It is a central assumption of modern, democratic economies that economic growth leads to rising living standards for the great majority of people. Now, evidence is emerging that questions that assumption. Median wages in the UK were stagnant from 2003 to 2008 despite GDP growth of 11% in the period. Similar trends are evident in other advanced economies from the US to Germany. For some time, the pay of those in the bottom half of the earnings distribution has failed to track the path of headline economic growth.
If a central goal of government is to secure a new period of rising living standards then these trends point to one of the great economic challenges of our time: the need to restore the link between economic growth and the pay of ordinary working people. That challenge raises a number of immediate questions. Which factors decide whether the pay of ordinary workers rises when the economy grows? How have these factors changed over time in the UK? How have changes in the UK’s industrial make-up affected these trends?
This paper builds on our earlier work by considering these questions in more detail. We use the wages of those in the bottom half of the earnings distribution as a proxy for the earnings of people on low-to-incomes. Our focus is specifically on earnings and the outcomes of the jobs market before the redistribution that is carried out by government through taxes and benefits. As with all of the work of the Commission on Living Standards, our concern is not the immediate fallout from the recent recession but longer term trends.
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