Income gap is set to grow – leaving low and middle earners further behind
Yesterday Labour leader Ed Miliband made a renewed pledge to give greater priority to Britain’s ‘low and middle income families’. This follows Bank of England Governor Mervyn King’s recent warning that real take-home pay has been stagnant for the last six years (pdf).
But there is nothing new about such a squeeze. Since the end of the 1970s, living standards for most of the workforce have fallen behind increases in wider prosperity. The winners have been the very rich and high-paid professionals. The losers have been those on low and middle incomes, especially those of working age.
There are three main reasons:
- First, unemployment has risen from an average of 1.6 per cent in the 25 years from 1950 to an average of 7.8 per cent between 1979 and 2009.
- Second, the share of economic output that goes to wages shrunk from a high of 65 per cent in the mid-1970s to close to 53 per cent in 2008 (pdf).
- Third, the earnings gap has become much wider. While real earnings for those near the top doubled in the three decades to 2008, earnings in the middle rose by only a half – and earnings for those close to the bottom rose by a mere quarter. As a result, the proportion working on low pay has almost doubled from 12 per cent in 1977 to over 22 per cent today.
This income squeeze accounts for two key trends in the last three decades. First, a doubling in the level of poverty. Second, an increase in the numbers of what US sociologist Katherine Newman calls the ‘near-poor’: a group sitting above the poverty line, but neither comfortable nor secure.
Labour took some measures to mitigate these trends. The introduction of the minimum wage and the system of tax credits built a stronger floor at the bottom. But these measures did little more than hold the line. Poverty fell a little on Labour’s watch, while inequality rose slightly. This was only achieved by much higher levels of spending on benefits. Incomes, pre- and post-tax, in contrast, rose much more sharply for those at the top.
Now, with a fragile employment outlook and rising inflation, real wages are likely to do little better than stagnate even when sustained recovery arrives. The income gap is set to widen further.
Stewart Lansley is the author of Unfair to Middling, TUC Economic Report, 2009
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