One of the features of the UK economy in the credit crunch era has been the fall in the level of real wages. This represented quite a sharp change in what economists and analysts considered the natural order of things which went as follows. Inflation was invariably assumed to be on target of Consumer Price Inflation or CPI rising at 2% per annum and wages were assumed to rise at 4% per annum giving real world growth of 2% per annum. Some were relatively risque and assumed real wage growth of 1.5% or 2.5% per annum but the general principle remained that real wages rose and expectations of this were clustered close together. So the falls of the credit crunch era came as a shock and made a lot of economic work from that time useless for analysing the situation. However we should not be too harsh as for a long time this was actually true as shown by the analysis of the Office for National Statistics below.
Adjusting for these price increases to give an estimate of real earnings growth, full-time employees were on average 62% better off in 2011 than in 1986.
They are soft-soaping us a bit by using CPI as their inflation measure up to 17 years before it was introduced as using Retail Price Inflation would lead to a lower real wage estimate but the overall principle of rises remains.
The Trade Union Congress presents a different perspective
We know that since 2007 such growth quickly ground to a halt and then slammed into reverse course and the TUC have presented this in a different way.
On the eve of the recession in 2007 workers across the UK were earning a total of £690bn (in 2012 prices). However despite rises in employment, a combination of falling real wages, reduced hours and changes in the kind of jobs people are doing has reduced the UK’s total pay packet by 7.5 per cent over the last five years – a real terms annual cut of £52bn in 2012. The UK’s overall pay packet fell to £638bn last year.
I have mentioned the depressing effect on the UK economy of falling real wages and we see that one way of putting this is that some £52 billion of likely demand in the UK economy has vanished over the credit crunch period. Those who say or imply that inflation does not matter have a direct contradiction to their claims in that number as above target inflation has palyed a full part here. Also the advocates of policies such as Quantitative Easing have an itemised cost to the inflation that it contributed too. Remember these days they have been reduced to arguing that everything would have been worse without it (counterfactual) whereas here we see an example of how it has been worse with it! Along this road we see that easier monetary policy can lead to weaker economic growth should it have the effect of generating higher inflation and lower real wages which of course has been the UK experience.
The Regional Pattern is not what you might have expected
The weaker areas could perhaps have been guessed.
The North West experienced the sharpest cut in its overall pay packet between 2007 and 2012 – a fall of 10.6 per cent or £7bn last year. The South West, West Midlands and Scottish economies have also seen employees’ overall pay packets shrink by around ten per cent.
However London has only seen a fall of 3.9% in real wages making it the region least affected. Seeing as we were promised substantial wage cuts and reform in our (London based) banking sector this might come as something of a surprise. But as ever we end up suspecting that the job and wage cuts have mostly come at the lower end of the spectrum moving the pain outside London. Those in authority seem continuously to dodge any form of axe.
As the TUC is concerned about excessive executive pay I think that they have missed something of an open goal here by not emphasising this point more. They are on better form here.
The average chief executive now earns 145 times more than the average wage.
Inequality has risen too
In spite of the effect of the national minimum wage inequality has risen according to the TUC.
The poorest half of the population have borne the brunt of Britain’s shrinking wage pie, and now receive just 12p of every pound of UK GDP – a 25% fall since the late 1970s.
Some care is needed here as our poorest half are substantially better off than they were in the late 1970s in absolute terms but are relatively worse off if compared to everyone now.
The balance between capital and labour
The TUC puts it thus.
For the last thirty years the British economy has seen a steady shift in the way national income has been distributed, away from wages and towards profits.
It is a shame that they did not give us any measure of this trend. Although we do know from the International Labour Organisation that a falling share of wages in developed economies is widepread and that it fell from 66.1% in 1990 to 61.7% in 2009.
So we are left with the impression that the good years hid to some extent a trend which is much clearer in the bad times we are now in. The other side to the equation is that more money is going to what Karl Marx called “capital” as he no doubts spins ever faster in his grave in Highgate.
This issue of falling real wages is getting increasingly serious as it continues. This was added to in March by the fact that the nominal level of wages fell too meaning that I am waiting for tomorrow’s data for April already! Was it a one-off affected by changes in bonuses or are we on a darker road? However if we return to the real wage issue we see that its fall does a pretty good job of explaining why the UK has recovered so poorly from the credit crunch. If you have a lower real income then you are to say the least fairly likely to spend less and we see why UK consumption and thereby economic growth has been weak.
We can add to this by factoring the other influences on the UK economy such as the reduced income for savers as interest-rates fell. This was magnified in real terms by the same above target inflation which hit wage earners and was again a contractionary influence. So for our so-called expansionary monetary policy to have worked it would have needed to have had an extraordinarily strong effect on borrowers consumption. Along that road we have the genuine worry which has been a theme of this blog for some time that policies such as QE may even have a contractionary effect on the economy. That can put you on a very dark road if you wonder if those implementing it had figured that out…. Is all the cheap credit that is available around many parts of the world a way of hiding this reality?
If we return to the analysis of the TUC they have a simple answer to the problem.
BRITAIN NEEDS A PAYRISE
If only it was that simple! There is of course the danger that some and maybe many industries are in a globally competitive market and that wage rises will simply persuade them to leave the UK. How we deal with globalisation is a big conceptual issue and we need to do a bit better than failing to tax global companies which seems to have become the default option.
So we find ourseleves with a question which goes way beyond the borders of the UK. What can be done about the falling share of labour?