ON WAGES, INCOME AND EMPLOYMENT

Rejoice! There was a href="http://www.telegraph.co.uk/finance/economics/10048704/There-was-no-UK-double-dip-recession-ONS-data-suggests.html">probably no double-dip recession, let alone a triple-dip. Praise be! For there are more people in work today than when the crisis began in 2007. The economy, say the Very Serious People in charge, is healing (they’re wide of the mark, as Duncan Weldon points out). Tell that to people whose incomes have stagnated whilst inflation erodes their living standards. Their power to earn a decent living from a hard day’s work has steadily declined, which defies Buch’s first law of political economy – that the primary purpose of a sustainable economy must be to empower all citizens to secure for themselves the means with which to live fulfilling live they have reason to value (catchy, no?!). A twitter exchange about incomes between the economist/blogger @Britmouse and Vince Cable’s Special Adviser @Gilesyb got me thinking. The growth in total income (compensation for employees) in the decade since 1997 has levelled off since the crash – my question was, what is the distribution of the levelling off? Have, as I suspected, the worse-off suffered more of an income squeeze than those who earn more? There are so many sources of data, and such excellent analysts of this sort of question, that I am sure this has been answered previously. Here is my take on data taken from The Effects of Taxes and Benefits on Household Income by the Office of National Statistics. First, here’s a graph showing incomes after the effect of taxes and benefits are accounted for, split according to income decile. It’s clear that whilst incomes grew for all groups from 1997 onwards, they grew for the richest more than they did for those lower down the distribution. To see how much less, I plotted the gradients as shown below:

This leaves little doubt that the richest enjoyed far higher income growth that the poorest – with the highest income decile a clear outlier. And yes, the slopes in the first graph are statistically significantly different from each other. So there. These are data for incomes – nominal incomes, before the effect of inflation is considered – after taxes and benefits are accounted for. What about incomes as they are earned in the workplace? Below is a comparison of salary, again split according to deciles, from 1997 onwards: Whilst the two charts appear similar, note the much flatter increase in the pre-taxes/benefits graph for all but the highest four income deciles. Again, I plotted the gradients – and was taken aback:

We know that government redistributes through taxes and benefits. This is a good thing, not least given the strikingly low income growth people in the lower half of the income distribution experienced from wages. That wages are stagnant has become axiomatic – but when displayed in this way it is brought home abruptly. The need for massive state spending in the form of tax credits and other benefits, to mask the failure of the labour market to provide a decent standard of living, also become clear – the Resolution Foundation Commission on Living Standards reckons the state effectively subsidises low wages to the tune of around £4bn a year, further distorting public finances in an effort to paper over serious fault lines in how the economy works. The LSE’s John van Reenen suggests that the low wage growth experienced by many isn’t just masking the unemployment figures (which are held to be better than expected by most economic models) – lousy wages are holding back demand and impeding economic recovery. The above data allow us to go further – it is lousy wage growth amongst the lower half of the income distribution that is a particular problem. John suggests factors such as declining union power, and more active welfare-to-work policies, are responsible for creeping wage growth. He is not, as far as I can tell, suggesting that the antidote would necessarily be stronger unions and weaker welfare-to-work policies. Given the distribution of the wage squeeze, an antidote could well be to bolster the voice and active participation of millions of employees through a radical programme of industrial democracy – a centre-piece of social liberal thought and the theme for the SLF’s conference this year [/shameless plug]. As the work of Mazzucato and Lazonick (The Risk-Reward Nexus), Acemoglu and Robinson (Why Nations Fail) and even Banerjee and Duflo (Poor Economics) shows, inequality of power within institutions plays a major role in their success, and that of the wider political economy – I suggest that the gap in income as secured through work, before state intervention, is an expression of this inequality of power in the workplace. This is something we will revisit on this blog. A brief post-script: @Britmouse contends that the steady growth in average nominal income (after taxes and benefits, I assume, emphasis added) suggests that weak Aggregate Demand is not holding back the economy. I contend that, given the shape of the distribution above – i.e. those with higher marginal propensity to consume experiencing lower income growth than wealthier people – AD is still likely to be a problem. Perhaps I’ve misunderstood, but these data say to me: “raise the income of low-earners, especially the incomes they earn through work, to raise demand and output.” Another post-script: I may have committed any number of errors in calculating the data above, although hopefully none of Reinhardt-Rogoff proportions. I'm happy to share the (publicly available) data and my analysis of it, if anyone asks. That'll be the rule from here on in.