Things Can Only Get Better?

02/07/2014 11:46 BST | Updated 31/08/2014 10:59 BST

In the 1980 US Presidential Election, Ronald Reagan famously asked people whether they were better off than four years ago, contributing to his defeat of Jimmy Carter. Labour is trying to shape the 2015 UK General Election in a similar way, but there are reasons to think that this is a more fundamental long-term challenge - that living standards no longer naturally rise as the economy grows.

In many ways, the UK economy looks to be back to business as usual: growth has returned, house prices are rising rapidly (at least in London), unemployment is falling, and there is speculation that it won't be long until interest rates rise from their current historic lows.

But appearances can be deceptive. The typical British couple with no children is £1800 worse off than if pre-recession income growth trends had continued. The Resolution Foundation projects that it will take until 2020 for living standards to return to the levels seen in 2000. And while employment continues to rise, there has been a growth in underemployment - people working part-time because they can't find a full-time job.

No wonder this doesn't feel like a recovery to many.

So it is possible that next year's election will in part be a debate between Labour arguing that people are not benefiting from growth, and the Conservatives arguing that the economy is now growing and this is therefore no time to change the fabled 'long-term economic plan'.

But it is worth stepping back and thinking about the longer-term challenge. Back in 1980, few people in the US would have guessed that those on low to middle incomes would barely be any better off today in real terms - and real wages have hardly risen, despite strong economic growth in the 30 years since.

A number of big, long-term changes are threatening to break the link between economic growth and rising incomes here in the UK too, including:

• the decline of labour market institutions like trades unions that helped to share the benefits of growth;

• technological change that has led to a loss of middle class jobs and 'hollowed out' the labour market; and

• globalisation that, along with the above, has replaced entry level manufacturing jobs with entry level service jobs.

The result is a higher number of low wage, low productivity jobs than many other countries - 1 million more than if we were at the OECD average for the share of low paid work in the economy.

The UK's flexible labour market has allowed it to keep employment relatively high, despite the severity of the recession. But a poor skills base and relatively low investment mean that workers displaced as industries change find it difficult to move into new and growing sectors.

So it is not inevitable that living standards will rise as the economy grows. But nor is it certain that they won't - there are active choices we can make to take a different path.

These involve big decisions about the type of economy we want to be, such as promoting long-term investment. But there are immediate steps we could take to help more people into work and more people on at work, including:

• Set full employment and rising living standards as central government objectives. Measure and report on them and test all prospective policies against them;

• Introduce a new Advance service. To provide low income families with Personal Coaches to help them build their skills and advance their careers, funded from the skills budget and future benefit savings;

• Sustained employment and wage progression. Should be the focus of Jobcentre Plus, skills and Welfare-to-Work services, replacing the current fragmented targets and focus; and

• Devolve more back-to-work and skills services. To cities and groups of Local Authorities, to allow them to join up services locally.

The General Election is just 10 months away. But the focus of its debate is a generational challenge to share the benefits of growth, in an environment of ongoing reductions in public spending. The good news is that the current squeeze in living standards is not inevitable and there are choices we make to reach a different outcome.