Someone asked an interesting question at the Institute for Fiscal Studies’ post-Budget briefing yesterday: have we ever seen a squeeze in real earnings like the one we’re currently experiencing?
The question matters because real earnings are one of the most important barometers of the economy’s health. During the post-financial crisis they were squeezed dramatically by a combination of higher inflation and lower earnings growth (“real” in this case simply means wages minus inflation).
I’ve long had a hunch that if you’re looking for a catch-all explanation about why everyone has seemed so, well, pissed off with each other in recent years, the stagnation in real wages might have something to do with it. Think about it: we’ve been accustomed, as a society, to getting richer each year, but in the years after 2008 that unwritten bargain seemed to evaporate. We trod water financially. Now on the one hand economists would say this is preferable to the alternative, higher unemployment. More people kept their jobs following the financial crisis than after other similar recessions, but some of the financial pain manifested in squeezed living standards instead of joblessness. A bruise, not a fracture.
I find it hard, when I observe today’s political climate with all its divisiveness, its culture wars and preponderance of people who refuse to see their opponents’ point of view, not to speculate that it’s partly because the dial of anger and frustration has been turned up a notch by this decade-and-a-bit of economic disappointment.
So I think this chart has a lot to answer for. Indeed, perhaps the most important insight from the Office for Budget Responsibility’s forecasts yesterday (the full document is really, really worth reading in full - it’s perhaps the best synthesis of the state of the economy right now and has great charts) is that this stagnation is likely to continue for another five years or so. See the blue dotted line above. Ugh.
Anyway, that brings us back to that question at the IFS briefing: have we ever seen anything like this before? You might recall a few years ago that the Resolution Foundation said that we were in the midst of the worst period for pay growth since the Napoleonic Wars of the early 1800s. This, like most long-run economic statistics, comes courtesy of an extraordinary spreadsheet available on the Bank of England’s website - the “millennium of data” sheet, which you can find in their dataset collection here.
So I pulled up that spreadsheet, got the series in real earnings and here’s how it looks when you add on the latest OBR projection onto it.
A few things stand out. Most obviously, the fact that if you’re looking all the way back to the Middle Ages, flatness in real earnings might better be thought of as the norm rather than exception. But what’s also very striking is the extent to which the recent plateau really does seem to be quite exceptional. There is no other period that’s anything like it. This really does seem pretty unique.
Making this chart made me wonder though. It’s striking, isn’t it, how many of the major issues we’re facing in the world today, whether economic or political or ecological, can be expressed via very similar looking hockey-stick charts. There’s gross domestic product and if you click here you’ll find that chart. There’s population growth:
There’s carbon emissions:
They all look roughly the same as the chart above, and in some respects (though not all) they are interconnected. More people means more carbon emissions.
Though if you compare total carbon emissions with per capita emissions, as I've done above, actually the chart is significantly more nuanced (I’ve rebased these lines to 1950 which may or may not be the best year, but you get the idea). The fact that emissions per person are flattening may not prevent that global number going up much higher - and that is what matters when it comes to climate change. But it is nonetheless a sign that some of our efforts to cut emissions might actually be working.
However, this isn't just a population story. Many of the hockey sticks are not directly influenced by population. Take, well, the real earnings chart at the top, or, for instnace, GDP per capita. Just as hockey stickish even when you adjust for population.
In so many of these charts, charts which depict some of the most important and sensitive issues we debate today, there is a long period of flat followed by a sharp increase. Those hockey-sticks are often a sign of happy stories: people getting richer or living longer or having fewer children die in childbirth. But they also unnerve people. For many, the world is too populous, too fixated on GDP. There’s little debate now that carbon emissions have contributed to climate change.
In other words, the big dynamic of the coming years is all about taking these hockey-stick lines and trying to flatten them. So should we be cheered or dismayed that one of the hockey-sticks is already flattening of its own accord? If one hockey stick is flattened, do all the rest as well?