Why doesn’t GDP growth lift household incomes?

With inequality rising and household incomes across developed countries stagnating, accurate monitoring of living standards cannot be achieved by relying on GDP per capita alone. In this VoxEU column I analyse with colleagues Brian Nolan and Max Roser the path of divergence between household income and GDP per capita for 27 OECD countries. It finds several reasons why GDP per capita has outpaced median incomes. We recommend to assign median income a central place in official monitoring and assessment of living standards over time.

Explaining the divergence between GDP per capita and median household income

Divergence between the evolution of GDP per capita and the income of a ‘typical’ household as measured in household surveys is giving rise to a range of serious concerns, especially in the USA. In a new working paper with Brian Nolan and Max Roser, we investigate the extent of that divergence and the factors that contribute to it across 27 OECD countries, using data from OECD National Accounts and the Luxembourg Income Study. While GDP per capita has risen faster than median household income in most of these countries over the period these data cover, the size of that divergence varied very substantially, with the USA a clear outlier. Our paper distinguishes a number of factors contributing to such a divergence, and finds wide variation across countries in the impact of the various factors. Further, both the extent of that divergence and the role of the various contributory factors vary widely over time for most of the countries studied. These findings have serious implications for the monitoring and assessment of changes in household incomes and living standards over time.

Automation and the welfare state

Current advances in information technology have led to a significant substitution of routine work by capital. In a new working paper together with David Rueda we develop a simple theoretical framework in which individuals in routine task-intensive occupations prefer public insurance against the increased risk of future income loss resulting from automation. Moreover, we contend that this relation will be stronger for richer individuals who have more to lose from automation. We focus on the role of occupational elements of risk exposure and challenge some general interpretations of the determinants of redistribution preferences. We test the implications of our theoretical framework with survey data for 17 European countries between 2002 and 2012. We find vulnerability to automation to be more significant than other occupational risks emphasized in the literature.

Welfare regimes and economic performance

Which model is best in delivering prosperity for its citizens? If we group countries with similar institutional settings are grouped together, can we see differences in median household income GDP per capita, or inequality? In a new working paper, we find remarkably wide variation across OECD countries in recent decades in economic performance. This variation is also seen within the liberal and coordinated market economy models distinguished in the varieties of capitalism literature, as well as within the welfare regimes commonly employed in welfare state analysis, with little difference between them in average growth rates.

Explaining widely varying income trends for ordinary households

In a new LIS working paper publication, written together with Brian Nolan, Lane Kenworthy, Max Roser, and Tim Smeeding, we show that there are striking differences across OECD countries in how “ordinary” households have fared from around 1980 through the Great Recession. Economic growth and inequality together leave much of the variation in the income position of these households unaccounted for, so direct measures of how these incomes in the middle of the distribution are evolving need to be central to monitoring progress towards inclusive growth.

Why did inequality increase and what are political and economic consequences?

The benefits of economic growth over the past few decades have not been shared equally among households in developed countries. In this video I talk about two chapters in my dissertation on determinants and political and economic consequences of income inequality and social policy development in affluent countries, which I’ll be defending the 29th of September in Leiden, the Netherlands.