The ‘Great Recession’ will have long-term effects on people’s incomes finds new study

Ordinary households have yet to feel the worst effects of the recession on their income a study of 21 wealthier countries reveals today.

In the two years following the financial crash of 2007, household income distributions hardly changed, even where national GDP fell sharply. Over this period, and for most countries studied, average disposable household income levels generally fell slightly and poverty rates and income inequality changed little.

Countries including the UK, the report says, have been able to cushion households from the immediate effects of the Great Recession by means of benefits and other social safety nets.

However the study, entitled The Great Recession and the Distribution of Household Income, and produced by a research team led by Professor Stephen Jenkins of the London School of Economics (LSE), also ISER Visiting Professor, predicts that as governments cut public spending and raise taxes to confront structural deficits, household incomes will be hit, and for up to five or 10 years or even longer, depending on when economic growth returns.

Cuts to a country’s welfare system as part of fiscal consolidation are likely to lead to greater instability in households’ income levels, poverty rates, and income inequality.

However, instability is less likely in countries that already have relatively health fiscal balances and are not facing large tax rises or benefit cuts (such as Sweden and Germany) compared to those, such as Ireland, saddled with both large cuts and deficits. The UK, whose deficit relative to GDP increased by eight percentage points between 2007 and 2009, lies between the two extremes.

Professor Jenkins said:

“We were surprised at how little household incomes changed in the years immediately after the Great Recession began. This has been the worst macroeconomic downturn in most OECD countries since the
Great Depression of the 1930s when there were substantial increases in poverty rates and other significant changes to the income distribution.

“Our study shows that stabilisation of the household income distribution in the face of macroeconomic turbulence is an achievable policy goal, at least in the short-term. The prospects for the medium- and longer-term are, however, much more worrying, and much greater differences in distributional outcomes will emerge across countries. We’re moving from the Great Recession era with relatively broad consensus about what to do to a new era of sharp distributional conflicts between, for example, rich and poor, old and young.”

The report says that household income is a better measure of people’s living standards than the wages and salaries of workers, a measure that is often focused on. Household income takes account of the income that people receive from others in their household, and includes the incomes received from other sources, such as income from savings and investments, benefits and tax credits, as well as deductions such as income taxes and national insurance contributions.
Average earnings actually increased between 2007 and 2009 in many countries, the study shows – though this was largely because lower paid workers were more likely to lose their jobs than higher paid ones.

Elderly people’s incomes appear to have been well-protected in the short term, at least relative to other parts of the population. This was apparent in the detailed case studies for Ireland, Italy, the UK and the USA.
The report The Effect of the Great Recession on the Household Income Distribution examines 21 richer countries from the OECD and includes in-depth studies of six individual countries – Germany, Ireland, Italy, Sweden, the UK, and the USA. The chapter on the UK was written by Robert Joyce and Luke Sibieta of the Institute for Fiscal Studies.

The report’s lead authors are Stephen Jenkins with Andrea Brandolini, John Micklewright, and Brian Nolan.

The study was commissioned and supported by Fondazione Rodolfo Debenedetti, a research institute on labour and social policies in Europe based in Milan.

Photo credit: henrybloomfield