Why is the UK seeing a record fall in workers’ wages?


11:01 am - June 14th 2013

by Chris Dillow    


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Real wages are falling at a near-record rate. Wednesday's figures show that they were 6% lower in April than they were in April 2008.

This is the biggest five-year drop in real wages since 1921-26, and the second-largest fall since records began in 1855.

This cannot be blamed simply on the recession. As the IFS has pointed out (pdf), real wages rose during the recessions of the early 80s and 90s. Something, then, has changed since then. But what?

Here's a theory. Back in the 70s and 80s, bosses could often not efficiently monitor their workers. To keep pilfering and skiving within tolerable limits they therefore had to pay better than market-clearing wages, to buy goodwill. The upshot was that wages rose even during downturns, because bosses feared that real wage cuts would create discontent and thus increase thieving, insubordination and malingering.

This led to a huge literature in economics on efficiency wages, gift exchange (pdf) and insider-outsiders (pdf), which tried to explain high and sticky real wages.

However, as Frederick Guy and Peter Skott have shown, socio-technical change since the 80s such as CCTV, containerization and computerized stock control has made it easier for bosses to monitor workers. Direct oversight means they don't need to worry about buying workers' goodwill. They are instead using the Charles Colson strategy: "When you've got 'em by the balls, their hearts and minds will follow."

Years ago, firms wanted smaller but motivated workforces. Now they can control workers directly, they don't need to worry so much about motivation* and so are content with larger but grumpy workers.

All this has three implications:

1. Talk of "wage rage" misses an important point. At the point of production – to use a quaint Marxian phrase – there is little meaningful rage, because workers can do little to fight falling real wages. (This poses the danger that such rage will find perhaps misdirected political expression, such as in antipathy towards immigrants).

2. Issues of industrial organization – how firms are organized – have important macroeconomic effects. Macroeconomics cannot be easily studied separately from ind. org. Economists need to look inside the "black box" of industrial structure.

3. You cannot understand economics without understanding power. The fact is that bosses' power has risen and (many) workers' power has declined. In this sense, the rising incomes of the 1% and the fall in real wages for the average worker are two manifestations of the same process.

* except, of course for top-level managers who cannot be directly monitored – hence their rising incomes.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments


this theory of does tend to miss out that sometime in the 80s corporate profits went from an average of 8 – 10% to 25 – 30%. This wasn’t just shareholder greed, although that certainly helped but was brought about mostly by the twin threat from banks who used catch-all head office determined formulae about profit criteria which prevented them lending to “under-performing” enterprises. And companies which couldn’t get loans were at the mercy of the new financier game of hedge fund leveraged buyouts.

All of whom protested that they were simply doing this, almost altruistically, to “eliminate inefficiency” and “liberate value”. Or closing down plant and shedding workforce.

In Germany c2000, wages were too high in relation to the production coming from those being paid. Productivity was too low. So, the German government engineered a relative fall in the workers’ wages. As productivity continued to rise wages did not, thus reducing the labour cost of production. And after a decade of doing this German industry is now extremely competitive.

British industry faces much the same problem. Wages are simply too high compared to the output from employing people. Thus the wages need to fall relative to output. Which is what seems to be happening. Hurrah!

3. EyesWideStupid

2. TONE

…and as wages fall – demand falls as the worker can no longer afford the goods and services he’s producing.

Businesses go bust – more jobs are lost and the world declines into a deep depression.

Hurrah!

If only employers thought about the consequences of falling wages rather than just blindly accuming they mean ‘more profit’ for the greedy shits.

4. Charlieman

@3. EyesWideStupid: “…and as wages fall – demand falls as the worker can no longer afford the goods and services he’s producing.”

That’s true, in broad way. It is also true that lower wages reduce the ability to save or get a mortgage, which changes housing costs. Many goods are pitched at the market on the basis of “what consumers can afford/will pay” rather than cost of manufacture and production; reduced wages lower the prices of such goods. When working people have less money, they spend it on different things. Spending patterns change, often in counter intuitive ways; UK consumers currently buy more good wine (absolute and as a percentage) than 15 years ago.

Demand falls but businesses and consumers also change. Whether/how this results in fewer jobs or reduction in quality of life is more complicated.

EWS @ 2:

But that’s simply not what happened in Germany.

As wages fall, many prices fall, too – all other things being equal. Moreover, as wages fall, employment increases, and fewer people are unemployed than would otherwise be the case. So, broadly, demand can be maintained during the adjustment to higher productivity.

@1 Helen

Would really like you to list some examples of ‘Hedge fund leveraged buy outs’. Profits at 25 -30% of turnover? I doubt that lasted for very long.

@3 EWS

Obviously employers should immediately triple the wages of all of their workers and everyone will be better off.

