Running faster just to keep up

In the long term, are we getting richer because pay is rising, or are we simply working harder? That’s the question looked at by some interesting new research from the Brookings Institution. The work compares long-term trends in the wages of US households with changes in the number of hours that households work. It finds that two-parent households in the US now work 26 per cent more hours than they did in 1975 but only earn 23 percent more in wages.  In other words, the only reason America’s households are richer than they were a generation ago is that they’re working much harder.

The findings point to one of the most serious economic challenges now facing advanced economies.  Day to day, our headlines may be filled by the politics of debt and the anxieties of bond traders, but beneath the hubbub is a deep hum of discontent that long-predates the bad times.  It’s now well known that ordinary workers in the US have been missing out on the gains of economic growth for a generation. Long gone are the days when productivity gains flowed through into appreciable rises in real hourly wages for middle-class American workers.

Yet as the Brookings work shows, these trends in wages have run alongside another great trend: the entrance of women into the labour market as a key driver of increased working hours.  In fact, since 1975 the average hours worked by American men have hardly changed while the average number of hours worked by women has doubled. That’s kept household earnings moving upwards even while individual earnings have flat-lined.

More recently, though, as women’s participation rates have neared those of men, the pace of growth has slowed. The strategy of raising household income by working harder has been running out of road.

As Gavin Kelly and I set out in Prospect earlier in the year, the UK economy now shows some worrying similarities to this American story.  On the whole, wages in the UK had stopped rising long before the recent recession, with median wages flat even in the boom years of 2003 to 2008.  And, just as in the US, the powerful force of women’s work is also petering out. From 1980 to 1990 the UK female participation rate rose by eight percentage points; in the ten years from 2000 to 2010 it rose only one percentage point. Further rises may prove even harder fought.

This all raises one challenge in particular for policymakers: if we want to back households in raising their own living standards, we need to strain every sinew of government to make it easier for parents to work. A recent study by the OECD showed that childcare is at the heart of that challenge. It shows that an average second earner in the UK now faces a ‘tax rate’ of around 27 per cent when they enter work, as a result of lost income from taxes and withdrawn benefits.  But once childcare costs are included, that tax rate rises to 68 per cent—a much worse figure in the UK, where childcare costs are sky high, than the OECD average of 52 per cent.

The hard truth is that future rises in living standards are likely to rely heavily on our ability—as households—to work harder. In that light, the government’s decision to reduce support for childcare costs, and plans to make further cuts through the universal credit, seems incredibly short-sighted. There has hardly been a worse time to make it tougher for parents to raise their living standards through work.

James Plunkett is Secretary to Commission on Living Standards at the Resolution Foundation and is on twitter at http://twitter.com/#!/jamestplunkett