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The chart below neatly sums up the problem. It shows trends in median wages in Britain in the past 30 years and sets out two reasonable possibilities for what will happen next. It carries two
important lessons. The first is that anyone in Britain who’s suddenly worried about a lost decade is a little late to the party. As the dotted black line shows, even under the OBR’s
March projections, a decade of no wage growth was already all but certain. The question for politicians now is whether we can avoid another one.
The second lesson speaks directly to the question of what the ‘new normal’ looks like when growth finally returns. The chart shows two scenarios for wages going forwards, both based on
what happened in past periods of economic growth. The green line is the good outcome, based on a return to the kind of growth we saw in the 1980s and 1990s. In those years, while the economy
expanded, median wages rose by 1.9 per cent a year in real terms making people much better off. If the same happens this time around, pay will rise back to its pre-recession peak before the end of
the decade.
But the red line shows another reasonable alternative based on the kind of GDP growth we saw in the UK’s most recent period of expansion, from 2002 to 2008. In these six years, even while the British economy boomed, median pay rose by just 0.1 per cent a year. A return to this would leave pay no higher in 2020 than it was in 2001 – in other words, nearly 20 years of no wage growth. That would put Britain’s households on course for a generation-long period of American-style stagnation.
The point isn’t that the immediate prospects for UK GDP are gloomy – we all know that. The point is that, even when the prospects for UK GDP look much better, future trends for living standards still look highly uncertain. Today, in London, the Resolution Foundation is hosting a summit of leading economists from the US and UK to talk about this missing part of the debate. Coffee House’s own Pete Hoskin will be in the audience, so you may hear more from him later.
James Plunkett is Secretary to Commission on Living Standards at the Resolution Foundation.
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