The latest employment figures out his week for both the US and the UK look great on the surface. In the US, the official unemployment rate is down to 4.5%, not far from the last low at the end of hi-tech boom in 2000 of 3.8%. And the employment to population ratio is picking up, although still well below the peak of 2000.
In the UK, the story is similar. UK unemployment rate held at an almost 12-year low of 4.7% in February 2017. And the employment rate stood at an all-time high of 74.6%.
However, it is not the same story for average real incomes and living standards. Most of these new jobs are low-paid, temporary and/or part-time. As a result, growth in weekly earnings is not racing up with employment. US average hourly earnings are rising at about 2.4% a year compared to average price inflation of 2.7%. So average real incomes are not rising at all.
In the UK, it’s the same story again. Average weekly earnings for employees in nominal terms increased by 2.3% compared with a year earlier. And guess what, inflation is rising at the same rate. So average real earnings are flat. Real pay growth fell to 0.1 per cent in the three months to February. The Resolution Foundation notes that pay is already falling in nine sectors of the UK economy, including accommodation and food services, transport, finance and the public sector. Together these sectors for account for 40% of the workforce.
Some time ago, I discussed in a post the concept of what has been called the misery index. This was an attempt to measure the overall economic well-being of people by adding together the unemployment rate and the inflation rate.
This was not a bad measure of misery when inflation was a big issue and attempts to drive it down would often lead to rising unemployment – or so the dilemma of Keynesian versus monetarist economic policy was posed. However, inflation rates slowed steadily to lows by the beginning of the 21st century, so the misery index could no longer indicate too much any more about economic well-being.
Back in late 2014, the Bank of England chief economist, Andy Haldane tried to develop a new index, which he dubbed as an ‘agony index’.
This was a simple index of real wages, real interest rates and productivity growth. His agony index showed that in the aftermath of the Great Recession, the British people and the economy had been in ‘agony’ for the longest time since the 1800s, with the exception of world wars and the early 1970s.
But the irony of the Haldane agony index was, just at the time he published it, the level of agony began to fall as the unemployment rate fell and real income growth picked with falling inflation and moderate improvement in wages.
At the time, I drew up a new simpler measure of ‘economic well-being’, based on the growth in real income per head less the unemployment rate. This showed that one year before the British general election of May 2015, the index had improved to levels not seen since the beginning the great global slump.
That led me to predict that the Conservatives could well win the May election against all the odds.
Given that real incomes are stagnating in the US and the UK, while unemployment rates are low, I thought I would look at my index again, at a time when both countries are being governed by right-wing administrations that are trying to shift the issue of economic well-being off the agenda in favour of immigration, terrorism, trade and Brexit.
I redid my ‘economic well-being’ index going back to the 1970s.
What I found was; first, that the index has been steadily been falling since the 1970s, implying that for the majority of British households, economic well-being has deteriorated in the last 50 years. Second, when economic well-being has dropped well below trend for any sustained period, the incumbent government is likely to lose in a general election. Thus, for the UK, the Tories lost in 1974, Labour lost in the depth of agony in 1979 and Labour lost in the depth of Great Recession in 2010. As I said in a previous post, “for one year before the 2010 election economic well-being was below par. No wonder Labour lost.”
The exception that may not prove the rule to this was the series of victories for the incumbent Thatcher government in 1983 and 1987 when economic well-being for the majority remained bad, if improved under Labour in 1979. The Tories even held on in 1992 under John Major just after the slump of 1991. Labour did not regain office until 1997 when things had improved and won two more elections during the credit boom of the early 2000s. But the Great Recession finished them off. What does seem to rule is that if economic well-being on my index is above average, then the incumbent government will win a general election.
I made some rough projections of where the index might go by 2020, when the next general election is expected in the UK. The narrow Tory win in 2015 coincided with that significant recovery in economic well-being. But the latest figures on real incomes do not auger well for the index staying up under the government of Theresa May. It is very likely to be well below the trend average by 2020. The May government is riding high in the polls at the moment and the Labour opposition under Corbyn is struggling. But if ‘it’s the economy stupid’, then it may not be plain sailing for the Tories in 2020 – and that’s assuming there is no major global economic slump before then.
The Scottish independence and Brexit referendums cut across the issue of the economy and class in the minds of the British electorate, just as the so-called Falkland Islands war cut across class antagonism to Thatcher in the 1983 election. Indeed, prior to the Brexit vote, UK membership of the EU was a non-issue in the polls compared to the economy. But immigration fears were there and the Brexit campaign drove that and the EU to the fore.
But as the excellent post by the FlipChart blog argues, that, after prohibition in the US was introduced in the 1920s, the crash and the Great Depression of the 1930s brought home to people that drinking or not drinking alcohol was less important that their real incomes and jobs. Those who voted for Brexit were mainly from rural areas and small towns. And they are the ones that will suffer from falling real incomes and lack of proper jobs the most and suffer the most damage to their well-being from any new economic slump. Whether the UK is in or out of the EU may seem less important then.