Why Britain's households got richer - and why they stopped

There are no signs of living standards for families getting any better. Brace yourself.

Before there is any prospect of shaking the economic pessimism that has engulfed the country we need first to alight upon a credible account of how working families will boost their living standards in the years ahead.

At the moment no-one is mapping out this course to a more prosperous future; but more surprising, perhaps, is the fact that we don't really know how it is that households got richer over the recent past. Even though recent history is unlikely to offer a clear guide to the future, it is instructive to understand why low-to-middle income households got richer over the last generation and more -- why it stopped.

Clearly, we do know what happened to headline economic growth over the last forty years, and that this resulted in an unparalleled rising tide of living standards, such that the average British household is twice as prosperous compared to 40 years ago. But we haven't, until now, been able to break down the sources of this rising tide of prosperity at the level of individual households, and tease out how they have changed over time -- for instance, between higher wages (for men and women), more people working, more hours worked, and more generous benefits and tax credits.

Now a landmark report by the IFS for the Resolution Foundation's Commission on Living Standards sets this out in forensic detail. It is a unique compendium of facts and figures about living standards -- and behind the statistics is the tale of economic and social change in late 20th and early 21st century: the rise of women, the relative decline of men and the emergence of tax-credits in low-to-middle income Britain. Any politician or pundit wishing to put the current squeeze on living standards into some meaningful context needs to put it on their Christmas reading-list.

A few findings leap out. Firstly, over the last forty years the great majority (over three quarters) of all the income growth arising from work in low to middle income households came from women. Indeed, women's contribution to total household income more than doubled from just 11 per cent in 1968 to 24 per cent in 2008. Much of this growth is accounted for by higher wages but a large share also comes from big increases in female employment.

Sources of household income growth 1968- 2008/09 - low to middle income households


Over the same period the model of the male breadwinner has taken something of a battering. The contribution of men's work to this same group of households plummeted from 71 per cent of total income to just 40 per cent. As shown in the chart above, this means that income from men's work accounts for only 8 per cent of all the growth in household income in this period, compared to 27 per cent for women. It is well known that male employment plummeted during the 1980s, but male wage growth has also been massively lower for this part of the population -- with any gains here nearly wiped out by falls in employment levels.

Secondly, if we look at the pre-crisis period of economic growth, from 2002 to 2008, a period characterised by steady growth, the evidence is even more striking. Women's employment served to raise household incomes, as did fast-rising tax credits (by an even larger amount); but these gains were almost completely wiped out by losses from male employment income. The net result? The chart below shows that average household income for this group barely rose at all: it went up by a grand total of £143 over 6 years.

Change in income for low to middle income households, 2002/03 - 2008/09, in 2008/09 £s


As with many reports, the conclusions you draw from it will to some degree reflect your starting point. Those favouring redistribution will, of course, point to the enormous importance of tax credits in helping lift family living standards, and be alarmed by the coalition's clear agenda of cutting them back. Whilst those instinctively opposed to using the tax-and-benefit system to mitigate market inequalities will take this report as proof-positive that some of the improvements in the Blair-Brown years were the product of unsustainable state spending.

But wherever you start from, several things jump out of this report as being particularly pressing to the current political debate. Most obviously we clearly have a gender problem -- in fact we have two. Given that income from female work is now so critical for families on low to middle incomes, and typical wages have been flat-lining over recent years, it is a uniquely dumb moment to reduce childcare support which has enabled so many women in low-to-middle income households to combine work and family life. Indeed, declining support for childcare, combined with falling public sector employment (which will affect women more), means that in the short-term female employment rates are likely to fall. Yet we also need to start talking about men. We all know that the UK suffered a strong decline in male employment in the 1980s, but what is less well appreciated is that male employment within the low to middle income group was still falling between 2002 and 2008. We rapidly need to halt this decline.

And -- perhaps this barely needs saying following yesterday's OECD report -- we are going to carry on having an inequality problem too -- indeed it will get worse. This is less a prediction, more a matter of arithmetic. Imagine for a moment that we find ourselves transported into an unlikely egalitarian future, in which pay increases (in per cent) at the top are exactly the same as those at the bottom (bear with me), well, even in this unlikely world, income inequality between households will rise. This is because households further down the income scale receive a significantly smaller portion of their budget from wages than the average household does -- never mind the most affluent. Consequently a given wage increase has a smaller impact on their overall income than it does for those further up the scale.

