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The economics of discontent

June 5th, 2016

Alastair Meeks on why Leave is prospering

Where did it all go right?  The bare statistics are breathtaking.  Even looking in percentage terms, employment rates are at all time highs, unemployment rates are at 10 year lows and the economic inactivity rate is also at a joint all time low (tying with 1990).  Job vacancies are hovering just below their all time highs.  Most of the economically inactive are students, stay-at-home mums or the retired.  So why are so many voters so angry?

Wage rises have been subdued for years. This is routinely blamed on immigration levels. We are told that there is hostility to immigration because it sets rich against poor, improving the purchasing power of the rich while taking jobs and wages from the poor, creating an underclass who are thrown on society’s scrapheap.  It’s a potent theme.

As a result, Leave are pressing hard on the theme of controlling immigration.  Remain is struggling to respond effectively.  The polls on the subject suggest that Leave definitely has the upper hand on this specific question.

However, the evidence that immigration has reduced wages in aggregate is actually fairly weak: as a matter of common sense if employment rates are at an all-time high, job vacancies are near their all time highs and unemployment rates are at ten year lows, this cannot be anything like the only or even main explanation for low pay rises.

Reasonably enough, the public are less interested in the why and more interested in the fact that pay is struggling to keep pace with inflation.  But contrary to popular myth, people are actually feeling better off than they did a few years ago.  The tables at the top of the page show the most up to date ONS data on how people assess their financial comfort.  More people say that they are living comfortably or doing alright than did so four years previously and fewer people say that they are finding it quite or very difficult.  Far from most people being crushed, on average things are slowly getting a bit better.

Meanwhile, low pay is being targeted.  The government is introducing a much higher minimum wage.  The effects this will have are uncertain. When the minimum wage was originally introduced, Professor Patrick Minford predicted unemployment would rise by up to three million.  In fact, it was introduced without incident.  There is wider concern this time that the new rate is set at a level that would have an impact on jobs, but the precise impact is unclear.  At a time of such high employment and labour force participation, however, it seems as good a time as any to find out: if the impact is not too severe, those in work on or close to minimum wage will see a sharp increase in their earnings.

So if more people than ever before are in work, people are feeling better off and the government is looking at addressing low pay, what is all this discontent really about?

The key to this problem is elsewhere.  The government has been cutting spending, which affects the poor disproportionately.  It also adds pressure on the services that the poor use, making them less sympathetic to other users of those services.  This effect has been intensified because the government has protected spending on the elderly, meaning that other spending has been cut disproportionately hard. 

If the government stops looking like it is helping you, you might well decide either that it should start helping you again – the leftwing working class analysis – or that the government is part of the problem – the rightwing working class analysis.  Controlling the immigration that puts pressure on hard-pressed public services is a natural response.

If this is right, the seething discontent will continue for as long as austerity continues.  And this is hardly surprising.  Not all of that government spending was wasted.  Some of it was usefully helping some people.  If those people are seeing things deteriorate as a result of that spending being cut, they might well be disillusioned and angry.  Perhaps that is why they are.

Alastair Meeks