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Published Date: 
Sun, 15/05/2011 - 20:21

Back in 1971 you could buy a dozen eggs for 23p, see Love Story at the pictures for 30p and fill up your car at 7p a litre. Texas Instruments also introduced its groundbreaking pocket calculator handy if you wanted to tot up how much of the newly introduced decimal currency you had in your pocket.

In the intervening years the costs of all these items have risen markedly, but at least the trade-off has been living standards have kept pace. "In real terms, household incomes and expenditure have more than doubled since 1971," explains Rickard, senior lecturer in business economics at Cranfield School of Management. "People are now much better off," agrees Alan Manning, professor of economics at LSE. By almost any measure, he argues, this is true of the worker of today versus the 1971 one.

However, there is a "but". Employees are now facing a squeeze, the like of which many people have never witnessed before. The Institute of Fiscal Studies recently warned that households are looking at the largest fall in their disposable incomes since 1981, with data for the first 11 months of 2010-11 showing earnings falling by 3.8%. Pay is lagging behind inflation, meaning real earnings are likely to fall by at least 2% this year.

"This will equate to a drop of almost £800 per household during 2011," warns Rickard. "The situation is not expected to start recovering until 2013 and it will still take until 2015 before it returns to the level at the start of 2010. And with house prices falling, households will also suffer a fall in their overall wealth as well as incomes."

This is bad news, and it could get even worse if interest rates (which up to this month have been at a record low of 0.5% for more than two years) start rising substantially, as a poll carried out by ICM for the Guardian and income protection provider Unum shows that 46% of homeowners would struggle if interest rates increased.

According to wealth experts, the financial squeeze is exacerbated because there are fixed costs for today's worker which simply did not exist 40 years ago. "People have more of a sense of entitlement than in the 70s," says Jasmine Birtles, founder of savings website "The worker of 1971 was far less likely to own a car, a telephone or a television, for example, and there are also costs like broadband, mobile phones and gadgets which many of us would not now care to live without."

And there is something else: while workers are better off than they were in 1971, more of them carry more debt than the average employee of four decades ago could ever have imagined. "The financial world for UK consumers is very different in 2011 than it was in 1971," says personal finance expert Mike Naylor. "Personal debt is now huge and UK consumers now owe more than £1.4tn on mortgages, loans and credit cards. This has increased from just £200bn in 1987. In 1971, there was one credit card and it was not widely used. Now there are hundreds and almost 60 million of them in people's wallets. UK household debt has increased dramatically compared with income, and it will get worse. Family budgets are being squeezed financially and it's likely they will continue to be in the next few years due to rising prices, wage freezes, the stagnant housing market and [public spending] cuts."

While the housing sector may be static, getting on the property ladder still requires more money than many people can muster. As Birtles says: "Taking out a mortgage used to be connected to what you could afford but then became connected to what money was available." A glance at the figures bears this out (see panel, above right). Housing charity Shelter points out that if the 40-fold increase in average house prices since 1971 was mirrored in grocery retail, we would today be paying £47 for a chicken and £20 for a jar of coffee.

The proportion of people's wages spent on food has shrunk over the years. But there is still no room for complacency when it comes to planning for an unscheduled interruption to your income due to illness or injury, says Naylor. "Another area people should spend some time reviewing is their protection insurance needs," he says. "Most people don't have any protection insurance if they were unable to work because of illness, or death. Or they may be wasting money on the wrong sort of insurance altogether. Relatively few people have enough income protection to provide for them if they are unable to work because of illness."

With the economic recovery still fragile, people's main source of income is clearly important and things are certainly not set to get easier anytime soon. "The squeeze now getting underway on household incomes will be greater than the 2009 squeeze," concludes Rickard. "And, yes, many will feel their living standards and quality of life have deteriorated."

What did you need to buy a house in 1971?

Mortgage inflation has far outstripped wage inflation in the past 40 years. Average salaries were around £2,000 a year in 1971, with the average house selling for £5,632: in essence, less than three times earnings. The average asking price for a home rose to £238,874 in May this year, according to Rightmove, while the average salary sits at about £25,000. Without relaxed bank lending, owning a house would be impossible for most people. A change in demographics means the mortgage burden may be greater too: in the early 1970s, 9% of adults lived alone, compared with 16% two years ago.

 Source:, Saturday 18 June 2011 00.01 BST