The Great Wage Squeeze
Today the TUC has launched its Britain needs a pay rise campaign. To accompany the launch we have published research showing that, in real terms, Britain’s total pay packet has fallen by over £50bn since the end of 2007. Rob Holdsworth has blogged on the findings and the Guardian provided a good write up of the key findings.
There is no doubt that the last few years have been tough for most people. Real wages have been falling since early 2010 and nominal pay growth is now at its weakest level since at least 2001. Although the pain is not being equally shared, with data out yesterday showing that the pay packet of the FTSE Chief Executives rose by an average of 10% in 2012 (£).
The response of some commentators when faced with these facts is to assume that it is nothing new. On twitter today the Economist’s Daniel Knowles asked if this was not just evidence that the economy was not growing? Obviously this a fair point – the economy has been doing badly and this has impacted on the earnings of most people. Two weeks ago the Independent on Sunday’s John Rentoul expressed similar point of view, arguing that:
What happens in recessions is that people tend to become worse off. Fortunately, because Gordon Brown saved the world—I mean, saved the banks and pumped money into the economy—job losses were kept lower than would have been expected in previous recessions, and the economy started to bounce back. Since then it has all been a bit bumpy, but job creation has been surprisingly strong and disposable income per head has fallen back only to where it was in 2003.
So “the cost of living crisis” is just a way of saying “the recession.”
I’m afraid that is not true. I wish it were so, for if it were simply a case that the recession had hit people’s incomes then the solution would be relatively straight forward – boost demand, restore growth and enjoy the fruits of that growth.
In support of his argument Rentoul offers a chart of expenditure per head, which does indeed show a steady upward trend in the years up to 2008.
But using a mean measure of expenditure per head somewhat misses the point. First the debate is really around incomes not expenditure – expenditure running ahead of incomes and the resulting build up of personal debt was a major factor contributing to the crash. (The key IMF paper on this is well worth a read, and one of its authors is speaking at the TUC next month).
But more crucially Rentoul has used a mean when we should be using a median. Imagine if we had an economy with only ten people who all earned £25,000 a year and one year one of them saw their income increase to £250,000. Mean income per head would increase to £47,500 – a fairly staggering increase – but 9 out of 10 people would see no rise in their income level. Using a mean in this example would give a highly misleading picture.
from 2003 to 2008 median wages flat-lined, average disposable incomes fell in every English region outside London and spikes in the prices of essential goods squeezed family budgets.
And warned that:
Millions of households are heading for a long period of stagnant living standards unless bold steps are taken to ensure that growth over the next decade is broadly shared. Even with a return to steady growth, it’s now entirely possible living standards for a large swath of low and middle households will be no higher by 2020 than they were in 2000.
In other words, something was going wrong before the crash. The striking falls in real wages over the past three years, follow on from a period in which for many people their pay packet had simply stopped growing.
This was driven by two major factors – an increasing proportion of the wage growth that there was being taken by those at the top and a fall in the overall share of the economy being paid out in wages over a three decade period. On this second point I’d highly recommend a recent TUC Touchstone publication.
By coincidence, Gavyn Davies has been writing about the same issues over at the FT’s own blog today. He presents the following chart:
Davies argues that:
[The] decline has been so widespread and persistent that it must have been caused by some very powerful and continuous economic forces, including a technology revolution, globalisation, financialisation and the erosion of labour’s bargaining power.
The programme ended with Resolution’s Gavin Kelly arguing that:
Even if we do get growth back, based on previous trends and given how far we have fallen in terms of living standards of working people over the last few years, it will take a long time – we’re looking towards 2020 – for many households to recover the position that they had previously attained prior to the recession. So this debate and the politics of this debate is set to run and run, and that’s assuming that the economy actually does recover. So I’m afraid we’ll be talking about this for a long time to come.
If we accept that what is happening to wages right now is not simply the result of the recent recession (and the evidence certainly suggests this) then the current debate about around macroeconomic policy has to move beyond how we simply return to growth and into questions about how we ensure that any growth we do get actually benefits most people.
Some of the answers are the subject of a forthcoming Touchstone pamphlet but they involve not just action to push up wages but also policies aimed at making sure our economy generates better paying jobs in the first place. This policy debate takes us away from the traditional levers of macro policy and into a broader discussion about reforming our national business model.