By Heiner Flassbeck. This article was first published on Flassbeck Economics.

Austerity: stagnating wages for 70% in the developed world

. Producing, sanctioning and killing the poor and increasing the number of billionaires

“The best way to boost the economy is to redistribute wealth downward, as poorer people tend to spend a higher proportion of their income.” Ha-Joon Chang

Why would you confront reality when your models tell you everything you need to know and everything that those in power want to hear? Avnar Offer

1. Up to 70% of people in the developed countries saw their incomes stagnate

A new report calculates that wages did not rise for more than half a billion people in the developed world between 2005 and 20014 (see here). Up to 70% of people in the developed countries saw their incomes stagnate. Half a billion people in 25 of the west’s richest countries suffered from flat or falling pay packets in the decade covering the financial and economic crisis of 2008-09. The report found there had been a dramatic increase in the number of households affected by flat or falling incomes and that today’s younger generation was at risk of ending up poorer than their parents. As a comparison, only 2% of households lived through the period from 1993 to 2005 – a time of strong growth and falling unemployment – without seeing their incomes rise. The report notes that a majority of people who had seen no increase in their incomes tended to be pessimistic about the future both of themselves and their children, that they oppose migration and that they are more likely than those who are advancing to support nationalist parties such as the Front National in France or support the Brexit in the UK (see here).

As Larry Elliot writes in the Guardian, MGI does not go into the causes of the great stagnation, although, remarkably, it claims that a decline in the influence of trade unions has played a part, which is certainly true. MGI warns that should the “slow growth” conditions of the past decade persist, up to 80% of income segments could face flat or falling incomes over the next decade.

The study looked in depth at incomes in six developed countries – France, Italy, the Netherlands, Sweden, the UK and the US – and then scaled the findings up to include a further 19 nations for a total of 25 countries with a combined population of 800 million and accounting for half of global gross domestic product. Of the six countries picked out, 97% of Italian households saw their incomes fall or remain stagnant in the decade ending in 2014. The comparable figures were 80% for the US, 70% for both the UK and the Netherlands, 63% for France and 20% for Sweden (see here).


Figure 1: The Big Hit: percentage of households with flat or falling real market income, 2005-2012/14 (Source: Financial Times).

The MGI said government policy and labour market practices helped determine the ultimate extent of flat or falling incomes. “In Sweden, for example, where the government intervened to preserve jobs, market incomes fell or were flat for only 20%, while disposable income advanced for almost everyone” (see here).

This, once again, proves, what Heiner Flassbeck has said here and in other places for hundreds of times: that the government needs to step up and that Keynesian stimulus policies are essential. There is just no other way. It also proves the nonsense of the ideology that ‘the nation state is finished.’ Varoufakis recently wrote a new piece, repeating his obituary of national policy-making. To him, the social welfare state is also ‘finished.’ A Universal Basic Income is ‘inevitable.’ The Swedish example shows otherwise. A UBI will make things worse, not better.


Picture 1: two headlines in the Financial Times yesterday.

  1. Making the poor: half of UK children will live in poverty by 2020

A shocking new report from the Joseph Rowntree Foundation and the University of Manchester lays bare the incredible toll of family poverty across Greater Manchester (see here). It reveals that within Greater Manchester 620,000 people – including 180,000 children – live in deprivation. One fifth of its inhabitants is on the breadline, ‘despite  huge economic growth in recent years.’ New growth did nothing to help the poor. More than half a million residents live in neighbourhoods which are in the 10% most deprived in the country. More than 20% live in a ‘highly-deprived’ area. Around 50,000 pensioners are on the breadline. Some 30% of children are in poverty and 22% of working-age adults. There are 180,000 people across Greater Manchester with no qualifications. One third of boys in Manchester cannot speak a full sentence by the time they start school. Thousands of people lack two or more of six ‘essentials’ – shelter, food, heating, lighting, clothing and footwear or basic toiletries. Others’ income is so low they are unable to purchase any of those items for themselves (see here).

How is this possible? Greater Manchester had the third-highest growth in terms of economic output of city regions outside London between 1997 and 2014. The problem is that people are being paid very low wages, that low qualifications are prevalent and that the social welfare system transformed itself into a predatory institution which is not there to help people but to sanction them. The third-highest growth in terms of economic output sounds good, but what does in amount to in reality? In the north – in Bury, Oldham, Rochdale, Wigan and Bolton – the number of jobs plummeted after the recession and has now only just reached the level of 2008. Low pay blights thousands of workers, with 23 per cent of jobs in the region paid less than the Living Wage in 2015. As an interviewee says “Nothing trickles down to vulnerable people” (see here).

