by Michael Roberts
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
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
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
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
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