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

graph

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

graph

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 chief executive of the Resolution Foundation 

Photo: Getty Images
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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.