Talkin' 'bout long-term stagnation

Politics is often a messy squiggle, but this morning's Resolution Foundation event did much to reduce it to a binary choice. Do we follow the US into a decades-long stagnancy around low-to-middle-income earners? Or do we not? James Plunkett explained the basic dilemma on Coffee House earlier, but more was said by a group of panellists which included Jared Bernstein, Martin Wolf, Steve Machin and Lane Kenworthy. Here, for the saddest CoffeeHousers, are eight points that I've distilled from my notes. This is more reportage than opinion, but I thought you might care to applaud or eviscerate some of the arguments that were put forward:

1) The UK triumphant. Or not quite — but at least we've outpaced the US on most measures of income growth for low-to-middle earners. Courtesy of the Resolution Foundation's Gavin Kelly, here is a chart which shows how median pay has moved in line with GDP growth across various economic cycles: 

In other words, British middle-class types have benefited more from recent economic growth, in terms of pay, than their American counterparts. And here's another graph, unveiled by Lane Kenworthy, which shows how median income has increased each year, in various countries, since 1979:

2) An entrenched problem. That said, in both the US and UK, and other countries, the squeeze on low-to-middle incomes has been happening for some time — around a decade before the crash. Just look at the first graph above: wage growth as a percentage of GDP collapsed in the swollen boom years of 2000 to 2007. Jared Bernstein put this into a US context, with a chart that compared labour market productivity with median income growth across two time periods:
 
So, productivity has remained roughly the same between 1947-73 and 1973-2007, while wage growth has slumped. Bernstein said that there's no real reason to expect the two to match each other, but it does suggest that people are, as he put it, ‘running faster up a downwards escalator.’

3) Why has this happened? Plenty of reasons were given, including: the proliferation of labour-saving technology; the ever extending reach of the Chinese economy; and, more recently, the effects of fiscal tightening. But it was emphasised that, despite some universal conditions, there is great variance between individual countries. For instance, Ireland's middle-income earners managed to avoid much of the squeeze (see the second chart in point 1 above), but thanks to an economic ‘miracle’ that turned out to be more con-trick than anything else.

4) Why should we care? The panellists didn't dwell too much on this, although a few words were said about ‘fairness’. What's happened, explained Steve Machin, is that many of these negative effects have impinged more heavily on middle-income earners, over the past few decades, than on the very lowest and highest earners. And this prompts a question about the equity of the economy: why hasn't everyone been benefitting, in equal proportions, from growth? Why have some been actively losing out?

But if fairness isn't your thing, there are other reasons to care, too. I mean, for most of us, this is our income we're talking about. For political strategists, the contraction of wages — particularly when mixed with other depressants such as inflation — could have worrying electoral side-effects. And for economists, the next bust may be encoded in all this. Take personal debt, which wasn't mentioned at the event, but which popped into my head at the time. If economic growth continues to outstrip income growth, then it's not unthinkable that there will be more pressure on people to borrow, borrow, borrow to fill the gap. Another bubble? Perhaps. 

5) The importance of transfers. What income growth there has been, in various countries, is largely down to increases in ‘government transfers’ (such as tax credits) rather than in earnings. Here's a graph that Lane Kenworthy produced for the very lowest income earners:

   And for modest income earners:

This was taken by many of the panellists as a cause for both encouragement and despair. Encouragement, because this is one concrete way in which the government can make a difference — by increasing tax credits and the like. Despair, because the coalition isn't doing that. But I was left wondering what the opportunity cost of those same transfers has been: would incomes be higher if the government had used the money differently, or not taken it in the first place? If any CoffeeHousers have data on that, do shout out in the comments section.

6) Individuals versus households. The FT's Martin Wolf made the point that, if this subject is going remain a focus of debate, then we had better be precise about what we're discussing and what we're worried about. Two terms were used frequently today: ‘wages’ and ‘household incomes’, and they are of course different things. In theory, individuals' pay could go down while household incomes increase. Household income depends on many more factors, such as the number of earners in the household, the benefits accruing to a household, etc, etc.

As it happens, household incomes have been sturdier than wages in the UK and US — but, according to Bernstein and Kenworthy (if I remember correctly), this has not been nearly enough to relax the general squeeze on middle-to-low income earners.  
 
7) Education, education, education... Oh yes, that good ol' Blair refrain was sung today — and with some cause. There was the unsurprising fact that the better qualified have been paid better. (One graph produced by Steve Machin showed that median wages for ‘high school dropouts’ in the US have actually fallen over the past 30 years, whereas they have risen quite significantly for the most garlanded graduates.) But there was also the slightly more surprising detail that the pecuniary benefits of a degree have held up, even as the number of people achieving them has increased:
 
Which is to say, if governments want to improve the incomes of low-to-middle earners, then they should improve the education and training that they receive. In the UK's case, it was suggested, this effort ought to be focussed on the would-be lowest income earners, where our performance has persistently lagged behind other countries. On this front, Michael Gove's reforms received some praise.

8) ...and more. But education alone won't be enough. Countless other, and sometimes competing, solutions were proposed, including: higher employment rates (natch); a stronger union voice; increasing tax credits; family-friendliness, etc. The question left hanging in the air was whether, so far as low-to-middle-income earners are concerned, governments' toolboxes are sufficient to overcome wider developments such as the rise of China and of technology. CoffeeHousers, I shall leave that with you.