27 May 2011

Britain’s economic emergency: flatlining living standards and low-skilled men

There is an economic emergency among Britain’s low skilled men, which political classes haven’t noticed, or don’t care about. That was my gut reaction as I chaired the launch of an impressive new report from Britain’s sparkiest new think tank, the Resolution Foundation.

The report, Growth without Gain? is a scene setter outlining some startling trends in the AngloSaxon economies. The central graph shows that since the mid 1970s, the stellar growth in The US economy has completely failed to drag up median male income. I reproduce it below:

That is an established trend. The issue is you can begin to sniff something similar in Britain, particularly over the past half decade, something likely to continue for another half decade. It isn’t something that is inherent to Western economies. All this is detailed in the report.

You could call this the Great Stagnation, you could call it the Disastrous Decoupling, you could call it Growth without Gain. What it definitely is, though, is deeply bad news for a massive swathe of Britain.

There’s obviously more than one reason. Technological change might be blamed, in shifting the demand for low-skilled labour relative to high skilled. Trade too would explain some of this. Immigration has to be considered: as we discovered with yesterday’s ONS analysis, 20% of low skill jobs are now filled by migrants versus 9% in 2002. You could blame the decline in union collective bargaining. It could be painted as utterly inherent of modern day capitalism.

So the question is: “should we do anything about it?” Britain’s political theology for the past 30 years would suggest not. The existence of low pay in and of itself should not be seen as a problem. As long as there is churn in these numbers and the low paid can become high paid, and absolutely people are becoming better off, it’s all fine, innit?

So what could be done about it? Here is one massive structural problem in UK politics. The solution to issues like this has been seen by both main parties as fundamentally fiscal. If you are Labour it has been about a series of incorrigible, complex tax credits that enable backdoor redistribution that won’t wash with the Daily Mail. If you are Conservative, the answer to this problem will be about soon to be delivered tax cuts via raising the income tax allowance.

It is an approach driven by income distribution decile tables. It is an approach that says nothing about the structure of the economy. In fact it assumes that Government has no role in delivering an economy that delivers for the mass of Britons. That’s not how it works in many of the currently more successful growing economies in the world.

A Labour strategy for dealing with this might stress the social return for massive make work schemes. A Tory strategy could argue that money spent augmenting low incomes through the benefits system would be better spent encouraging mass sustainable job growth. Maybe immigration is having an impact here. Perhaps you could oblige the totemic Polish plumber to take on a British apprentice?

Consciously or not, this problem was masked in Britain by the superabundance of credit, artificially inflating people’s perceived living standards. My guess is that the Coalition will argue that raising the income tax threshold solves these problems.

I throw these ideas out there because I do not have the answers. But I do fear the right questions aren’t being asked.

And this report begins to show why.

Another important issue is how little we know about what is happening in the economy, our economic ignorance, as recently reflected upon by the Bank of England’s chief economist. More on that in another blog. But if, like me, you could feel that something didn’t smell right in the engine of the UK economy between 2002 and 2007, then this report begins to take you under the engine hood.