When does economic growth benefit people on low to middle incomes – and why?

The Resolution Foundation today published a new paper by Professor Lane Kenworthy of the University of Arizona; James Plunkett reports.

James Plunkett is the secretary to the Resolution Foundation’s Commission on Living Standards

The Resolution Foundation today published a new paper (pdf) by Professor Lane Kenworthy of the University of Arizona. The report makes particularly interesting reading in advance of the chancellor’s autumn statement next Tuesday.

With UK commentators squarely focused on growth, the paper asks a simple but important question: when does economic growth benefit people on low to middle incomes – and why?

Two main lessons emerge from the analysis.

First, if you look across the world’s rich nations, the main thing that explains why ordinary working people get better off over time is less the extent of economic growth and more the extent to which growth ‘trickles down’ to those in the bottom half.

In statistical terms, the variation in household income growth is explained more by the relationship between growth and income and less by the overall level of growth.

That’s an important and surprising finding because it means that, although a focus on economic growth is important, it misses a massive part of the story. We need to worry just as much about the kind of economic growth we are achieving.

So what explains why some economies see ‘good growth’ (that trickles down) and some see ‘bad growth’ that doesn’t?

To answer that question Professor Kenworthy divides the low to middle income population he’s looking at into two smaller groups: those on ‘low incomes’, from the 10th to the 25th percentile of the income distribution and those on ‘modest incomes’, from the 25th to the 50th percentile.

The story is quite different for the two groups.

For households on low incomes, the answer is stark: generally speaking, growth doesn’t trickle down into higher wages. Instead, low income households only really benefit from economic growth if governments redistribute the proceeds through the tax-benefit system (the dark green bars in Figure 3 below).

Moreover, and importantly, when the generosity of the tax-benefit system doesn’t rise (as in the US and Canada), wages don’t step in to the fill in the gap; instead, household incomes simply flat-line.

Figure 3:

Average-yearly-increase-in-earnings-and-in-net-government-transfers
For households on modest income, by contrast, employment income is much more important. Generally speaking, about half the growth in household income among this group comes from employment rather than more generous government transfers. In other words, ‘trickle down economics’ works for this group a bit – though the role of the tax-benefit system remains significant.

Generally speaking, then, our obsession with growth is justified, but it must be accompanied by an equally obsessive focus on another big question: when economic growth does finally return, how can we make sure it filters through to ordinary working people?

You can read Lane Kenworthy’s excellent blog over at Consider the Evidence

See also:

UK not performing too well in the GDP growth championshipAnn Pettifor, November 17th 2011

Osborne has put Britain in an economic death spiral: Here’s how to break outWilliam Bain MP, November 14th 2011

Look Left – UK growth forecast to be worse than eurozoneShamik Das, November 11th 2011

New report dubs Osborne’s economic strategy a “myth”Ed Jacobs, November 9th 2011

Inflation is worse for the worst offAlex Hern, November 6th 2011

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15 Responses to “When does economic growth benefit people on low to middle incomes – and why?”

  1. Political Planet

    When does economic growth benefit people on low to middle incomes – and why?: The Resolution Foundation today pu… http://t.co/G52JqXco

  2. Alex Braithwaite

    RT @leftfootfwd: When does economic growth benefit people on low to middle incomes – and why? http://t.co/zbJ5TKUO

  3. TheCreativeCrip

    When does economic growth benefit people on low to middle incomes – and why? http://t.co/17AllHki – @ResFoundation’s @JamesTPlunkett reports

  4. Trevor

    “when economic growth does finally return, how can we make sure it filters through to ordinary working people?”

    Except that you’re asking how can we make sure that it trickles down to the “10th to the 25th percentile of the income distribution” – ie NOT the *ordinary* working person, but some of the *lowest-paid* working people

  5. Nigel Gardner

    Trickle down was always a p*** take When does economic growth benefit people on low to middle incomes – and why? http://t.co/Ezt2jRPZ

  6. Michael

    When does economic growth benefit people on low to middle incomes – and why? – http://t.co/O69bQKc4

  7. Jamie

    When does economic growth benefit people on low to middle incomes – and why? http://t.co/9LiK9ffX

  8. Otter

    When does economic growth benefit people on low to middle incomes – and why? http://t.co/MDVW9bAt #personalfinance

  9. Matthew Wilson Eames

    RT @leftfootfwd: When does economic growth benefit people on low to middle incomes – and why? http://t.co/zSgMuBgj

  10. Andrew Martin

    When does economic growth benefit people on low to middle incomes – and why? http://t.co/17AllHki – @ResFoundation’s @JamesTPlunkett reports

  11. James Plunkett

    When does economic growth benefit people on low to middle incomes – and why? http://t.co/17AllHki – @ResFoundation’s @JamesTPlunkett reports

  12. George Hallam

    Another case where Oxford’s finding is Mile End’s guess.

    Where I was born, near Stepney Green,
    They toil all day on a sewing machine,
    Marry on twopence and live on less,
    Bring up a family on watercress.
    They’re mostly ill-starred,
    But they die hard.

    Where I was born, near Stepney Green,
    They make fighting Cockneys out of margarine.
    Some get old, and some T.B.
    They’re mostly ill-starred,
    But they die hard.

    Where I was born, near Stepney Green,
    Some read Lenin, but none Racine.
    Their learning is little, their culture less,
    But Oxford’s finding is Mile End’s guess.
    They’re mostly ill-starred,
    But they die hard.

    John Singer

  13. ResolutionFoundation

    When does economic growth benefit people on low to middle incomes – and why? http://t.co/12kxMx8w – via @leftfootfwd

  14. Alan Cowan

    When does economic growth benefit people on low to middle incomes – and why? | Left Foot Forward http://t.co/FvmnKgyI

  15. We’ve got the wrong sort of growth – a fall in real GDP now looks more likely | Left Foot Forward

    […] also: • When does economic growth benefit people on low to middle incomes – and why? – James Plunkett, November 21st […]

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