Before the bursting of the housing bubble and the catastrophic unemployment and underemployment that followed, the fact that the wages and incomes of most American workers were not keeping up with economy-wide productivity growth was one of the most glaring failures of the American economic model. This decoupling of pay and productivity has been the source of much debate in the US. But it is not a uniquely American phenomenon. From Canada to Australia, and, more recently, Germany and the UK, there is now evidence that similar patterns are beginning to emerge in other developed economies around the world.

This chapter indicates that the similarities between the American and British economic models may now be more significant than the differences. US politicians still talk of the ‘socialist’ healthcare system in the UK as an alien concept, and Brits may look across the Atlantic in horror at our threadbare welfare system, but at a more fundamental level, our countries share a problem. That problem is that a rising tide no longer guarantees that all boats are lifted. In other words, while our nations have got richer, our low- and middle-income households have suffered a stagnation and even decline in their living standards.

In that light, this chapter outlines the major trends in the US in the hope that we can offer some lessons to learn from the unbalanced growth that the US has had over the last generation. These lessons are important for any country hoping to create a more equitable future. Most importantly, we argue that the economic situation we observe today is not simply the product of globalisation and technology. Rather, it is also the result of choices made about economic and social policies. In other words, it is within the gift of politicians and others to usher in a broader-based prosperity in the future – if they want to.

The long-term stagnation of median household income

Figure 1.1.1 tells the basic American story by showing family income growth at the 20th percentile, the median and the 95th percentile, indexed to 100 in 1979 for easy comparison of growth rates at each of these points in the distribution.