal austerity. In fact, most of its (many) pages are devoted to showing how living standards for many families were coming under pressure, long before the recession - for reasons that are long-term and often global.

The Commission included some pretty independent characters, including the managing director of British Gas, Phil Bentley, the Lloyds chairman, Win Bischoff, and Paul Johnson, the director of the Institute for Fiscal Studies. They also had the soon-to-be director general of the TUC, Frances O'Grady, and a director of Netmums, Sally Russell.

Somehow, all these people have managed to agree on both the diagnosis, and some possible cures. It's worth reading, perhaps, for that fact alone.

Income inequality

Some of the gloomy stats are a bit familiar: the report says that "it is now entirely possible that living standards for a large swath of low to middle income households will be no higher by 2020 than they were in 2000".

More interesting, for me, than the stuff about the squeeze in pay was the analysis of why, despite this, incomes were able to carry on rising, for most households, as long as they did.

There's also interesting research on how the UK compares with the rest of the world. In a nutshell - we were better than most at delivering higher real wages for people on middle and low incomes in the 1980s and 1990s, but since 2000 we've done much worse.

Only the US has seen a larger rise in income inequality than the UK since the 1970s. We also have a relatively high share of workers on low pay - which for the Commission means an hourly wage of less than two-thirds of the median.

Incomes in the lower half still grew up until the financial crisis, only because of two factors: higher tax credits and more women going out to work.

On average, women brought in 14% of earnings in low to middle income households in 1968. By 2008 that had risen to 37%, while the male share had fallen to 63%. Over the same period, the share of their total income, after tax, that came from tax credits or benefits rose from 8% to 18%.

Tax credits did even more work in the years just before the crisis. Between 2003 and 2008, employment and other non-government income for these kinds of households fell by £570 a year, on average. That was offset by an eye-popping £730 a year rise in tax credits and benefits.

That kind of growth in state handouts was not sustainable, and it clearly won't be the story going forward, whichever party is in power.

Can we expect a turnaround in wages for those in the lower half of the income distribution to come to the rescue? Research commissioned for the report suggests not. Like most academics, they expect a "hollowing out" of middle income jobs in many countries including the UK.

They forecast that there will be 2 million senior and professional jobs created by 2020, plus 400,000 "basic service and elementary jobs". At the same time, maybe 800,000 mid-level administrative and manufacturing jobs could be lost.

I wouldn't put too much store by these numbers: this is the part of the report that is most likely to be proved wrong. With new developments all the time - in digital manufacturing and 3D printing, for example - we simply don't know what the workforce of a successful Western economy will look like in ten, let alone 20 years' time.

That said, the authors are probably right to conclude that government - all governments - need to do more to help people be a part of that future workforce.

Benefit changes

They are probably also right that if it wants to raise living standards across the population in the future, the government - any government - will need to help women and older workers make a greater contribution.

It's a matter of arithmetic: if we want more of the country to enjoy rising living standards per head, in an environment in which government budgets are tight, more people need to do more work, ideally for a higher wage.

Members of the Commission have managed to agree on one set of ideas for achieving that: for example, they would make the benefit system more generous to second earners and increase the amount of free childcare.

Changes which cost money would be funded by cutting tax relief for top earners and means testing universal benefits such as the winter fuel allowance. They also have proposals for skills and education policy.

Ministers will agree with some of the Commission's answers, and reject others. But they will likely admit that it highlights some very important questions about the future shape of the economy.

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

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  • rate this

    Comment number 1.

    Impact on income is difficult. Globalisation in the IT industry has affected me - I had no pay rise (at all) for 9 years from 2001-2010 mostly due to impact of India - since then 5% as India/China also rising. Since GFC, I've seen mortgage costs collapse from £600 to £70 pm, so this is a major factor, so this has been more important to me than earnings. I've seen a loss of interest of course

  • rate this

    Comment number 2.

    A simple application of this principle would be to stop all benefits including state pensions, fuel allowance, etc for those with an income of over £50,000. This would have an immediate and big effect on our economy and wouldn't cause any hardship.

  • rate this

    Comment number 3.

    Main problems are rising cost & availability of of childcare + lack of administrative & manufacturing jobs. It simply no longer pays for women wo work Britain. To avert: raise low pay, raise skills, & increase female employment. Result: middle income family better off by £1,600 (after inflation) a year by 2020.

  • rate this

    Comment number 4.

    Jan. 26, 2011:
    Mervyn King - "In 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years. It is hardly surprising that unhappiness describes the reaction of many."
    So between Jan 2011 and Jan 2013 - what has been done about these long foreseen problems?
    There has been no tide in 2 years.

  • rate this

    Comment number 5.

    At last, we can comment on how Archimedes' principle applies to economics?

    More seriously, isn't most of this the result of a long standing plan, shared by Cons and Lab, to deny middle income and poorer groups a decent education?



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