UK incomes are decoupling from economic health

Has the typical family gained from the UK's growth since the 1970s?

On both sides of the atlantic, there has been a relatively long-running debate about the extent to which "decoupling" – the failure of typical household incomes to grow at a rate matching the increase in GDP – has occurred.

The classic treatment of the topic compares GDP per capita to the median family income, as Lane Kenworthy did for the USA:

The difference is clear, albeit not entirely unsurprising (what the graph shows is largely the result of the large increase in income inequality since the 1980s). Yet not everyone accepts that it demonstrates a real phenonmenon.

Kenworthy writes:

One objection is that the price deflator typically used to adjust GDP per capita for inflation differs from the deflator used for median family income. I’ve addressed that here by using the same deflator for both.

A second concern has to do with GDP per capita as an indicator of economic advance. Since the 1970s a larger portion of GDP has gone to replace old capital equipment and therefore can’t go to household income. Also, the number of persons has increased less rapidly than the number of households, so a per capita (per person) measure of GDP could mislead.

A third worry is that the income measure used to calculate median family income is too thin. If a growing portion of GDP has gone to employer benefits, that would help middle-class households, but it wouldn’t show up in these income data.

He addresses the second and third concerns by using a per-household measure, which includes in-kind payments and the effects of taxation. The result is a very similar graph:

This demonstrates, he says, that "decoupling is real and sizeable".

But what about the UK? Have we got the same problem? Yes:

All the data comes from the ONS, the inflation measure used is RPI, and both median and mean household income are taken measured from after the application of taxes and distribution of benefits.

Just as in the US, income growth for middle-class households has become decoupled from growth of the economy.

Stocks are up in the NYSE, but real incomes aren't. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Leader: Theresa May and the resurgence of the state

More than any of her recent predecessors, the Prime Minister seems willing to challenge the economic and political orthodoxies of the past 35 years.

Theresa May entered office in more tumultuous circumstances than any other prime minister since 1945. The UK’s vote to leave the European Union was a remarkable rebuke to the political and business establishment and an outcome for which few had prepared. Mrs May recognised that the result was more than a revolt against Brussels. It reflected a deeper alienation and discontent. Britain’s inequalities of wealth and opportunity, its regional imbalances and its distrusted political class all contributed to the Remain campaign’s ­defeat. As she said in her speech in Birmingham on 11 July: “Make no mistake, the referendum was a vote to leave the European Union, but it was also a vote for serious change.”

When the financial crisis struck in 2007-2008, David Cameron, then leader of the opposition, was caught out. His optimistic, liberal Conservative vision, predicated on permanent economic growth, was ill-suited to recession and his embrace of austerity tainted his “modernising” project. From that moment, the purpose of his premiership was never clear. At times, austerity was presented as an act of pragmatic bookkeeping; at others, as a quest to shrink the state permanently.

By contrast, although Mrs May cautiously supported Remain, the Leave vote reinforced, rather than contradicted, her world-view. As long ago as March 2013, in the speech that signalled her leadership ambitions, she spoke of the need to confront “vested interests in the private sector” and embrace “a more strategic role” for the state. Mrs May has long insisted on the need to limit free movement of people within the ­European Union, and anticipated the causes of the Leave vote. The referendum result made the national reckoning that she had desired inevitable.

More than any of her recent predecessors, the Prime Minister seems willing to challenge the economic and political orthodoxies of the past 35 years. She has promised worker representation on company boards, binding shareholder votes on executive pay, improved corporate governance and stricter controls on foreign takeovers.

The shadow chancellor, John McDonnell, has set the ­Labour Party on a similar course, stating in his conference speech that the “winds of globalisation” are “blowing against the belief in the free market and in favour of intervention”. He pointedly criticised governments which did not try to save their domestic steel industries as China dumped cheap steel on to global markets.

We welcome this new mood in politics. As John Gray wrote in our “New Times” special issue last week, by reasserting the role of the state as the final guarantor of social ­cohesion, Mrs May “has broken with the neoliberal model that has ruled British politics since the 1980s”.

The Prime Minister has avoided the hyperactive style of many new leaders, but she has deviated from David Cameron’s agenda in several crucial respects. The target of a national Budget surplus by 2020 was rightly jettisoned (although Mrs May has emphasised her commitment to “living within our means”). Chancellor Philip Hammond’s Autumn Statement on 23 November will be the first test of the government’s ­fiscal boldness. Historically low borrowing costs have strengthened the pre-existing case for infrastructure investment to support growth and spread prosperity.

The greatest political ­challenge facing Mrs May is to manage the divisions within her party. She and her government must maintain adequate access to the European single market, while also gaining meaningful control of immigration. Her statist economic leanings are already being resisted by the free-market fundamentalists on her benches. Like all prime ministers, Mrs May must balance the desire for clarity with the need for unity.

“Brexit means Brexit,” she has repeatedly stated, underlining her commitment to end the UK’s 43-year European
affair. If Mrs May is to be a successful and even transformative prime minister, she must also prove that “serious change” means serious change and a determination to create a society that does not only benefit the fortunate few. 

This article first appeared in the 29 September 2016 issue of the New Statesman, May’s new Tories