Wage inequality: the crisis before the crisis
I spoke at an ETUC fringe event at the Party of European Socialists’ convention in Brussels this morning, about the economics of inequality and well being. My opening remarks focused on how low wages helped cause the current crisis, and about how we need a renewed emphasis on equality of income and wealth to get out of the mess we’re in. Below is an edited version of what I said.
In the discussion which followed, the main concern expressed was the way that wages have not just not kept pace with top people’s pay but nor have they kept pace with GDP: the fruits of what growth there has been have not been shared equally.
We’re discussing the central challenge facing the European left. Not just how to curb excessive financial speculation, nor how we shape a new political economy, but how we move from growth fuelled by debt to growth fuelled by wages. Because that is the only sustainable path we have out of the current turmoil.
We have to give working people the confidence and the means to start spending again. That means ensuring that everyone shares in the spoils of growth: spreading the wealth around, as President Obama rightly puts it. Without that, economic renewal will remain beyond our grasp.
It’s clear that the free market fundamentalism of the past three decades has enriched far too few and failed far too many. The top half a percent – the big bankers, hedge fund managers and the super-rich – now own one third of the world’s wealth. And as this tiny elite has prospered, as corporations have become more powerful, ordinary workers have struggled.
In Britain, in the mid 70s, 65% of GDP went into workers’ wage packets. Now it is just 53%. And the global financial crisis has made things even worse. Living standards in 2013 are predicted to be no higher than in 2003. In other words, we have already had our “lost decade” and the no growth decade ahead of us promises to be even worse.
But at the other end of the spectrum, they’ve never had it so good, as Prime Minister MacMillan once said. Last year, top directors in Britain saw their packages rise by an average of 49%. In the midst of austerity, that is a truly staggering figure.
But beyond the outrage, inequality like this is not just morally indefensible. It is economically unsustainable. As the former chief economist of the IMF has said, the primary cause of the crash was the growing wealth gap between a tiny financial elite and everybody else.
Untold riches for those at the top created a vast pool of footloose global capital. It sought ever greater returns. It was invested in ever more risky financial instruments. And it drove the unregulated explosion of speculative trading.
And as this was happening, the only a way for workers facing stagnating real wages to maintain their living standards was to borrow dangerous amounts. In Britain, household debt nearly quadrupled between 1980 and 2005. Across Europe, consumers increasingly resorted to credit to keep up. And in the USA, thirty years of stagnating wages and escalating wealth at the top led to the sub-prime mortgages that sparked, rather than caused, the global financial crisis.
It was this toxic cocktail of financialisation, massive borrowing and debt-fuelled growth that drove the global economy off the edge of the cliff.
So it follows that we need to address these structural problems if we are to build a fairer, more stable global economy. As the Occupy movement and the indignados before them show, there is a genuine public appetite for change.
First, we need policies that curb excessive speculation. Better regulation of the banking and shadow banking systems. A financial transactions tax at EU or even global level. And new models of corporate governance.
Second, we need policies that promote a more even distribution of wealth. Stronger taxes on bankers’ bonuses. A clampdown on tax avoidance. Worker representation on company boards.
And third, most importantly, we need policies that increase the pay of ordinary workers. Higher minimum wages, where they exist, and minimum wages were they don’t. Investment in lifelong learning. More effective labour market regulation. And a stronger role for collective bargaining.
So now is surely the time to make a decisive break with neoliberalism. To set out the form of a new economic settlement. To give working people a sense of hope about the future. And to rebalance a relationship between capital and labour that has become dangerously lop-sided.
The focus must be on wages. Because decent wages drive sustainable demand. Sustainable demand creates stable growth. And stable growth underpins successful economies.
That’s the message trade unions need to get across. And it should be the socialist pitch to ordinary working people. Because in the long run it is the only way to safeguard European social democracy for future generations.