The situation in Manchester is by no means unique. Last month, the  government  released figures revealing that the number of children living in poverty in the UK increased by 200,000 over the past year to 3.9 million. 66% of these children now live in working families (up from 64% last year). The IFS and Resolution Foundation indicate that this trend is set to continue, with predictions suggesting that child poverty will rise by 50% or more by 2020 (see here).

This is just unbelievably bad. Children growing up in poverty are more likely to suffer chronic illness during childhood or have a disability. Children living in low-income households are nearly three times as likely to suffer mental health problems as their more affluent peers. Young adults who have lived in poverty as children are significantly more likely to earn lower wages or be unemployed, while men are more likely to spend time in prison, women face a higher risk of becoming lone parents. Clearly, the effects of growing up in poverty are significant, and have a limiting effect on children’s health and opportunities in later life (see here).

The economic costs of poverty are also massive: in 2013 a report estimated that child poverty costs the UK at least £29 billion each year. But that is not an issue for the Conservatives either. Earlier this year, the government fought to scrap income as an indicator of poverty (!) – a battle it thankfully lost. Publication of the government’s Life Chances Strategy has been shelved amidst the chaos surrounding Brexit. Along with the recent dismantling of the 2010 Child Poverty Act, it is clear that despite government rhetoric promising to ‘improve life chances’ there has been a complete absence of any action which actually achieves anything positive (see here).

  1. Sanctioning and killing the poor

The subject of sanctions is so broad and so complex that it is impossible to do justice to even its broadest lines in one article or a series of articles. The situation has become radically insane, absolutely Kafkaian. People working fewer than 35 hours per week at the “national living wage” were forced to attend jobcentre meetings to prove they are searching for more hours, better paid work, or additional jobs, as a condition of receiving low-wage pay top-ups. If they break this commitment, they face sanctions.

The ideology is always the same: there are these magical jobs in combination with the inherent laziness of those insufficiently motivated to look for them. It is irrelevant if 370 people show up for one job at ASDA. No one cares about reality. Now, however, the DPW staff which is supposed to ‘guide’ (sic) unemployed and not fully employed people towards jobs are on the line too, because, as it turns out, their pay is also historically low and many of them do not work full-time. It turns out that a significant percentage of those who are supposed to guide the lazy welfare scroungers towards better jobs have no decent job themselves.  It is now panic all over because the very last thing that the DWP personnel wants is to become a victim of the policies that they implement. This is the UK these days.

After many years, people are finally speaking up. According to a PCS union poll of jobcentre workers, 70 percent believe sanctions have “no positive impact” while two thirds said they had experienced pressure to refer claimants for a sanction inappropriately. The truth is that the DWP has been a sadistic sanctioning machine for many years, with no consideration for humane circumstances whatsoever. There is no doubt that the policies of the DWP led to the death of several hundreds of people – or perhaps even thousands. Several activist groups, human rights organisations and Left Labour want to take the former boss of the DWP, Iain Duncan-Smith, to court. Let’s hope they succeed.

  1. Explaining the causes of poverty away

The causes of poverty have been explaining away for many years. As said, this year the government fought to scrap income as an indicator of poverty. In 2014, the UK government launched a consultation round on a new child poverty strategy. It published a 130 page ‘review of the evidence’ surrounding child poverty. This is more outright surrealism. The review identified a number of ‘key’ ‘individual and family characteristics’ which ‘make it harder’ for some families to move out of poverty. These characteristics were identified following a ‘preliminary informal evidence review:’

“This evidence review only considers individual and family characteristics and events associated with current and future poverty. It does not take account of the macroeconomic context, in terms of the number and quality of available jobs or the returns to qualifications. This review also does not examine the impact of the institutional framework (e.g. the current educational system) or culture of society. Nor does it consider the interaction between the benefits system and incentives to work, although this will obviously have a role in ensuring work pays. These factors are important as they may limit the extent to which individuals are able to improve their situations through their own agency and changes in these factors could affect the future stability of the associations reported” (Review of Evidence on Child Poverty, DSP, 2014: 12) (see also here).

