Sunday, 2 February 2014

Living standards and economic growth; a depressing tango

At the risk of sounding like an anally retentive stat obsessive, I found some interesting figures about real wage growth in Britain, or its absence, on Saturday and put them together with statistics on GDP growth (alright I admit I’ve got a problem but it’s one way to spend your weekend).

Both sets of figures are from the Office for National Statistics. Real wages mean the increase or decrease in the value of wages taking account of the effect of inflation.

UK GDP growth %
UK real wage increase %

What’s interesting is that wage growth, and now wage decline, has tracked GDP quite closely, and GDP has fallen substantially since the end of the ‘80s and since the ‘60s. According to ONS figures, annual growth in Britain averaged 3.27% from 1960 to 1970. The figures are quite kind to Margaret Thatcher, it should be said, since the second Thatcherite recession began in the first quarter of 1990 when she was still Prime Minister.

The drop in the increase in wages was very definitely apparent in the 1990s and 2000s when virtually no-one thought there was a problem. Now there is wage decline, an awful lot of people have noticed the problem. The conventional liberal-left explanation is that Thatcher’s war on the unions and the decline in collective bargaining has belatedly fed through to how well employees are paid. I’m sure this is a factor – the precipitous drop in real wage increases from the 1980s to the 1990s, has doubtless a lot to do with the “Thatcher effect”. But that is not the whole story. Wages have faltered as growth has declined. Frances O’Grady, general secretary of trade union representative body, the TUC, said in response to the wage figures that “average pay rises have been getting weaker in every decade since the 1980s, despite increases in productivity, growth and profits”. But productivity and growth have also been getting weaker. I believe there is hardly any chance of the UK economy turning things around and returning to the growth levels of ‘60s, ‘70s or ‘80s. In those circumstances, real wages will either continue to decline or, at best, show slight increases.

The figures are evidence of an economic system in decline and the prospects for most people, while TINA is securely ensconced in the political consciousness, are not enticing. Consumer debt, which has trebled since the early ‘90s in the context of faltering wage growth, is likely to grow even larger, leading to further economic tremors.


  1. Interesting, but an international comparison would be revealing too. Can any developed economy replicate the sorts of growth figures we saw in the 60s-80s? Also, if you are wanting to flex your newly found stats muscles, listen to last night's More or Less on Radio 4
    They looked at exactly the same issue of recent real wage growth and showed you can get different a picture to suit your political hue depending on which years you compare, whether you use RPI vs CPI and whether you use post or pre-tax earnings. Can't remember which way around though!

    1. Thanks for the comment. I'd like to do an international comparison but figures aren't easy to come by. I imagine Japan could definitely exceed the 60s and 70s figures and probably the 80s, but since then growth has disappeared. I did some figures based on 'Angus Maddison' data which showed growth being higher in every region of the world between 1950 and 1973 compared with 1973 and 2008. On real wages, yes I'm aware that there is a difference between RPI and CPI but given that the ONS must be using the same measure (RPI presumably) the drop is undeniable even if the actual level of wages may be higher (or it may not). Isn't a bit like crime stats - people argue that the British Crime Survey underestimates crime, and that may be true, but it still shows a significant drop in crime since the mid-1990s and the its calculation method hasn't changed?

  2. I did get round to listening to the Radio 4 More or Less programme, ta for the link. They basically say that to make things look as bad as possible you'd choose the Retail Price Index and wages before tax and conversely to make things look as rosy as possible, use the Consumer Price Index and look at wages after tax. I looked at what the Office for National Statistics use and they use CPI and pre-tax wages and found that between 2009 and April 2013, real wages dropped by 8.5% -

    On pre and post tax, I think that's a can of worms, because how do you factor in the stonking great rises in VAT that the Tories always introduce? Because that tax only kicks in when people start spending money.

    I would say that in the above post I was looking at long-term trends not trying to fight some party political battle about what has or has not happened after April 2010