The assumption has been the same for decades: that a thriving economy will benefit everyone. But a new report concludes that the middle class is collapsing – and that even if Britain now returned to growth, half the population would be left behind

Clair Beattie, who lives in Nottingham and works part-time as a hairdresser, looks back to her parents' generation and wishes things could be like that now.

Her father had a good profession: he was a builder who brought home a decent wage. Her father-in-law, working in the same trade, owned his own company. His prosperity meant his family owned their own house and went away every year on holiday. "Our parents' generation definitely seemed to have had an easier time," she says. "There were more jobs, better wages and it was easier to get on the housing ladder."

By contrast, Clair and her husband Dan struggle. They don't complain too much, largely because they have two lovely daughters – one four and the other 17 – as well as an 18-year-old son who has left the family home. But life is tough. Dan's expertise is in air conditioning and because there are few jobs in that field in Nottingham he works 50 to 60 hours in London every week.

They don't own their own home and half of their joint income of around £30,000 a year goes on rent and council tax. Clair would love the family to buy their own house but sees no hope because prices are so high and money is too tight. "If childcare was cheaper, I would be able to work more and make a greater contribution to the family budget," she says. "That would make it easier to buy a house."

She has also thought of re-training for a new career that would better suit her family's needs, but that route seems blocked too. "I qualified as a hairstylist after finishing school. Since then I have looked into re-training for a career in education, but the cost of the training is more than we can afford."

Nowadays Clair and Dan just concentrate on getting by, rather than looking forward. "We can't look beyond the next payday. I can't even think of my children growing up and needing more. I have to deal with what they need this month. We're stuck in a rut."

She adds: "I look around and it's hard to see signs of hope. A neighbour's son went to university and hasn't worked in a year."

Today a report by the Institute for Fiscal Studies and the Institute for Employment Research for the independent Resolution Foundation highlights how Dan and Clair, and millions of others like them, are victims of changes in the UK jobs market which – coupled with current policy on tax, benefits and other issues – are fast creating a Britain of two halves: those in the bottom 50% whose living standards are on the slide, and those in the top half who can look forward to better prospects in the future.

The heart of the problem, the study points out, is that traditional well-paid skilled jobs, such as those in manufacturing and administration, have given way to low-skilled, low-wage jobs in the retail, caring, leisure and service industries. Coupled with government policies that offer limited childcare and vocational training, the ability of people to find escape routes out of what Clair calls a "rut" is limited, and the outlook for low to middle income households is bleak. These days large swaths of the "squeezed middle" – to use Ed Miliband's phrase – are in danger of becoming part of a "vanishing middle".

So serious is the situation, the report says, that even in a rosy scenario in which healthy levels of economic growth return between now and 2020 the bottom 50% of households would still see their living standards decline steadily between now and the end of this decade. Whereas previous generations assumed their children would be better off than they were, the reverse is becoming the case.

The further down the income scale one goes, the sharper the decline becomes. Some of the lowest-income families, the report says, are projected to see real-term drops in their living standards of around 15% by 2020 as benefit cuts and changes to the tax system – including a move to link future rises in tax credits and benefits to the lower consumer price index of inflation rather than the retail prices index – bite.

By contrast, the report finds the future for the top 50% of earners looking far brighter. It estimates that between now and 2020 some 2m more jobs will be created in high-paid professional and managerial occupations. In short, in income terms, a divided, polarised country is taking shape in which low earners are increasingly hard-pressed and increasingly numerous, the well-heeled continue to flourish and pull away from their unluckier contemporaries, and the ranks of those on middle incomes shrink inexorably.

As the party conference season opens, with Lib Dems meeting in Brighton this weekend, the report is political dynamite that should blow apart many of the current debates on policy. It puts firmly into context grandiose claims by the Liberal Democrats to be delivering "fairness" in austere times, in one fell swoop, by lifting two million people out of income tax.

More broadly, it raises fundamental issues about how fairness really can be delivered in a meaningful way. Up to now the predominant political argument between Labour and the coalition parties in this parliament has been over the delivery of economic growth, as if growth were the panacea. Labour's Ed Balls has argued that coalition spending cuts should be slowed and that a burst of Keynesian pump-priming is the way to revive the economy. The coalition, on the other hand, says the credibility of the UK economy in the eyes of the markets rests upon cutting the deficit, hard and fast, and this is the route back to growth.

But – particularly for Labour and the Liberal Democrats, who put fairness and the interests of low earners at the heart of their message – this study should change the game. It makes clear that, even with healthy levels of growth, inequality will go on widening if the current thrust of policy stays the same. The study assumes average annual economic growth of 1.9% from 2011 to 2015 and 2.5% from 2015 to 2020 – figures more optimistic than the latest projections from the Office for Budget Responsibility.

In other words, the guiding assumption of British politicians during the postwar generations – that a growing economy will automatically provide the jobs and opportunities to allow all social classes to prosper – is no longer adequate to the times. Without fundamental moves to address the collapse in what used to be called white-collar employment, and without a strategy to engage those whose fathers would once have found skilled work in manufacturing, growing numbers of Britons will be excluded from future good times.

It does not take a sociologist to recognise that the implications for social cohesion are huge. Last summer's riots and looting in the streets of English cities offered a vivid illustration of what can happen when disaffected sections of the population go their own way.

So Labour and the Lib Dems will need to focus hard on the suggestions this report makes for addressing the crisis – because a return to growth, though vital, will not on its own be enough. Although it does not put forward precise policy suggestions, it makes clear that, if progress were to be made in three key areas, the incomes of typical middle income households would be £1,600 higher in 2020 than under the current policy path.

The first is to raise female employment to the level of the best-performing member countries in the Organisation for Economic Co-operation and Development. This would mean developing more generous childcare systems like those in Denmark and Sweden. The second is to raise skills and training in the bottom half of the workforce – something that could only be achieved by a new and costly focus on vocational training. And, third, it suggests boosting wages for the lowest paid in a way that would have an effect equivalent to that seen when the minimum wage was introduced in 1999. Only by doing all three together, the report says, will the policy mix combine effectively to have a substantial positive effect on raising incomes at the bottom end.

Until government moves in that direction, Clair and Dan will have to continue relying on their parents for help to get by and for money to get away from the struggle of everyday life. "This year my father-in-law paid for a family holiday which we could not afford otherwise. We rely on them quite a bit," she says.