Here it is, in all its utter, disgusting, shamelessness. There will be no ‘consultation’ pertaining to questions, theories, explanations, analyses, empirical data, biographical findings about the causes of child poverty, no macroeconomics, no consideration of the numbers and the quality of available jobs, no impacts of institutional frameworks, no role of education, no dominant culture, no sociology of deprived areas, no benefits system or incentive to work will be investigated. The only factors that will be dealt with are those that may limit the extent to which individuals are able to improve their situations through their own agency.

This is only an example of a general pattern. Wiggan from Queens in Belfast examined how the UK government’s 2010 Green Paper, 21st Century Welfare, and the White Paper, Universal Credit: Welfare that Works construed a discourse about social security that completely marginalised the structural aspects of persistent unemployment and poverty by transforming these into individual pathologies of benefit dependency and ‘worklessness.’ The consequence is that familiar neo-liberal policy measures favouring the intensification of punitive conditionality and economic rationality could be portrayed as new and innovative solutions to address Britain’s broken society and restore economic competitiveness.

Many others, such as an international group of scholars belonging to the Work and Welfare State Project, which adopted a street-level approach to welfare state research, reached the same conclusion (see here). The reforms altered organisational arrangements and practices to emphasize workfare’s harsher regulatory features and undermine its potentially enabling ones. In other words, the government did nothing to help the poor. Nor was it their intention. The contrary is true, they actively worked against them. As for competitiveness, the only growth we saw was in homelessness, suicide and food banks, a 2000% increase since 2010. Aside from such details, what Chris Purchase said remains historically true: if all those on benefits (£56 a week) would do nothing else than drink and smoke, they would still be paying more UK tax than Amazon. This the Conservatives did not change.


Picture 2: Letter from a reader in an English newspaper (Source: Labour Party).

  1. The cost of austerity, keeping the poor poor, making the rich richer

No one will ever know the real cost and the real amount of damage of these policies. All of these policies were outright stupid, they were all unjust and some were criminal. No one will ever know how many millions of people would be working now if Keynesian policies would have been implemented. Stiglitz mentioned that if Europe would have followed the correct policies in 2010 that there would be at least 10 million more people at work in Europe now. This is only an educated guess.

But other costs have been quantified. According to the Equality Trust– and this report is dated now, as it is from 2013 (figures undoubtedly rose in the meantime), the ever-increasing gulf between rich and poor in Britain is costing the economy more than £39bn a year (see also here). The effects of inequality are measured in financial terms through its impact on health, well-being and crime rates. The report puts the annual cost of inequality to the UK at £622 for every man, woman and child, with a total of £12.5 billion lost through reduced healthy life expectancy, £25 billion lost through poorer mental health, £1 billion lost through increased imprisonment figures and £678 million lost through an increase in murders. The wider economic cost of mental illness in England alone is estimated to be £105.2 billion each year, which includes direct costs of services, lost productivity at work and reduced quality of life. The cost of poor mental health to businesses is just over £1,000 per employee per year, or almost £26 billion across the UK economy. In 2008-09, the NHS spent 10.8% of its annual secondary healthcare budget on mental health services, which amounted to £10.4 billion. Service costs, which include the NHS, social costs, and informal care costs, mounted to £22.5 billion in 2007 in England. In a more equal UK, people could expect an extra eight and a half months of healthy life expectancy while rates of poor mental health could improve by 5%, valued at £24 billion.

  1. Developmental delay and vicious biological cycles

In 2013, Margaret Curtin et al. set up a study in Cork to address the determinants in early childhood development. They point towards yet another factor which works against poor people: developmental delay in early childhood. They used the Early Development Instrument (EDI) for this study. The EDI is a well-validated population-level measure of give developmental domains: physical health and well-being, social competence, emotional maturity, language and cognitive skills and communication skills and general knowledge at school entry age. The researchers contacted 47 elementary schools in Cork city; 1243 teachers completed EDI scores were calculated for children in their first year of full-time education. Contextual data were collected using a parental questionnaire. The results of the study are that 29 per cent of children were not considered developmentally ready to engage in school. Low birth weight, poor parent – child interaction and mother’s lower level of education showed the most significant correlations for developmental vulnerability. The greatest population-level risks were being male (35 per cent), low mother’s education (27 per cent) and having English as a second language (12 per cent). These were staggering and unexpected results. The most surprising result is that a ‘low’ level of mother’s education contributes more than 2.2 times as much to developmental delay than having English as a second language. This mother’s educational attainment is a huge factor in developmental delay in early childhood.

