The income squeeze

"Have ordinary families become detached from the proceeds of economic growth?" asks Duncan.

The answer, of course, is yes. My chart compares real (equivalized) disposable median incomes to GDP. I think this is the best comparison, as this shows the money in the pocket of the typical "ordinary family". This shows that from 1977 - when these data began to 1995 - household incomes kept pace with GDP. Since then, though, they've fallen behind. Between 2004-05 and 2011-12, median real incomes fell by 4.7% whilst GDP rose 7.5%.

There are some explanations for this - from right and left - which won't do, for example:

 - "The top 1% have grabbed a bigger share of the pie". They have. But their share grew between 1977 and the mid-00s, and this was consistent with median incomes keeping pace with GDP.

 - "Profits have grown at the expense of wages". They haven't. Since 2005, the share of profits in GDP has fallen.

 - "Rising employers' NICs has reduced wages." It's true that the incidence of employers' NICs does fall on wages. But as James says, this is only part of the story. Since 2005, employers' NICs as a share of GDP rose from 7.3 to 9.6%. This isn't big enough to explain the 12.2 percentage point gap between median incomes and GDP growth.

 - "The tax burden has risen." But ONS data show that median income recipients are paying a smaller share of their income in tax than in 2005.

Instead, I'd stress the role of the productivity slowdown. Quite simply, lower productivity has meant lower real wages for those in work. With productivity falling, GDP growth has created jobs rather than higher incomes for ordinary workers.

This poses a problem for the left. We want to increase the bargaining power of "ordinary families", simply because incomes are a function of bargaining power . Doing so, though, runs into two problems, even if we ignore the Marxian point that the state has been captured by capitalists.

The first is that one way in which median incomes kept pace with GDP historically is that "insiders" - incumbent workers - had market power relative to "outsiders" (the unemployed). In the 80s and 90s, incomes for workers rose nicely as productivity rose, but unemployment was high (except during the unsustainable Lawson boom). I'm not sure anyone on the left really wants a return to this.

Secondly, there's another process hurting medianish earners - job polarization, the fact that middling jobs are declining as a share of total employment to the detriment of median earners. Helping middle incomes requires a fight against this technical change, which is tricky.

I don't have much answer here. I fear that a mere economic upswing alone mightn't be sufficient to help workers simply because history suggests that the biggest beneficiaries of the early phase of recovery is profits, not wages. Instead, I agree with Duncan that we need a "progressive supply side policy" - what I've called supply-side socialism. But this isn't on the agenda.

Comments

[Jackart]

My guess is that once the huge changes to the economy work their way through the system, the steady rise in wages will resume its upward path. I can't say how, but it always has in the past, and I have a tendency to disregard anyone saying "it's different this time". This is as true for good news as bad.

But, but, but *reasons*

Yes. But the economy is FAR more complicated than any reason that can be captured in official statistics.

[Luis Enrique]

umm, unless I am missing something the explanation you stress - productivity slow down - still requires some combination of the explanations you say won't do, to be true.

ah - what I might be missing is that your chart doesn't show GDP per worker.

Otherwise, I was thinking, if it was just productivity falling then there wouldn't be a disconnect between GDP per worker and income per worker. A disconnect requires either distributional changes (so median departs from mean) or some other wedge (taxes, profit share). Absent such things, a productivity slow down would cause GDP per worker and median income to move in tandem.

[Luis Enrique]

sloppy, I meant "wouldn't be a disconnect between GDP per worker and median income"

[chris]

@ Jackart - I'm saying it's different now because it has been different. Granted, things might change. But what if a mix of secular stagnation, job polarization hitting the median and continued low wage competition from the far east do continue to depress the bottom half of wages? The idea that things'll be OK in the long-run seems a bit Stalinist to me.
@ Luis: GDP per worker has fallen since the mid-00s:
http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=A4YM&dataset=prdy&table-id=1
This has been exacerbated by job polarization, which has favoured upper deciles over the median.

[andrew]

You seem to be struggling for an answer.

What about raising the educational standard - not just children (that will take ~16 years to work through), but everyone.

i.e. v.v. big subsidies for anyone who wants to learn anything.
If there really is a lot of hidden unemployment, there wont be a big impact on companies.

[Staberinde]

Might there also be a demographic factor in this?

Anecdotally, I'm told that Generation Xers are in short supply. Apparently people my age (38) should be managing and running things and leading things because that's what Boomers did at my age. However, it seems there aren't as many of us around to do this as there were Boomers, so those better paid managerial jobs are effectively hoarded by older cohorts or distributed to younger cohorts at cheaper cost.

So perhaps one reason why the middle is getting less is because there's less of a middle age cohort to get as much?

[SK]

Perhaps we should reduce taxes on income and instead increase taxes on wealth which are currently much lower than the income ones.

A