Five decades of household income growth… and what might be in store for the 2020s

Data released yesterday on household incomes confirms what we’ve known for a while – the 2010s was a decade of chronic income stagnation.

Median weekly disposable household income in Scotland in 2018/19 was £514 – identical to the figure for the UK. But income growth since 2009/10 has averaged just 0.3 per cent per annum.

Its hard to find good news, although most measures of income inequality have not tended to increase further (from their already relatively high level) -– incomes have stagnated for everyone. Clutching at straws even further, poverty has not increased as much has some had anticipated (17% of the Scottish population live in relative before housing cost poverty, rising to 19% after housing costs). But this largely just reflects the fact that earnings growth has been so weak that the impact of working age benefit cuts has not increased ‘relative’ poverty by as much as many had anticipated, rather than being a triumph of policy.

If the 2010s are the decade of stagnation for all, the 2000s was the decade of robust, evenly distributed income growth (the chart shows average annual real terms income growth for each quintile of the income distribution) The 1990s was also a decade of robust incomes growth, but those at the top of the distribution did better than the rest. The 1980s was the decade of extremely unequal income growth. The 1970s was characterised by evenly distributed but weak household income growth for the UK – although it was relatively better for Scotland (see chart).

quintile growth chart

If each decades’ trends in household income growth in can be ascribed a simplistic byline, how will we refer to the 2020s in years to come?

Like a doctor supporting a critically ill patient by inducing them unconsciousness to prevent further damage, the government has induced the economy into a major recession to mitigate the deleterious impacts of coronavirus on health and the NHS. Economic life support is being administered in the form of wage/income replacement and increases to benefit rates.

It is hard to avoid the conclusion that the immediate impact of these containment measures will be a sharp fall in household incomes and an increase in inequality. Evidence suggests that unemployment is increasing sharply. For some employers, the outlook appears so bleak that even a commitment by government to cover 80% of wage costs will not be sufficient to justify the costs of staff retention. Meanwhile many workers are experiencing cuts to hours worked, and many self-employed have seen demand for their activities abruptly stop.

And the jobs that are most resilient to the economic shutdown – jobs where working from home is reasonably sustainable, and jobs in the public sector – tend to be higher paid than many of those that are more exposed to the crisis (see chart). There are plenty of exceptions of course – jobs in caring, cleaning, driving and some retail will remain in high demand. But the general observation seems difficult to deny.

public sector workers

 

So the short-term impacts on incomes and inequality are likely to be substantial. At the moment it is difficult to know how long the containment measures might remain in place. But it seems likely that restrictions will be lifted gradually, so that even if we are on the downward part of the health crisis by summer, activity in some sectors, particularly leisure and hospitality, may remain subdued for a year or more.

Whilst the government is doing a lot to ensure that businesses remain viable and workers remain attached to the labour market, significant labour market detachment is nonetheless likely. And whatever happens, businesses profits are going to take an unprecedented hit potentially blowing a hole in investment plans for many years to come. The combination of these factors means we could see a weak (and unevenly felt) recovery.

As we transition into the recovery stage, much of the impact on household incomes will depend on the policy response. After the financial crisis of 2008/9, the government withdrew the fiscal stimulus rapidly, moving quickly to the austerity phase which stymied the recovery. Big cuts to public investment reduced prospects for economic recovery, whilst freezes in benefits and public sector pay weakened household income growth.

It will therefore be important that the life support the government is providing the economy is not withdrawn too quickly once we move into the economic recovery phase. Fiscal policy to support demand will need to be in place to support the recovery to enable businesses to get back on their feet and to kick-start the growth and investment cycle. And the enhanced welfare support is likely to need to remain in place if the recovery phase does not lead to widening disparities between those in more and less affect economic sectors. There’ll also need to be a revisiting of training and active labour market policy, the funding of which has been decimated in recent years.

It is clearly too early to know how we’ll summarise the fortunes of household income growth in the 2020s. Perhaps it’ll be known has the decade of renewal, or recalibration. Or perhaps it will be the decade of stagnation 2.0. Time will tell.

Authors

The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.

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