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Home Publications Maintaining pay in the modern era has become an unequal struggle

Maintaining pay in the modern era has become an unequal struggle

Newspaper article

One of the many great pleasures of working at the Institute for Fiscal Studies is talking with my colleagues about the work that they are doing. Quite often they’ll say something. I’ll stop them. “My goodness that’s interesting, I never knew that. Why haven’t we published it?” I’ll say. “Oh, that’s not new, everyone knows that already,” comes the reply.

What they mean, of course, is that the group of experts working in the area know it. It may not be wholly new to the research world, but it is not something that has penetrated the wider world, or at least not my thick skull.

One thing that did penetrate my skull quite a long time ago is that growth in earnings and incomes has stalled, and stalled badly. So it took me a little bit by surprise when, in the context of talking about Philip Hammond’s first rather dull autumn statement (and believe me, I mean “dull” as high praise in this context) my comments along those lines were seized on as big news.

So perhaps now is a good moment to say some things about what has been happening to earnings, incomes and inequality over the past few years, things that we all need to understand.

Let’s start with this issue about what is happening to earnings. Average earnings, after adjusting for inflation, are still below their level back in 2008, before the financial crisis hit. That is true whether you measure them on a weekly or an hourly basis.

This in itself is unprecedented in recent decades. Real earnings generally rise each year by 1.5 per cent or 2 per cent as productivity rises. That’s how we get better off over time. For average wages to be below their level eight years ago is, on any yardstick, dreadful. This is one way of measuring the deep and persistent impact of the financial crisis.

What we learnt that was new last Wednesday was the Office for Budget Responsibility’s forecasts for earnings over the next few years. Back in March it had forecast modest growth that would finally take average earnings over the 2008 level by 2020. Last Wednesday it downgraded those projections as a result of higher expected inflation, coming from the recent depreciation in sterling and also because it now expects productivity — the ultimate driver of wages — to increase less quickly than it had been expecting back in March. The result is that it now expects average real wages to still be a bit below their 2008 level in 2021.

So that’s what we know about wages and what we learnt last week. We know some other rather important things about what has been happening to incomes and their distribution over recent years.

First, and a fact that still gets greeted with incredulity however many times I repeat it, is that income inequality has fallen since 2008. While the fall has not been dramatic, it has been more pronounced than any fall over at least the last 40 years. The result is that, excluding the top 1 per cent, income inequality is no higher today than it was a quarter of a century ago. The reason for this fall in inequality in recent years is that wages have fallen while, until now at least, the real value of most benefits has been reasonably well protected. Higher-income households tend to be more reliant on wages. And the falls in wages have stretched right across the distribution. The very highest earners appear to have done no better than the average. On the other hand the minimum wage, and now the national living wage, has been relatively protected.

Second, income inequality is still much higher now than it was 40 years ago. Most of that increase in inequality happened in the 1980s as wage dispersion grew enormously and the relative values of most welfare benefits fell. Since about 1990 the only big upwards pressure on inequality has been a rise in the relative incomes of the very richest. Even those 90 per cent of the way up the income distribution are no better off relative to those just 10 per cent of the way up than was the case back in the late 1980s. It’s only when you get to the top 2 per cent or 3 per cent that the gap kept growing after 1990. The top 1 per cent saw their share of all income rise from 6 per cent to nearly 9 per cent between 1990 and 2008. That explains the growing interest in the small number of the very rich.

Third, since the financial crisis different age groups have had very different experiences. By 2014 incomes for those aged between 30 and 60 were essentially the same as they were in 2007. Incomes for those in their 20s were still 7 per cent below their 2007 level. On the other hand the over-60s had incomes 11 per cent higher than in 2007.

One remarkable consequence of a long-run trend is that in 2011, after accounting for their lower housing costs, the average incomes of pensioners for the first time rose above the average incomes of those below pension age. Combined with other factors, these income trends look like turning into longer-term difficulties for the young. Home ownership rates at age 30 are half what they were two decades ago. And the numbers of younger people working in the private sector who have access to the sorts of defined-benefit occupational pension schemes that have been so important in driving up incomes of those retiring in recent years have fallen close to zero.

I don’t know, reader, whether any of this is news to you. I do know that at least a passing acquaintance with these facts is rather important in understanding much of what is happening in Britain today.

This article first appeared in the Times and is reproduced with permission.

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This presentation was given at an IFS briefing following the Autumn Statement 2016.
These slides contain supplementary information to accompany the briefing on the outlook for living standards for the Autumn Statement 2016.