I really enjoyed two recent FT articles about the squeezed “middle” struggling on £200k household incomes.
The first FT article profiled a 45 year old married lady living south of the river with her husband and kids. Their earnings “nudge £200,000 a year”. The lady says:
“In theory, with our household income, we are in the top 5 per cent of the UK population and yet it does not feel that way,” she says. “If you’re earning millions of pounds, then you’re OK — and at the other end of the spectrum you get everything paid for. We are caught in the middle where we are paying for everything.”
The article lists various things squeezing couples like this:
- School fees. Killik & Co reckon there has been a 342% increase since 1990 in average private school day fees.
- Childcare. Nursery costs have risen by 69% in 10 years.
- Loss of child benefit. This benefit, worth a maximum of £1k per child, feels more symbolic than real to me for £200k households, but the symbolism is powerful.
- House prices. Up 475% in 30 years. And transaction costs have risen from less than 4% to potentially 15%. This means the old ‘upgrade every 7 years’ no longer works.
The article also cites a real issue of pension provision, as the funds required to maintain incomes of anywhere approaching £200k per year are far beyond what most ‘squeezed’ couples can dream of amassing. And more to the point the maximum tax-free pension pot of £2m per couple would not generate anything like their pre-retirement income.
In his article the following week, Janan Ganesh brings wonderful scorn and observation to the uproar that the first FT article caused. Without even mentioning the article’s obvious omissions about lower mortgage costs and lower inflation, and with a down-to-earth groundedness that many of the FIRE community would appreciate, Ganesh reminds us of the average incomes in this country:
“A crude but quick test of someone’s grip on reality is to make [people] guess typical earnings. In Britain, the average weekly wage is around £530 before tax. Oh yes it is.”
But what really had me thinking about Ganesh’s piece is his observations on the modern-day class system. As he puts it:
“The people I grew up with had parents who earned the average wage or thereabouts. Almost everyone I know now makes several times more. … Culturally, much more separates the real middle from the upper middle than the upper middle from the gilded few above them. An £80,000 a year television producer might have a millionaire lawyer around for dinner, but not an estate agent who makes £35,000.
People in my world never seem to have normal-earners as friends. They do not fall in love with people in normal lines of work. Their children do not go to normal schools. I am sure it is just a logistical mix-up.”
Reflecting on Ganesh’s observations, I find them to be true for my world too. And I’ve been asking myself what has been going on.
It feels to me as if two big effects are at play here.
First of all, we’re seeing social mobility in action. Pretty clearly, Ganesh has catapulted himself from ‘an ordinary background’ (in South London) into the elite. He’s done this by getting a very good education and seizing the opportunities that were then presented to him – notably by basing himself in London where he writes as a (mostly) political journalist. I consider the same happened to me in that I went to a top university and it changed my life – particularly as I subsequently moved to London to seek the gold-paved streets.
My worry is that upward social mobility has got worse since my/Ganesh’s day (erm, he’s a lot younger than FvL – Ed.). When I was walking to my (state) primary school my peers were pretty much across the (non-London) bell curve. When I then took the bus to my independent secondary day school, most of the bottom half of that curve disappeared, but not entirely – thanks to government-funded Assisted Places. At my university (despite its elitist reputation) – tuition was free and the government paid significant living expense grants – so I’d say I saw more of the UK’s bell curve than I had seen before at my not-very-exclusive school.
Incidentally one of the guys I met on the school bus, who was a bit older than me, became the UK’s highest earner a few years ago. Yet at school with me he’d had the same slightly-above-household-average background that I had. Like me, he went to a top university and did well. Education really is everything.
These days, Assisted Places have gone – so disadvantaged kids are now far less common at my old school than they were in my day. In London if you are aiming for Oxbridge/similar levels one day, the done thing is to start private schooling aged 4, not aged 11 or 13. You’re driven there in your Chelsea Tractor, so you’re not meeting other folk on the bus. We’re all mating ‘assortatively’ these days – i.e. marrying similarly educated characters in similar lines of work – whereas in my parents’ day the career options for women were truly retarded compared to 2016, and marrying your school-leaver secretary would had very different connotations to today. I’m sure there are other factors that have reduced social mobility but I struggle to remember them all.
There is a second effect that this FT thread is picking up on. Namely that, I believe, the squeezing sensation is a very London thing.
I heard an illustrious (knighted, no less) retailer speak recently and he said that one of the differences between London and e.g. Manchester is that people earning say £60k in London will start spending more by e.g. eating out at smarter places / buying organic food. Whereas people earning £60k in e.g. Manchester will still proudly buy from Asda/etc and, while they also feel like they are doing alright, their (grocery, eating etc) spending behaviour won’t vary so much from £30k earners in the same way. In London, at every income level there are tantalising things to aspire to trade up to, and no concerns about how conspicuous such consumption might be.
Why is the squeezing more pronounced in London? Of course no article like this is complete without mentioning house prices. And one cause of the class rarification is the combination of the high level of house prices and the large size of the city. Homes in similar areas tend to cost similar amounts. Many areas – e.g. Maida Vale, Chelsea, Finchley, Hampstead, Clapham, Acton – have houses of strikingly similar size/shape/amenity – so price variation within areas can be limited. But the variation across areas is significant; Acton vs Soho are almost an order of magnitude of each other (see Find Properly’s very cool interactive map).
And the size of the city means that if you live in Finchley you are highly unlikely to use the same schools as people in Becton, Acton or even Maida Vale. It takes me longer to see friends on the other side of the river than to get to a commuter town 60 miles away. So the school gates conversations will be more narrow demographically than I remember them being in my rural upbringing. I know people at work who are below-average-wage earners, but I don’t live anywhere near them. My kids won’t know their kids. This starts to explain Ganesh’s “I don’t [know] normal earners”. Those friends of mine on the other side of the river are not as good friends as they once were.
And of course, bankers. Or financial services. London has the top jobs in finance, as in so many other sectors. And the top jobs in finance earn simply staggering amounts of money compared to the national average wage. Even ordinary jobs in finance can earn £200k+. The £80k TV producers and the millionaire lawyers and the star political journalists probably don’t socialise with any Premier League footballers. They might not know any Oscar-winners, pop stars or other celebrity rich types. But they will almost all know people in banking, or asset management, or the top law/accountancy firms. And whereas only the top <1% of football, drama, music stars earn £200k+ on a regular basis, it feels like the top >10% of bankers etc earn £200k, and can expect to do so for many years on the trot.
The policy implications of what’s going on aren’t obvious.
In theory the London idea of insisting on ‘social housing’ in every neighbourhood, implemented via development levies, helps to avoid hastening the ghettoisation. But it doesn’t feel very successful from my limited understanding of it. And it certainly won’t encourage the £200k brigade to use local state schools.
The state schools have got a lot better in London in the last 20 years. But the competitive pressures seem to have worsened faster, and private schools have upped their game too. So the social pressure to fund private schools seems at least as strong as it was in my day. And while I am nostalgic about those Assisted Places, I can’t see the political case for reinstating them.
Obviously if something could be done about house price inflation that would be A Good Thing. The obvious thing to be done is loosening planning restrictions, and improving transport links (which of course have the opposite effect). But the political implications of this are enormous.
The upwards pressures on pay are legion. Bankers, CEOs, hedgies not to mention dear old active fund managers – everybody looks around them and finds ways to argue for 10% increases when the people who populate cost centres are struggling to get an inflationary pay rise. What is hard is to see free-market-friendly solutions for this. Ironically the gradual moves to more transparency, which I applaud, probably help the already best-paid more than anybody.
Finally, and while it pains me to say it, part of the issue is how London-centric the UK is. The top people are almost all here. The best hospitals, the best schools, the best universities (pace Oxbridge), the best businesses, the best political jobs, the top professionals are all in London. It makes the city amazing, but it makes it a pressure cooker. And with all that glittering success will come a lot of rich folk moaning and griping.