It is not only developmental delay. There is epidemiological evidence that early childhood development (from gestation to age 6) strongly influences health trajectories: major public health problems such as obesity, heart disease and mental health problems are seen to have roots in early childhood. They result from a complex interplay between genetic make-up, in utero development and both prenatal and postnatal environmental factors, all of which influence brain development in the first five years of life. There is overwhelming epidemiological evidence of social gradients in child development, with children from poorer background doing less well in school and entering into an intergenerational cycle of reduced employment opportunities, higher fertility and health inequalities.

In fact, these factors are absolutely huge. Kershaw et al. estimate that the cost of preventable early childhood vulnerability to the Canadian economy is between CA $ 2.2 and CA $ 3.4 billion a year. This enormous sum refers to a wide range of health problems, loss of economic base, disability, hospitalisation, remedial therapies and intergenerational effects – low schooling, higher fertility, high unemployment, higher crime rates, lack of socialisation.

A lot of research in social epidemiology deals with identifying poverty as a causal factor for debilitating medical conditions, the destruction of self-esteem, depression, isolation and a whole plethora of other diseases that make people under-perform, unable to study or work and unable to make rational and informed decisions. There is no doubt that poverty perpetuates poverty, leaving poor people trapped in a vicious biological cycles.

  1. The children of the Smoky Mountains

In 1993, a group of researchers started an eight-year longitudinal study of children in the Great Smoky Mountains, a range of peaks along the North Carolina-Tennessee border. This study has not stopped to surprise many, while the Right has been trying to discredit it for more than ten years, even in Congress (see here for explanation and context).

The study deal with 1425 children – 25 percent were Native American, 7.5 percent were black and the rest were white. They were given psychiatric exams annually. The children from poor families exhibited psychological symptoms much more than their middle-class counterparts. The differential was 60 per cent. This is huge, of course, but it was within expectations, it is just how bad the problem is. Then something happened. The Eastern Band of the Cherokee, who live in the region, opened a casino and in 1997 – exactly halfway through the first half of the study – every member of the tribe started receiving income. It was not much: the annual payout increased each year, hitting an apex of $ 6.000 before taxes in 2001, with children’s money going straight to a trust fund. This increase of income made an enormous difference. The rate of conduct and oppositional defiant disorders in (now formerly) poor children dropped to that of children who had never experienced poverty. The crime rate of (now formerly) poor children also dropped dramatically. The number of formerly poor students graduating from high school increased by 64 per cent. Their access to higher education increased by 22 per cent.

These results created so much political upheaval in the US – according to Right wing rhetoric, these people are supposed to be ‘losers’ and ‘welfare scroungers,’ not people who show upward social mobility – that a group of scholars was set up to independently evaluate the results of the study. No fault was found.

The sum of $ 6.000 per child per year can be put in perspective by comparing it to other costs. Attention deficit hyperactivity disorder (ADHD) is a condition which is almost twice as likely to appear in poor children as in the general population. The reason why is unknown. ADHD is estimated to cost $ 14,576 per child per year for treatment, educational adjustments, remedial teaching, parents missing work and juvenile justice. This is for one condition only. For the sum of $ 14.576 per child per year, ADHD is treated, it consequences are minimised, but the disease remains uncured, there is no cure. More than half of ADHD patients will suffer major depression at least once in their adult lives. This will subsequently lead to more misery and more losses. Half of them will suffer from ADHD all their lives and/or from a long list of associative diseases. Imagine what raising the minimum wage would to the occurrence of ADHD and many other diseases.


Picture 3: Another citizen from the richest country on earth (Source: Google images).

  1. Sugar cane farmers in India: IQ depends on harvest

In India, three economists, Anandi Mani Sendhil Mullainathan and Eldar Shafir gave a range of cognitive tests to Indian sugar cane farmers pre- and post-harvest (see here and here). Just before the harvest, the farmers are largely waiting for their crops to ripen. They have little work to do and they do not generate income. They are much poorer before the harvest than after it. The researchers found that the cognitive losses produced by pre-harvest poverty were equivalent to 13 IQ points. This loss is in the same range as the loss of cognitive ability due to chronic alcoholism. The researchers proposed an image for it: bandwidth. The human brain has a finite amount of bandwidth. If one’s brain is constantly forced to spend worrying about survival, it has less capacity to spend on other tasks. Nothing is as bad for mental health as trying to solve a problem that is not solvable. It is not possible to think your way out of poverty. It is in this way that bad decisions are being made: people fail to take prescribed medication, they fail to use preventive health care, they are less productive than they ‘normally’ should be, etc – and as a result their bandwidth further decreases.

