Who benefits from ‘economic growth?’

For a while now, it’s been recognised that wages for median workers in the US haven’t risen in a generation – but it was sometimes assumed that this was a phenomenon limited to the US. However, a new report released today by the Resolution Foundation – my tip for the most influential UK think-tank over the next two years – find signs that this has been happening in several countries including the UK.  Looking beyond earnings at inflation, living standards and housing, they argue that we seem to be at the start of a worrying period of ‘growth without gain’ for middle-earners…

The international picture

To begin with, it helps to look at the picture internationally.  In the figure below, they show the evidence for eight countries – the top row all showing signs of ‘stagnation of middle wages’, and the bottom row showing continued rises.  The UK is particularly interesting here; we saw strong growth in middle wages for most of the past 20 years, but since 2003 middle wages have flatlined.  While rises in German middle wages have been consistently slower, a similar pattern can be seen here of a change in the past few years that predates the recent recession.

The UK has already found itself spending ever-greater efforts to maintain the living standards of people on low-to-middle incomes – now spending 4% of national income lifting their incomes, compared to 1% in 1977 (using tax credits themselves inspired by the US Earned Income Tax Credit).  The fear is that the UK could see the patterns of Canada or the US.  In the clearest terms I’ve seen this expressed, the report’s author James Plunkett says that “if US median household earnings had continued to track GDP per capita since the mid 1970s – as they had from 1945 to 1973 – the average household would not have earned $50,000 in 2008 but around $80,000, or 60 percent more.”

Growth, living standards and wellbeing

The Resolution Foundation have been hammering an awareness of the importance of differential inflation into the public debate, and again in this report they highlight how the cost of living for low-to-middle-income people has risen faster than for others.  They also tie this into housing changes, arguing that “a generation rich in housing and relatively poor in consumer goods has been replaced by one that is relatively rich in consumption and housing-poor.”  The report ultimately argues that “Growth is a prerequisite to rising living standards. But an additional lesson does emerge from these pages: growth is necessary, but it may not be enough.”

This reminds me of a fabulous series of lectures I saw earlier in the year on the link between inequality, growth and happiness that were given by Adair Turner at LSE – Adair being Chairman of the Financial Services Authority, the Climate Change Committee and the Overseas Development Institute, and to my mind the closest thing to a public intellectual that we have in the UK. I strongly recommend listening to the podcasts of the three lectures (particularly the 1^st and 3^rd ones), which I can scarcely do justice to here. But there were three points that I thought were particularly interesting:

• The argument that higher wealth is automatically good for human welfare is clearly false.

• Inequality is bad for human welfare, all other things being equal.

• Yet growth is still crucial for human welfare – not because wealth makes us happy, but because stagnating wealth makes us unhappy. (In other words, we constantly need to have novel improvements in our living standards in order to keep us at the same level of happiness). And some inequality is likely to be important for (or at least a by-product of) growth, as well as a by-product of allowing economic freedoms as a point of principle.

If this intrigues you, then definitely do listen to the lectures in more detail – they’re the best lectures I’ve ever seen at LSE. In the meantime, the Resolution Foundation are near the start of an 18-month commission on living standards, so these are issues we’ll return to periodically over the coming months.