Three charts that complicate a simple focus on growth
James Plunkett 11:13amGDP growth figures have become the barometer of choice for commentators trying to tell the political weather – a good measure of how the public will eventually fall in the faceoff between Osborne and Balls. The story goes that a return to sustained growth will mean a return to rising living standards. That means a vindication of the government’s position, and a victory for the Chancellor.
As a simple story, that makes sense if the pressures now facing Britain’s households are straightforwardly growth-related – if, in other words, we’re in a post-recession hangover that will vanish when growth returns.
But there’s now mounting evidence of a deeper problem for living standards in the UK economy. Take the chart below. It shows long-term trends in UK median wages. It reveals that stagnant wages didn’t start with the 2008-09 recession, but began as far back as 2003, when GDP growth was still strong.
On its own, that undermines the simple assumption that a return to sustained growth will mean a return to rising living standards. And stood alongside Figure 2, it raises a bigger set of questions.
Fig 2. looks at long-term wage trends in the US context, and sets these alongside trends in US GDP per capita. It shows that middle incomes in the US have now been stagnant for a generation, even
while GDP has been strong. More precisely though, it shows that in the post-war period, US GDP growth tracked growth in living standards closely, but from the early 1970s, something changed.
From 1973 to 2010, US GDP more than doubled while the incomes of the bottom 90 percent of workers rose by just 10 percent.
That’s not to say the UK is now headed for 30 years of flat wages. Our labour market differs in many ways from America’s, and in any case it’s far too early to tell. But evidence
does suggest that the UK’s post-2003 wage slowdown has meant a similar ‘decoupling’ of wages from trends in output. Figure 3 captures that trend clearly. It shows a marked
divergence of growth in wages and growth in labour productivity from the early 2000s. In other words, the economy was still showing signs of good health at a national level, but from the vantage
point of households, things felt feeling decidedly queasy.
Of course, none of that suggests growth isn’t important. We won’t see a return to rising living standards while the economy remains stagnant. But it does suggest the story is more
complicated. Growth alone is unlikely to be enough.
James Plunkett is Secretary to the Commission on Living Standards, a wide-ranging investigation into the long-term economic trends hitting low-to-middle earners. The Commission is launched today by the Resolution Foundation.
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MorrisOx
February 28th, 2011 11:28am Report this commentThere might be another line you could usefully lay over these graphs: the growth of consumer credit.
If wage growth was low but the economy grew then part of the answer surely has to lie in our old, and now unwelcome, friend, borrowed money.
If that's the case, then only when credit conditions return to some kind of normality will trend growth return.
mark c
February 28th, 2011 11:28am Report this commentnotwithstanding a mammoth increase in tax take from the same group, and the masking of real household inflation levels with the redefined CPI measure. No wonder mars bars wont sell. For the economists its even worse ... real disposable incomes are more decoupled from earnings than is shown above, poor dears wont have a clue.
normanc
February 28th, 2011 11:50am Report this commentHow does the stupendous growth of the state over the last 40 years fit into this? One imagines that as companies shoulder their 'fair share' of the cost of big government it leaves less scope for increased workers salaries?
As taxes, such as employers NI, and increased regulatory burdens (elf n safety) eat into revenue we can't expect wages to keep up.
John Dubai
February 28th, 2011 12:00pm Report this commentThis is very interesting, I would make a number of points though: the first graph is not well presented - rather than bars a continuous line would be more useful in analysing the trend here. Could one be found? I'd also be interested to see a similar curve which divided up public and private sector earnings.
I would also suggest that these figures highlight the importance of consumer credit in fuelling the growth - I would posit this as one of the chief reasons for the disparity illustrated here.
John Dubai
February 28th, 2011 12:03pm Report this commentGood point mentioned in comments above - how has tax take altered over this period?
It would also be an interesting exercise to factor in inflation to all these figures. Of course this is not as straightforward as it sounds since inflation intertwined with GDP growth and wage growth.
David Bouvier
February 28th, 2011 12:30pm Report this commentHmmm... GDP per capita is per head of population, working or not. Median income will not just reflect higner super-median incomes, but also increases in workforce participation.
E.g. there were a lot of £0 income people not counted for median wages in the 1970s whose equivalents are now on low often part-time earnings.
There are various ways of explaining this; a start would be to recognise the different denominators and plot sometehing like a particpation rate on the graph.
The 70s is a plausible time to expect participation rates to start changing.
Median family/household income might tell a different story - though the expectation of setting up an independent household early in adult life makes like-for-like comparision difficult too.
Barry Bilge
February 28th, 2011 12:31pm Report this comment"Take the chart below. It shows long-term trends in UK median wages. It reveals that stagnant wages didn’t start with the 2008-09 recession, but began as far back as 2003, when GDP growth was still strong."
Fueled by Government and personal debt spending.
Figure two needs re-labeling I think. 1973 = 100 not 1953. Productivity has increased due to mechanisation. You don't pay workers vastly more if the thing making them substantially more productive is a succession of better, faster, more efficient machines - you've spent the money on the machines.
Barry Bilge
February 28th, 2011 12:31pm Report this comment'figure 2 needs re-labeling'.
Scrap that I misread the axis.
DZ
February 28th, 2011 12:39pm Report this commentHow long is "sustained growth"? How many years, before the error bars (not shown) on the sums get so big as to be meaningless? Three? Five? Twenty? The only element that shows "sustained growth" is world population size, and I don't think that there is any attempt to control that.
TomTom
February 28th, 2011 1:13pm Report this comment"Our labour market differs in many ways from Americaâ™s"
Of course it does, our public sector is proportionately much bigger and better rewarded.
Banks are more central as a percentage of GDP in Europe than in the USA probably because the Us has a bigger oil sector
daniel maris
February 28th, 2011 1:40pm Report this commentGrowing inequality with the top few per cent creaming off huge wads of cash must be part of the story. A million pound bonus would easily cover average wages for 300 people.
Added business burden (health and safety, maternity cover etc).
Increased tax take.
Increased raw materials costs.
But yes, as someone pointed out pay is not the same as pay rates. And,one might add, only average hourly pay rates over the whole economy could tell a story, since pay rates linked to jobs have been subject to grade inflation.
yank
February 28th, 2011 2:13pm Report this commentYes, it is more complex than just GDP growth.
You've observed a divergence in US GDP per capita and median income starting in 1973, about the time that mass immigration started to kick in. We've likely added an entire population of the UK here since then, and then some. Many of them low skilled, low education, low income, or no income. It total, they make GDP rise. By household? Not so much.
Your UK rise in immigration seems to track your divergence date, 2003. Perhaps both coincidental, but perhaps contributors in both cases.
Cost of government has skyrocketed, in both cases, including the costs of the welfare state, which is a purely negative GDP growth.
Yes, household debt is a factor, especially once a real estate bubble pops and stagnates growth, as it is.
This is why Neathergate matters. Ignoring immigration is a disservice to all. It must be discussed, and all of its costs and effects analyzed. To do otherwise is amoral.
Dan
February 28th, 2011 2:26pm Report this commentA really interesting article, James. But can you explain the decoupling of wages and growth?
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