The only way this dynamic towards ever more polarised household incomes will be countered is either by more aggressively redistributive tax and benefit policies, or a disproportionately large rise in employment levels among this part of the population. And currently we're heading in the wrong direction on both these fronts. Brace yourself.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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By refusing to stand down, Jeremy Corbyn has betrayed the British working classes

The most successful Labour politicians of the last decades brought to politics not only a burning desire to improve the lot of the working classes but also an understanding of how free market economies work.

Jeremy Corbyn has defended his refusal to resign the leadership of the Labour Party on the grounds that to do so would be betraying all his supporters in the country at large. But by staying on as leader of the party and hence dooming it to heavy defeat in the next general election he would be betraying the interests of the working classes this country. More years of Tory rule means more years of austerity, further cuts in public services, and perpetuation of the gross inequality of incomes. The former Chief Secretary to the Treasury, Seema Malhotra, made the same point when she told Newsnight that “We have an unelectable leader, and if we lose elections then the price of our failure is paid by the working people of this country and their families who do not have a government to stand up for them.”

Of course, in different ways, many leading figures in the Labour movement, particularly in the trade unions, have betrayed the interests of the working classes for several decades. For example, in contrast with their union counterparts in the Scandinavian countries who pressurised governments to help move workers out of declining industries into expanding sectors of the economy, many British trade union leaders adopted the opposite policy. More generally, the trade unions have played a big part in the election of Labour party leaders, like Corbyn, who were unlikely to win a parliamentary election, thereby perpetuating the rule of Tory governments dedicated to promoting the interests of the richer sections of society.

And worse still, even in opposition Corbyn failed to protect the interests of the working classes. He did this by his abysmal failure to understand the significance of Tory economic policies. For example, when the Chancellor of the Exchequer had finished presenting the last budget, in which taxes were reduced for the rich at the expense of public services that benefit everybody, especially the poor, the best John McConnell could do – presumably in agreement with Corbyn – was to stand up and mock the Chancellor for having failed to fulfill his party’s old promise to balance the budget by this year! Obviously neither he nor Corbyn understood that had the government done so the effects on working class standards of living would have been even worse. Neither of them seems to have learnt that the object of fiscal policy is to balance the economy, not the budget.

Instead, they have gone along with Tory myth about the importance of not leaving future generations with the burden of debt. They have never asked “To whom would future generations owe this debt?” To their dead ancestors? To Martians? When Cameron and his accomplices banged on about how important it was to cut public expenditures because the average household in Britain owed about £3,000, they never pointed out that this meant that the average household in Britain was a creditor to the tune of about the same amount (after allowing for net overseas lending). Instead they went along with all this balanced budget nonsense. They did not understand that balancing the budget was just the excuse needed to justify the prime objective of the Tory Party, namely to reduce public expenditures in order to be able to reduce taxes on the rich. For Corbyn and his allies to go along with an overriding objective of balancing the budget is breathtaking economic illiteracy. And the working classes have paid the price.

One left-wing member of the panel on Question Time last week complained that the interests of the working classes were ignored by “the elite”. But it is members of the elite who have been most successful in promoting the interests of the working classes. The most successful pro-working class governments since the war have all been led mainly by politicians who would be castigated for being part of the elite, such as Clement Atlee, Harold Wilson, Tony Crosland, Barbara Castle, Richard Crossman, Roy Jenkins, Denis Healey, Tony Blair, and many others too numerous to list. They brought to politics not only a burning desire to improve the lot of the working classes (from which some of them, like me, had emerged) and reduce inequality in society but also an understanding of how free market economies work and how to deal with its deficiencies. This happens to be more effective than ignorant rhetoric that can only stroke the egos and satisfy the vanity of demagogues

People of stature like those I have singled out above seem to be much more rare in politics these days. But there is surely no need to go to other extreme and persist with leaders like Jeremy Corbyn, a certain election loser, however pure his motives and principled his ambitions.

Wilfred Beckerman is an Emeritus Fellow of Balliol College, Oxford, and was, for several years in the 1970s, the economics correspondent for the New Statesman