A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mo
Last week the team came across some remarkable data. The Oxford economist Max Roser estimates that in 1820 more than 90% of the world’s population lived in extreme, absolute poverty, defined as living on less than $2 per day in today’s money. By 1981 this had fallen to 44% of the world’s population. Today it stands at less than 10% of the world’s population.
On this admittedly low standard, world poverty has reduced by three-quarters in less than three decades, and against a background of a 67% rise in the world’s population. This is impressive. It took the UK a century, from the 1820s to the 1920s, to achieve the same degree of poverty reduction.
Yet averages conceal wide variations. In the last 40 years people in emerging economies, and the world’s richest people, have seen the fastest growth in income. By and large incomes for those on middle to lower wages in Western economies have grown more slowly.
Nowhere is this more apparent than in the US. There, strong growth – the US economy grew by 165% between 1980 and now – has been distributed unevenly across households and types of workers.
Median US household incomes – which include wages, investment income and welfare benefits – grew in real terms between the end of the Second World War to the late 1990s. Household incomes fell in the wake of the global financial crisis and it wasn’t until last year that they inched above where they were in 1999. So real incomes for a household in the middle of the distribution – the one that can reasonably claim to be typical of America – have scarcely risen in 18 years.
Richer households have done better. They hold financial assets, such as equities and pensions, which have done well in recent years. Such households also tend to have the skills and education which are at a premium in the labour market.
Things have been hard for lower income households. They have neither the assets nor the skills of those higher up the income scale. Technological change, globalisation and a growing premium on education have squeezed pay for unskilled workers. For someone without a high school diploma real hourly pay is a staggering 24% lower today than it was in 1979.
Gender offers another lens. For full time male workers median annual pay fell 3.0% last year to $52,146. After adjusting for inflation men earned more than that in 1973 – $55,317. So men on middle incomes have seen their pay stagnate over 45 years. For reasons which are not clear, men have also been withdrawing from the labour market, with male participation rates lower than at any time since records began in 1950. This has put an additional dampener on household incomes.
By contrast, women’s median earnings have risen since the sixties (although they remain lower than that of men). This has helped offset the pressure on households from weakness in the pay of middle, lower paid and less skilled male workers. Legal and social change has narrowed the gap between men and women’s pay and a shift in the structure of the economy has increased women’s role in the labour force.
The story of wage and income growth is nuanced, far more so than growth in GDP or average earnings might suggest. For some groups economic growth is not translating into personal prosperity. This not a new phenomenon; for those without a college degree, or middle income men, it predates the financial crisis by more than three decades.
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In the nineteenth and twentieth centuries, American growth transformed the material condition of the mass of its population. From generation to generation, life got better. By 1940, 90% of 30-year-olds were earning more than their parents were at that age. It is a sobering thought that today just half of American 30-year-olds earn more than their parents did at the same age. For some, the up escalator of rising prosperity seems to have ground to a halt.