It’s official — we’re not all in this together

Workers are taking a pummelling as real earnings fall for all but those in the financial sector, and

I was surprised to discover last weekend that George Osborne feels vindicated by what other countries are doing to address the economic crisis. Apparently, the Chancellor believes there is some similarity between the US economy and that of the UK. Indeed, his words were accompanied by headlines such as "Deficit deniers are trounced", which appeared in the Daily Mail on 16 April above a piece by Alex Brummer. I would invite the growth deniers to consider the facts.

Since November, unemployment in the US has dropped by roughly one million and the jobless rate has fallen by 1 full percentage point. In the UK, unemployment has fallen by 12,000 and the jobless rate has fallen by a tenth of 1 per cent. US GDP grew by 0.8 per cent in the fourth quarter of 2010 and 2.7 per cent year-on-year, compared to a quarterly decline of 0.5 per cent in the UK and 1.5 per cent on the year. Ignore the empty threats by the Standard & Poor's credit rating agency to downgrade US debt: America is recovering nicely while the UK is not.

Different strokes

Meanwhile, the Organisation for Economic Co-operation and Development (OECD), which Osborne claims is a big supporter of his austerity measures, is forecasting UK growth of 1.5 per cent and 2.0 per cent for 2011 and 2012, respectively, compared to 2.2 per cent and 3.1 per cent for the US. The Consumer Prices Index measure of inflation in the UK was 4 per cent in March; the comparable figure across the Atlantic was 2.7 per cent. Ed Balls noted this month that the Chancellor is "forgetting that, by taking a steadier approach to secure the US recovery, President Obama now has a growing economy and falling unemployment, which is crucial to getting the deficit down". As they say, different horses for different courses.

In his 23 March Budget speech, Osborne claimed that "our country's fiscal plans have been strongly endorsed by the IMF, by the European Commission, by the OECD, and by every reputable business body in Britain". The IMF has already lowered its forecasts for the UK economy and its boss, Dominique Strauss-Kahn, used some prepared remarks to the Brookings Institution in Washington, DC on 13 April to warn against cutting budgets too far, creating long-term unemployment. "What about fiscal policy? Advanced countries need to put fiscal positions on sustainable medium-term paths, to pave the way for future growth and employment. But fiscal tightening can lower growth in the short term, and this can even increase long-term unemployment, turning a cyclical into a structural problem. The bottom line is that fiscal adjustment must be done with an eye kept keenly on growth." This doesn't look much like a trouncing to me.

Another set of numbers worth looking at comes from April's Office for National Statistics data release. It shows that despite prices rising by 4 per cent, average weekly earnings grew by only 2 per cent overall, while earnings in financial and business services (FBS) rose by 4.5 per cent. So real earnings - that is, earnings adjusted for price rises - for the average worker are falling, but those of bankers and financiers are rising. Average weekly earnings in February 2011 were £448 per week, compared to £596 in FBS, according to the official data.

The definitive source of data on the distribution of earnings is the Annual Survey of Hours and Earnings (ASHE). It surveys a sample of 1 per cent of UK workers - around 200,000 observations a year. The most recent data we have available is for the financial year ending April 2010; this is presented in the table below. The median gross annual earnings were £21,221, a decline of 0.4 per cent from £21,310 in 2009; median gross weekly earnings were £404, up 1.8 per cent from £397 in 2009. I use the median here because it refers to the earnings of a person halfway up the earnings distribution, a measure not pulled upwards by highly paid outliers in each group. (If we were to look at football players' salaries, for example, the best measure is the median salary, as that is the pay of the typical person: the mean salary will be a lot higher, as it is pulled up by inclusion of all the really high-paid Premier League players.) For the working population as a whole, mean annual earnings in 2010 were £26,510, up by 0.2 per cent from £26,450 in 2009. These are highly misleading numbers, given that the 2010 pay increases were much higher at the top of the wage distribution than at the bottom.

table

A certain ratio

Research I undertook on the "wage curve" with Andrew Oswald for our 1994 MIT Press book of the same name suggests that the pay of those earning the least is likely to be hit hardest by an increase in unemployment. We discovered that, as a rough rule, when unemployment doubles, real wages fall by 10 per cent overall, and by as much as 20 per cent for the lowest-paid. So rising unemployment hits the wages of the lowest-paid the hardest. This is what has happened during the current downturn.

Of particular concern is that earning inequality took a big jump upwards in 2010, in part because of pay freezes in the public sector. A simple measure of inequality is the 90:10 ratio - that is, the relationship between the earnings of someone 90 per cent along the distribution range compared to someone 10 per cent along: the bigger the ratio, the more inequality there is. After rising sharply in the 1980s and 1990s, wage inequality has been roughly flat - in part due to the introduction of the national minimum wage - but it has started to rise again. In 2010, the 90:10 ratio calculated from the ASHE survey for the years 2007-2009 was roughly constant at 6.92:1; but it jumped to 7.16:1 in 2010 (£46,428/£6,480). Evidence from the Labour Force Survey, which is another poll of individuals used to calculate the unemployment rate, also confirms that there was a big increase in hourly earnings inequality, measured by the 90:10 ratio in the fourth quarter of 2010.

Wage inequality is rising. Bankers and financiers are doing well and ordinary workers are not. And then there are all the tax increases and spending cuts that are about to make themselves felt. We are not all in this together.

David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling