Taxes rise and fall, while wages flatline for 100 years

Morning all,

They say a week is a long time in politics. Let me tell you – it can be a long time in think-tanks too. TOTC readers will be familiar with Torsten’s tirades against anti-politics over the years, and those sentiments have followed their logical conclusion as he seeks elected office. We wish him well, and will miss him much at RF.

But the show goes on. I’m stepping in as Interim Chief Executive and taking over TOTC. I can’t replicate Torsten’s unique style, but producing TOTC is a team effort at RF, and I hope you’ll stay around to enjoy the research that we love finding and digesting ourselves. We’d appreciate any feedback as the TOTC baton is passed on.

On to the election…One of the best things about them is that the issues that us wonks love to talk about all the time – from housing policy, to wage trends and inequality – suddenly become part of the national conversation. But one of the worst things is that that debate is often light on detail, nuance and honesty. To address this, we’ve picked reads that dive deeper into some of the issues that are likely to crop up during the campaign.

All the best,

Mike Brewer

Interim Chief Executive
Resolution Foundation

Comprehending controls. Mentioning rent controls in front of economists is a sure-fire way to split a room. Opinions are… mixed. Do they reduce costs? Or do they lower housing quality, and impede mobility? The highly contentious answers seem to depend largely on who you follow on X/Twitter. Luckily, someone has sifted through mountains of research to give us some answers. This near comprehensive lit review considers 112 studies, ranging from 1967 to 2023, and covering multiple continents, although this does mean looking at different forms of rent controls in very different institutional settings. The good news is that introducing some form of rent control policy does tend to reduce rents in homes where the control is in effect and increase homeownership. I’m afraid there’s bad news too – rent controls raise rents in uncontrolled units, lowers housing quality and quantity, and increases spatial misallocation (as in, it creates incentives for people to live in places that are under-supplied with housing). So, after all that, the jury is still out.

Wavering wages. We love a bit of history at TOTC and this paper takes us back to the eighteenth century, with a look at wage patterns at the time. Surprisingly (at least to economists), the period saw nominal wages in certain occupations and locations staying *exactly* the same across a *hundred-year period*. Now, I know that on some measures Britain has just experienced the longest pay squeeze since the Napoleonic wars, but that is in real rather than nominal terms, and is a mere 16 years long. How on earth can wages be frozen in cash terms for a century? The authors note how labour market frictions gave employers the ability to post non-negotiable wage offers. Essentially, this was a time period marked by monopsony power – where employers held all the cards. Economists today still worry about monopsony power, but these days it’s more employer coercion – such as workers being forced to accept zero-hours contracts for a lack of alternative job options (which is where regulation can help level the playing field…). I doubt any firm could manage another 100-year wage freeze.

Damaging deprivation. The best data is longitudinal data, which lets you analyse changes to a cohort over time. I love it, and I love this new paper that examines whether where you’re born affects your need for hospital care through childhood, and costs the difference. The authors identify just over half a million babies born in 2003-04, and track their outpatient and emergency department attendance up to the age of 15. They found children born in the most deprived areas of the country used more hospital services, especially during the first year after birth. Another reason to reduce spatial inequalities, as if we needed one…

Average AI. I know some of you might be sick to death of all the AI chat bounding around the policy world, but when Daron Acemoglu writes, economists tend to read. And so I turn to his new paper titled “the simple macroeconomics of AI”. Now, there certainly isn’t anything simple in his paper, which concludes that the macroeconomic effects of AI will be modest, not greater than a 0.71 per cent increase in total factor productivity over 10 years. That’s one in the eye for the tech bros. When it comes to wage inequality, Acemoglu predicts that AI may increase rather than reduce inequality. So far so familiar, but he then qualifies this by saying that AI is unlikely to increase inequality by as much as other automation technologies have done, since its impact is felt more evenly across all demographic groups. In a world of endless AI evangelism and nihilism, it’s this kind of nuanced argument that really cuts through.

Pondering policies. Have you lost track of the policy commitments made by different parties already? Fear not, Public First have produced this handy-dandy campaign policy tracker to keep you straight. Plus it can double up as a bingo card for use during TV debates. But you didn’t hear that from me.

Chart of the week

This week’s election row has mainly centred around tax – will taxes go up or down under this party or that one? And did the Johnson-Truss-Sunak Government put taxes up or cut them? As Chart of the Week, taken from our latest General Election 24 briefing published tomorrow shows, there are different legitimate ways of approaching that last question. If we take a macro view of tax over the past 50 years, we can see that the UK’s tax to GDP ratio has been broadly stable for most of that period – falling in the 1980s, rising in the 1990s – before rising again in recent years to reach a record level (the highest since the 1940s in fact, although still lower than almost all northern and western European countries). But at the same time, the average tax rate on a typical salary has fallen consistently, and has never been lower. What explains the divergence? First, while basic payroll taxes have fallen, others like VAT and corporation tax have risen. Second, the higher income inequality that we’ve been living with since the 1980s, together with some more recent tax rises at the top, means that our progressive income tax system collects a much larger share of tax from the rich. There’s lots more in our report tomorrow, and you can read all our General Election 24 briefings here.