Report on growth and inequality

Yesterday’s Resolution Foundation report on the failure of economic growth to benefit Britons on low and medium incomes, although flawed, is well worth reading. Missing Out by Matthew Whittaker and Lee Savage uses conventional economic analysis to identify the relative winners and losers from economic growth. The report’s headline finding is that:

“In 1977, of every £100 of value generated in the UK economy, workers in the bottom half of the earnings distribution received £16 in the form of wages; by 2010 this share had fallen by a quarter to £12. Workers in the top ten per cent increased their share of value from £12 to £14 over the same period (a 22 per cent rise). The share of the top 1 per cent grew from £2 to £3, a rise of 58 per cent.”

The authors identify three reasons for the fall in the share of the lower paid of which growing wage inequality, accounting for 70% of the shift, is by far the most important. A fall of the share of output going to labour and higher social contributions by employers, such as National Insurance, were the other two factors.

It is important to recognise that real wages for the lower paid have increased by 8% in real terms since 1977 – the fall is relative rather than absolute. In contrast, incomes for the top 10% of the income distribution increased by 22% in real terms.

There are limits to this statistical approach but the results are interesting. Its most obvious weakness is that it tends to muddle the difference between correlations (for instance 70% of the shift in the share of GDP going to the low paid is associated with wage inequality) with genuine explanations.

No doubt many of the commentators on the report will use it to justify their view that economic growth has become an undesirable goal. The report itself argues for a reestablishment of the link between GDP growth and rising incomes for the whole of the population.