Real typical household disposable income growth for working age families fell to 0.7% a year in the 15 years leading up to the Covid-19 pandemic, leaving households, especially those in rented accommodation and with young children, brutally exposed to the current cost-of-living crisis, according to new research published today (Monday) by the Resolution Foundation.
The Foundation’s 14th annual Living Standards Audit examines household incomes in Britain during the last few decades, what drove periods of growth and stagnation, and the lessons that must be learnt if Britain is to return to greater income growth in the decade ahead.
Low income growth in Britain has a major influence on households’ ability to cope with the cost-of-living problem, the authors conclude.
Too many families today have low discretionary incomes, little or no private savings (one-quarter have less than a month’s buffer), and an inadequate social security safety net (basic unemployment support is now down to just 13 per cent of average pay, its lowest level on record).
The study highlights Britain’s living standards decline. Non-pensioner family earnings rose 2.3% per year, or 25% per decade, between 1961 and 2004-05. Average income growth dropped to 0.7% between 2004-05 and 2019-20.
Even more strikingly, the lowest fifth of the population had no greater earnings on the eve of the pandemic than in 2004-05, despite GDP per person expanding by 12% during this period.
The analysis finds Britain has poor growth and substantial economic inequality.
The Gini index rose 13 percentage points between 1978 and 1992, but successive governments have failed to lessen inequality since then. Five of the ten most unequal years on record have occurred since 2013-14.
The authors claim weak growth and rising inequality have exposed some groups to the cost-of-living crisis more than others.
On the eve of the pandemic, social and private leased households’ incomes were 37% and 24% below average. Single parents had 35% lower salaries, while children under 5 had 20% lower incomes.
Couples without children (33% higher), mortgagors (27% higher), those 55-60 (19% higher), and those in the South East of England had salaries well above the general median (12 per cent higher).
The research says salary is driving Britain’s falling living standards. Typical salaries remain the same as they were before the financial crisis, reflecting a salary loss of £9,200 per year.
Despite claims that economic growth doesn’t affect living standards, sluggish growth is behind Britain’s wage drop. Productivity, wage, and income growth have typically tracked each other in recent years.
Employment and hours also affect income growth, and Britain’s recent job growth has benefitted low-income households.
The report finds that between 2007-08 and 2019-20, the employment rate rose by 6 percentage points among the poorest half of the working-age population, compared to 2 percentage points among the richest half, and that the proportion of working-age households with no earnings fell by 6 percentage points to 15%.
Pay and productivity are not the only drivers of disposable income growth – Britain has low direct tax rates compared to other advanced economies, and rents as a share of income are high – but it will be impossible for Britain to turn around its recent record of low growth and high inequality without stronger, productivity-led economic growth.
Stronger income growth would help households enjoy greater living standards in good times and safeguard them in bad.
Adam Corlett, Principal Economist at the Resolution Foundation, said: “Households across Britain – and across many other countries – are currently grappling with high levels of inflation that we haven’t seen for generations.
“But while many of the causes of the current crisis are global in nature, it is Britain’s recent history of low income growth and high inequality that has left so many households really struggling to cope.
“Britain’s poor recent record on living standards – notably the complete collapse of income growth for poor households over the past 20 years – must be turned around in the decade ahead.
“To do that, we must address our failure to raise pay and productivity levels, strengthen our social safety net, reduce housing costs and build on what we’ve done well – such as boosting employment for lower-income households.”