Good sense from Osborne
The Chancellor has just delivered a thoughtful speech to the American Enterprise Institute in Washington. I thought this section, rebutting Ed Miliband’s “broken link” and “hollowed out middle” theses, was clear and persuasive:
I believe that if we reward hard work and support people’s aspirations to provide a better life for their family then there is no limit to what human enterprise can achieve.
I bring this same optimism to the second of today’s pessimistic predictions – that even if growth is sustained the benefits will accrue to the few not the many.
This prediction – that the link between living standards and economic growth has broken – also leads its proponents to the same prescription: more government spending on welfare and the costs of economic dependency.
But it too can be proved wrong if we follow a different approach.
To begin with it is not well supported by the facts.
As Greg Mankiw has pointed out for the US, on a superficial reading the data appears to show that real median incomes grew by only 3% over the entire period from 1979 to 2007. That sounds like there is a big problem.
But in fact once you take account of changes in household composition, lower taxes, healthcare benefits and other forms of remuneration then that number turns into a 37% real terms increase.
Of course that’s not to say that inequality doesn’t matter – it does.
The Great Recession made our countries poorer and times have been difficult for British and American families.
But in the UK the evidence shows that growth supports rising living standards.
Recent work by academics at the London School of Economics and our own analysis at the Treasury has found no evidence that employee compensation has become detached from GDP growth in recent decades.
Previous results that appear to show a break disappear once you take account of rising pension contributions and payroll taxes.
That is one reason why the labour share of national income in the UK has stayed constant over the last decade.
Nor does the evidence support the so-called “hollowing out” hypothesis in the UK – the idea that middle-skill and middle-income jobs are disappearing with most of the growth in employment either at the top or the bottom of the distribution.
While some traditional mid-level occupations have shrunk or moved down the income scale, new ones have been created to take their place.
So we have fewer middle-paid production line and secretarial jobs, but a lot more middle-paid jobs in IT and professional services.
Overall there has been little change in the proportion of people in middle-income jobs in recent years.
And after rising during the industrial restructuring of the 1980s, as it did in many countries, the level of inequality in the UK has been fairly constant for two decades, and according to the latest data is at its lowest level since 1986.
The only consolation Miliband can take from this is that at least George Osborne feels he has to devote a large part of an important speech abroad to demolishing his analysis.
Ed Miliband: setting the agenda.Tagged in: economics, ed miliband, equality, george osborne, inequality
Latest from Independent journalists on Twitter