“Inequality kills,” writes Therborn in The Killing Fields of Inequality. Between 1990 and 2008, life expectancy of white American men declined by three years and low-educated white American women saw their life expectancy decline by five years. For many in the US, wages have been stagnating since the 1970s. The life expectancy between the richest and poorest neighbourhoods in Glasgow, a difference of twenty-eight years, is the same as that between the UK and Haiti. The ‘restoration’ of capitalism to the former Soviet Union is associated with no less than four million excess deaths. Studies of social epidemiology unequivocally show that unemployment is associated with a significant number of excess deaths (when controlling for other health indicators).

  1. Billionaires became richer in 2015 and there are more of them

In 2014, Anthony Shorrocks and Jim Davies found that, globally, the top 10% wealth holders had 86% of all household wealth while the bottom 41% had just 1%. Oxfam UK reported that the country’s five richest families own more wealth than the poorest 20% of the population. Oxfam said the poorest 20% in the UK had wealth totalling £28.1bn – an average of just £2,230 each. The 100 wealthiest people in the UK have as much money as the poorest 18 million – 30% of all people. The total wealth of these oligarchs rose to £257bn to surpass the £225bn held by the poorest 30% of British households. Household wealth consists of the ownership of a house or flat, pension fund and other possessions like cars. Total household wealth in the UK is £10trn, with the top 10% having £967bn and the bottom 10% just £13bn. The bottom 10% has in fact no wealth at all, except old cars and a few personal possessions. The scale of inequality and the concentration of wealth is such that even the top 10% of wealth holders really only own their house and live on what may be reasonable pensions. It’s the top 1% or even the top 0.1% who really have wealth in stocks, bonds and commercial property and businesses, etc.

Yesterday, The Wall Street Journal published an article providing evidence that inequality got worse. The combined wealth of the world’s billionaires, defined as individuals with a net worth of $1 billion or above, increased by 5.4% to a record $7.7 trillion, according to Wealth-X’s 2015-2016 billionaire census. The world’s billionaire population grew by 6.4% to 2,473 in 2015. “Wealth helps accumulate more wealth.” Europe, the Middle East and Africa are still the regional group with the most billionaires (1,013) while the Americas come in second with 782 billionaires. The Asia-Pacific region is poised to take over the Americas. With 678 billionaires, Asia-Pacific produced four times more billionaires than the Americas during 2015. But, the Americas did overtake Europe, the Middle East and Africa in total billionaire wealth, clocking in at $3 trillion, compared with about $2.8 trillion for EMEA. I am certain that no one knows what these figures are really worth. They are, in all likelihood, a manifest under-estimatation.

  1. Conclusion

The Wall Street Journal does not provide an explanation for the growth of the billionaire class. Hard work and being driven seem to be more important than inheritance. What do you want them to say? The ideology is that you get out of life what you make of it. If you become a billionaire, it’s because you deserve it. I also hear this regularly on Facebook (because if you want enlightenment, fight on Facebook). There is something remarkable about the stories that people tell in order to prove meritocracy. ‘I cut wood, I worked in a coal mine, I worked in a store, eventually I set up my business, look how well I did.’ All these people are, without exception, more than sixty years old. ‘The younger generation has to stop whining and hand-outs won’t help.’ This is vicious ideology. The younger generation does not whine and people do not want to live on ‘hand-outs.’ It is simply the case that the system no longer works for an ever increasing part of the world’s population. The reasons for this have often been explained on this website. We will either succeed in changing the economic governance of the world or inequality, poverty and other dysfunctions and pathologies will rise to unimaginable levels. Let us also not ‘forget’ that regions are being increasingly affected by droughts, plummeting agricultural yields, food and water shortages, or otherwise floods, depleting fish stocks and so on and so further. Either we will make a difference or we will collectively sink, billionaires included. If these people are so smart and so driven as they think they are and hence so superior to us mere mortals, why don’t they realise that it is high time that they to come to their senses? Is it because they are so intelligent? Or is Ha-Jong Chang right in saying that the best way to boost the economy is to redistribute wealth downward?

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