One of the features of the credit crunch era has been the feeling that we as individuals have not done as well as the aggregate official statistics tell us. One way of looking into that is to note that GDP per capita or person has underperformed the GDP figures during this time.
GDP per head is now 1.8% above the pre-downturn peak in Quarter 1 (Jan to Mar) 2008, having surpassed it in Quarter 4 2015…..
This contrasts with 8.6% above on the overall GDP numbers and it surpassed its previous peak in Quarter 4 2013. That was a change because as we ran into the credit crunch the per person number was doing better that the total.
Another way of looking at this is to examine the pattern of real wages. Even according to the official data ( which uses the CPI measure of inflation that ignores owner-occupied housing) real wages went negative in the middle of 2008 and did not return to positive territory until near the end of 2014. Whilst the improvement was welcome the worrying part was that it was much more to do with a lower level of recorded consumer inflation than any improvement in wage growth. This of course is concerning at a time when we are expecting higher inflation this year the theme of which was reinforced by the fact that inflation in Germany has reached 2.2% and even worse for living standards it was driven by rises in prices for two absolute essentials which are energy and food. But looking back real wages posted negative year on year changes for 25 quarters which contrasts with a general increase of 2% per annum before the credit crunch era. The UK statisticians have done a specific calculation for 2002-07 and it in fact averaged 1.9%.
The Institute for Fiscal Studies has looked into these and suggested this today.
As is now well documented, incomes in the UK fell sharply in the immediate wake of the Great Recession, and have recovered only slowly since. The latest available data show real median income in 2014–15 just 2.2% above its 2007–08 level. This poor performance is largely due to wages (and ultimately productivity) – the large falls in real wages that characterised the recent recession and the weakness of real pay growth since.
In fact the numbers are boosted by pensioner’s incomes which we know have been boosted by the triple lock on the basic state pension for example. The picture deteriorates if we exclude that.
among the rest of the population, average incomes were essentially the same in 2014–15 as back in 2007–08.
They use 2014-15 because the official data has only reached there but they use other data to tell us where we are now and here it is.
The Labour Force Survey (LFS) indicates employment growth of around 1.6% in both 2015–16 and 2016–17. LFS earnings data suggest a 2.4% real rise in average earnings in 2015–16, but available LFS data for 2016–17 combined with the OBR forecast suggest that real earnings growth has slowed to 0.6% in 2016–17, thanks to both weaker nominal earnings growth and higher inflation. Taking these together, we project growth of 3.4% in real median income between 2014–15 and 2016–17.
So since the credit crunch hit real median incomes have risen by 1%, please do not spend it all at once! As we look forwards the picture is for more of the same.
The net effect of all these changes in earnings, employment and benefits is that in our central scenario, real median income is essentially unchanged for two years between 2016–17 and 2018–19.
So we remain on what is in essence a road to nowhere. I will go further and say that the experience has depended much more on what inflation has done than wage growth. When inflation falls we get real wage growth and when it rises we do not and if it is goes further we get falls. By contrast wage growth has not responded much to either the rise in employment or fall in unemployment meaning that the output gap style theories so clung to by the Ivory Towers and the Bank of England have yet another problem with reality.
Looking forwards to 2021
There is an obvious click bait element in projecting this to 2021 but there is a large catch which is that the work uses the forecasts of the OBR or Office of Budget Responsibility. Regular readers will be aware that the first rule of OBR club is that it is always wrong. So please take more than a pinch of salt with this and maybe the whole cellar.
Beyond that, the steady rise in real earnings growth forecast by the OBR, and the (assumed) ending of the working-age benefit freeze in 2020–21, push up real median income growth for the last three years of the projection to an annual average of 1.2%. Taking the seven years from 2014–15 to 2021–22 as a whole, real median income grows by an average of 1.0% per year in our central projection – a cumulative increase of 7.4%.
Something else is then added which is to assume that the credit crunch had not happened and project the trend before it forwards. This has the problem it ignores the fact that it was an unsustainable boom but even so a little light is shed.
The falls in median income after the recessions of the early 1980s and early 1990s took it 8% and 9% respectively below its long-run trend up to that point. In our central projection, as outlined above, median income in 2021–22 is 18% below its long-run trend.
Some of you may be wondering about the number below?
Median income among pensioners, however, was 11% higher in 2014–15 than in 2007–08.
Actually there is a core existing group of pensioners who have not done so well but they have been joined by something of a golden generation who seem to have done rather well. The obvious examples that spring to mind are Baron King of Lothbury with his ~£8 million pension pot and Professor Sir Charlie Bean with his ~£3.5 million one ( although as ChrisL points out in the comments below they would affect an average measure more than a median one). Plus of course they have been handed post retirement jobs.
There is some fascinating analysis of this which departs from the official claims in two ways as shown below.
However, in this report, we follow the HBAI methodology in deflating BHC and AHC incomes using different (appropriate) variants of the CPI. BHC incomes are deflated using a variant that includes mortgage interest payments (MIPs), dwellings insurance and ground rent, while AHC incomes are deflated using a variant of CPI that excludes rent. ( BHC = Before Housing Costs and AHC = After Housing Costs).
CPI does not have mortgage interest payments although in my opinion it should have both them and house prices. So maybe my influence has reached the IFS! Even more so when they exclude the rent which of course we are told will be used to measure owner-occupied housing costs as part of CPIH in a week and a bit.
As ever we find that once we look below the headline data the situation deteriorates for the ordinary person. The “lost decade” principle appears as we note that there must be more than a few people who have real incomes less than ten years ago although most have gained a little if not much. As we break the groups down we see that those who have been retiring recently have been something of a golden generation which looks unlikely to be repeated.
So small gains which sets the tempo for now although there are dangers of a dip as inflation rises. If we are lucky we will arrive in the next decade having gained a little bit more but with the rider that economic life regarding wages and incomes is far from what it was.