The illusion of rising living standards: Real wages vs real life

Politicians love a clean number. “Real wages are rising.” It sounds reassuring. It sounds like progress. It sounds like people should feel a bit better off than they did a few years ago.

And yet, a lot of households don’t feel better off. They feel squeezed. Tighter. Like more of their income disappears the moment it arrives.

So who’s wrong? Annoyingly, possibly nobody. The tension comes from the fact that “real wage growth” and “real life” are measuring two very different things.

When economists talk about real wages, they mean wages growing faster than inflation. Inflation, in this case, is usually measured using CPI or CPIH, which track the cost of a representative basket of goods and services. That basket includes food, transport, energy, clothing, electronics and various services. It’s designed to reflect average household spending.

That’s the key word: 'average'. Because average spending is not the same thing as unavoidable spending. The index tells us how much the typical mix of goods costs. It doesn’t tell us how much pressure households feel after paying for the things they can’t opt out of.

Housing, for example, is only partially captured in these measures. Childcare is included, but not with the weight it carries in the real world for many families. And the basket itself reflects what people spend on, not what they must spend on.

So the official question becomes: “How much has the average basket gone up?” But the household question is much simpler and much harsher: “How much do I have left after paying for the essentials?” Those two questions are not interchangeable.

This is where averages start to break down. Inflation blends everything together. If televisions, clothes and gadgets get cheaper, that pulls the overall number down. On paper, that looks like good news.

But you can’t pay your rent with a cheaper television. You can’t offset nursery fees with discounted trainers. So while the index might show moderate inflation, the actual pressure points in a household budget can still be rising sharply.

The issue isn’t that the data is wrong. It’s that it’s answering a different question to the one people are actually asking. Over the past few decades, this gap has widened because the structure of household spending has changed. In the 1970s, housing was typically a smaller share of income. Formal childcare was less common. Many households relied on one income supported by informal care or extended family.

Today, housing is often the single biggest outgoing. Childcare is a major, unavoidable expense for many families. And two incomes are no longer a lifestyle choice in many cases - they’re a requirement just to stand still.

What that creates is something you might call cost concentration. A growing share of income is absorbed by a small number of non-negotiable costs. And when those costs rise, they crowd out everything else. So even if wages increase, it doesn’t necessarily translate into a better lived experience. The extra income gets swallowed before it has a chance to improve anything.

Part of the reason for this is that not all prices behave in the same way. Some sectors become cheaper over time because they get more efficient. Manufacturing and consumer goods benefit from automation, globalisation and scale. That’s why many products today are cheaper, better, or both compared to previous decades.

But the big 'life' costs don’t follow that pattern. Housing, childcare, healthcare and education are far more resistant to productivity gains. A nursery still needs a certain number of staff per child. You can’t automate that away in any meaningful sense. Housing is constrained by land, planning and supply - and on top of that, it functions as an investment asset as well as a basic need.

So you end up with a split. The things you can delay, substitute or shop around for often get cheaper. The things you absolutely need keep getting more expensive. That’s where the disconnect really bites.

This is why two seemingly contradictory statements can both be true. On one hand, the data shows real wages rising and inflation stabilising. On the other, households feel like they have less room to breathe. The gap isn’t ideological. It’s methodological. One side is measuring averages across the economy and the other is dealing with what’s left at the end of the month.

If you want a measure that better reflects real life, you’d look at something like effective disposable income. In simple terms, that’s income minus housing, childcare and core bills. What’s left is what people actually have control over. And that’s the number that determines whether life feels easier or harder. It’s what dictates whether you can save, absorb unexpected costs, or just not worry quite so much.

Crucially, this doesn’t hit everyone equally. Homeowners (particularly those with small or no mortgages) are often more insulated. Older households may have benefited from rising asset values and lower exposure to these growing costs. People without childcare costs avoid one of the biggest financial pressures altogether.

But renters, younger households and families with children are far more exposed. They’re more dependent on earned income, more vulnerable to rising housing costs and more likely to face large, unavoidable expenses each month. So when averages are presented, it’s entirely reasonable for people to ask who those averages actually represent.

To be fair, real wage data isn’t useless. It’s standardised, comparable over time and helpful at a macro level. That’s why policymakers rely on it. It gives a clean, consistent signal about the direction of the economy. But it doesn’t capture how costs are distributed. It doesn’t distinguish between essentials and discretionary spending. And it doesn’t tell you whether a working household has anything left once the major bills are paid. So when it’s used as proof that people should feel better off, it starts to miss the point.

When politicians say to us, real wage growth has increased and expect us to agree – this is the contrition we see building between “us” the citizens and “them” the politicians. It is my belief that without education in what they are doing - playing with data and misrepresenting, they will continue to get away with it.

So when you next hear a stat from a “leader” ask yourself, do you understand that stat? - but more importantly is that stat actually measuring something that means anything meaningful to you in the real world?

Lloyd

The Finance Guy