Living standards

Gaining from growth: The final report of the Commission on Living Standards

31 October 2012

Millions of households are heading for a long period of stagnant living standards unless bold steps are taken to ensure that growth over the next decade is broadly shared. Even with a return to steady growth, it’s now entirely possible living standards for a large swath of low and middle households will be no higher by 2020 than they were in 2000. Yet actions can be taken to alter this course.

The findings are contained in the final report of the Commission on Living Standards, a broad group of leading employers, trade unionists, economists and heads of parents’ groups brought together by the Resolution Foundation. The report sets out for the first time the full explanation for the challenge now facing low to middle income households, the risk that the benefits of a period of growth could bypass millions of working households, and key recommendations on how to avoid this.

Key findings

The two main motors of rising living standards in the late 20th century – broad-based wage growth and rising female employment – have lost their power. Hourly wages were lagging productivity long before the crisis, and employment among women had reached a lower plateau than in other leading advanced economies. With direct state support for household incomes now severely curtailed by short- and long-term fiscal pressures, past strategies to mitigate these underlying trends in living standards are not sustainable. This makes it worryingly difficult to answer the question: where will future rises in living standards come from? This early lesson from our evidence-gathering sessions struck us as missing from our public debate.
The decline of broad-based wage growth is complex and, to a degree, a global phenomenon, arising from shifts in consumer demand, patterns of trade, and the pace and shape of technological change. But the UK underperforms in key areas. Our chronic failure on intermediate skills and our lack of institutions to get employers engaged in training mean that a large share of the UK workforce simply doesn’t have the skills they need to compete with graduates for 21st-century jobs. A failure to think of new ways to put upward pressure on low and modest pay – over and above the minimum wage – has left millions in a weak bargaining position in the face of new pressures on wages and job security. Both shortcomings tilt the UK towards an economic model in which the quickest route to profit is too often underinvestment in people and pay.
The distribution of employment across an economy owes much to social and cultural preferences but, like the shape of wage growth, is also moulded by policy choices. As things stand in Britain, large numbers of people who could work and who want to work – and who would probably work in some leading economies – stay at home. In our slowness to recognise fully the importance of new frontier pro-employment public services like childcare and social care, and in the inefficient design of our tax and benefit system, the UK has created its own glass ceiling for employment. This waste of productive potential has a direct bearing on living standards.
On our current path, households across the bottom half in 2020 are set to have incomes lower than in 2011. For low and middle income households, we projected income falls of between 3 and 15 per cent compared with their pre-recession peak. If this comes to pass, the 21st century will have begun with two decades of no overall real income growth for low to middle income households. Yet we also saw that a different path for living standards could be possible if the UK can raise its performance on low and intermediate skills, female employment and low pay.

Recommendations

First and foremost, people need better chances to earn a good wage and to progress in the jobs we have today. Longer-term, we must gradually move to a different type of economy, in which the bad jobs we have today get better and in which more good jobs are created. Making this agenda work is perhaps the biggest and most important challenge facing the next generation of policy- makers. It leads directly to some new arguments that we have started to fill out.
While the government must keep pushing on higher education participation, today’s defining challenge on education is the quantity and quality of low and intermediate skills. How can people without degrees gain access to well-paid, fulfilling careers in a polarising 21st-century jobs market? Part of the answer is that intermediate skills need to be so widespread and of sufficient quality that they give large numbers of people without degrees access to professional jobs in knowledge sectors, roles seen today as graduate- only professions. One necessary step in this direction is that our formal education system must, in time, switch its focus from attainment at 16 to the acquisition of intermediate skills by age 18.
Public authorities must also do all they can to upgrade occupations like childcare and care for the elderly, which we know are mass-employing sectors in a maturing economy and ones that are currently dominated by low skilled roles.
In the long run the task is to tilt our economy towards creating a greater proportion of good jobs, changing the mix between sectors and occupations. An important part of both these tasks will be new institutions to combat low pay. We propose building on the success of the National Minimum Wage and the Low Pay Commission through new mechanisms like an “affordable wage”, a push to understand and address the broader drivers of low pay, and new rules on transparency.
On employment, we are clear that securing the macroeconomic conditions for a move back towards full employment is the most important thing a government can do for living standards. But there has been too little discussion about the social infrastructure needed for broad employment in which a higher proportion of parents with dependent age children and older workers find it worthwhile to be economically active. Our nascent childcare system all too often leaves parents barely better off in work and must be expanded. Meanwhile, the costs of our failure to secure a social care settlement fall heavily on workers in their 50s and 60s, who have to stop work early to care for their ageing parents.
For both groups our tax and benefit system aligns poorly with modern preferences for work, giving and taking away money at the wrong times. And for all but a relatively fortunate few, the words part-time and flexible turn out to be synonymous with low paid and insecure, resulting in careers that are thwarted and skills that are wasted. Shaping a jobs market and policy stance that reflects the reality of today’s workforce will be vital to securing future gains in living standards.

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