Who is benefiting from the 'economic recovery'?

Published: 22nd Jul 2013

"There are growing signs that this nascent recovery is mainly benefiting those at the top."

Ed Balls, The Guardian, 22 July 2013

With some commentators talking up the possibility that this week's GDP figures will reveal growth of up to 0.8%, Labour's Shadow Chancellor Ed Balls warned in yesterday's Guardian that "most families" might not see the benefits from any burgeoning recovery in their wallets and purses.

According to Mr Balls, the indications are that those higher up the income scale are the ones enjoying the fruits of the improving economic climate. What is the evidence for this?

Growth? What Growth?

As we've seen before, so far we've only had one quarter of growth confirmed, and the economy experienced two periods of negative growth in 2012, broadly flatlining for the year.*

If this week's GDP figures do report growth as strong as 0.8%, the outlook will seem a little rosier, but it's important to remember that previous quarters have seen growth even larger than 0.8% without it preventing the economy from subsequently contracting. At this stage therefore, any recovery is certainly "nascent".

However such as it is, the "recovery" began in the first quarter of 2013, meaning that we are looking at the six months from this January onwards.

Bankers' Bonuses

The first point advanced by the Shadow Chancellor in support of his view that it's the higher echelons of society that have benefited from the recovery is that bankers' bonuses rose sharply this year.

As we've seen before, there was a sharp jump in bonus payments in the financial services sector in March this year: end-of-financial-year bonuses were 64% higher than in March 2012.

However, whether this is evidence that City workers are creaming off the benefits of a more benign economic climate is more dubious. For starters, they were awarded at a point when the econonmy had only just returned to growth, having been in a period of contraction as recently as the previous quarter.

As Mr Balls' himself alludes to, the spike in bonus payments may owe more to changes in the top rate of income tax. The Office for Budget Responsibility (OBR) has also noted this phenomenon, although suggested the effect wasn't as large as the Government might have feared:

"Financial bonuses may have fallen by less than we expected and fewer people than we thought may have pushed income into 2013-14 to take advantage of the cut in the highest income tax rate to 45p."

Life at the top

Of course bankers aren't necessarily representative of "those at the top."

In fact, according to the Institute for Fiscal Studies' latest analysis of incomes, people on lower incomes have seen similar falls to those on higher incomes, and the richest 10% have actually seen their incomes fall by slightly more than those in the bottom 10%.

Again however, this doesn't tell us much about the impact of the recent ressurgence in the economy, as the most recent data we have on the relative incomes of richer and poorer individuals only covers the period 2011/12.

Falling average wages?

Given the lack of up-to-date figures, how can the Shadow Chancellor claim that "most families are not seeing any recovery in their living standards, with average wages after inflation still falling?"

Labour confirmed to us that this assertion rests on a second dataset, the ONS's Monthly Wages and Salaries Survey.

The figures themselves show that average weekly earnings in May 2013 were £476, while in January they stood at £469, the same level they were at in May 2012.

While this suggests a 1.5% rise year-on-year, the growth has been slower than the annual rate of inflation, which in May this year stood at 2.7%.

On this count, the Shadow Chancellor is therefore correct: the recent upturn in the economy has yet to translate into better real wages for the 'average worker'.

*Update (25 July 11am)

This piece originally stated the economy was in recession for much of 2012. In fact these ONS figures have since been revised so that the economy only dipped in and out of negative growth twice. This has now been amended and thanks to one of our followers for pointing out the mistake.

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