7. Derek Hattons Tailor

You are missing the obvious decline of unions in the period between 1970s and now. Individual has replaced collective bargaining which puts low skilled workers in particular, at a disadvantage. This has probably been exacerbated by the apparent willingness of women, who constitute a larger proportion of the workforce than in the past, to accept lower wages than men for the same work.
The other, connected, change is to service industries whose organization (outside financial services) dispenses with tiers of skilled workers and pays a single rate for unskilled work, and a single rate is more easily eroded than multiple rates.
There is also, I think, more pressure from shareholders meaning that costs are screwed to the floor, and in service industries wages are usually the most significant cost.

8. Derek Hattons Tailor

@ 2 Its not that productivity is too low it’s that prices are too high. If you want to drop wages then prices have to fall, otherwise the workforce/consumers can’t afford to buy anything. That is what is happening at the moment, 2007 real prices on 2013 real wages, so demand falls. The response should be prices fall but it isn’t, because that would harm the interests of management.
This is the real problem. UK industry has always and still does suffer from chronic over management. Too many managers as a ratio of workers, they are not on average very good and they are on average overpaid. If you want BRIC productivity you have to have the flip side which is BRIC company structures and BRIC remuneration for the board.

If we had BRIC productivity we would be massively poorer because BRIC productivity is hugely below UK productivity, which is kinda why they are poor. Productivity has very little to do with how hard someone works, but is related to the output they produce. Someone digging ditches with a shovel will be working hard. An earth moving operator will not be working so hard but will be more productive.

I think there needs to be more disaggregating done rather than just look at the issue of wages as a homogenous whole. When wages are disaggregated it usually is the case that it is manual male wages that have been devalued. The decline of unions may partially provide some explanation but it is lazy to think of that as a theory of everything. The same phenomenon happened all over the advanced industrial world no matter what happened with union membership. Moreover, most of the type of labour that has been devalued never had high union membership anyway. Marxists always see things in terms of power relations and it probably is the case that labour that can easily be automated does not hold much power.

10. Derek Hattons Tailor

Indeed, but initially at least automation tends to replace low skilled work. This is what preceded the feudal/industrial transition. Subsequently, ICT has done the same, or should have, to divisional company structures. The company of the future will be a board, some contract technocrats, and an outsourced workforce. It’s already practically happened in a lot of the service industries. What is the point of all those middle managers synthesising and analysing data when a computer can do it cheaper and quicker. The pressure for this is coming from above (i.e shareholders), so Marxist or not, you cannot ignore power relations.

How come this in the news?

“Despite a drop in overall employment during the economic downturn, the Organisation for Economic Co-operation and Development found that male migrants in the UK have had higher levels of employment than ‘native-born men’ from 2007 onwards.”
http://www.telegraph.co.uk/news/uknews/immigration/10117717/Migrant-men-more-likely-to-be-in-work-than-indigenous-British-males.html

Could it be that immigrant males are better educated and more productive than unemployed indigenous males?

12. Ben Chifley

Obviously, printing money doesn’t effect anything doesn’t cause inflation. Inflation is only measured when the government participates in the economy because it effects prices for business’ hey.

How much concrete can the bankers pour in this country?

http://www.theatlantic.com/business/archive/2013/06/rich-countries-are-creating-more-jobs-by-creating-worse-jobs/276505/

The Alantic a bit to left wing for people believe printing money is the best way to run a country.

As you can see Sth Korea has the highest wage increases and good jobs. Well Done David Cameron!!!!!!

http://www.bbc.co.uk/news/business-17127488

13. Ben Chifley

http://www.theatlantic.com/business/archive/2013/06/heres-why-investors-seem-to-be-sprinting-away-from-bonds/276764/

http://qz.com/94613/how-hedge-funds-can-help-detroit-avoid-bankruptcy/

Yeah Milton Friedman can print money in England to buy Detroit. A few articles in relation to hedge funds and why they are a fraud.

14. Ben Chifley

http://www.theatlantic.com/china/archive/2013/06/how-municipal-governments-are-dragging-down-chinas-fiscal-health/276886/

bond markets crashing all around the world but hey lefties don’t know what they are talking about…

dave carney can just create new bonds and the rbs and others can get all the incentives to build houses

EyesWideStupid: “If only employers thought about the consequences of falling wages rather than just blindly accuming they mean ‘more profit’ for the greedy shits.”

I’m sure many of them are quite aware of that, but there’s not a lot you can do if your competitors are cutting wages in order to cut prices. In most markets, if you don’t keep up with the competition on price you’re going to get destroyed.

It’s a form of market failure. Lower wages are advantageous for almost every single business in the market, but where the earners are also the consumers, ultimately damaging for the market as a whole.

(BTW I’d say there’s another reason wages are being pushed down – nowadays the fear of unexpected destitution created by the JobCentre’s sanctions-based approach means that people are much more desperate to get into the job market. You’ll find plenty of jobs now which are minimum wage + lots of unpaid overtime, and get plenty of applicants.)

16. margin4error

Some raised a comparison with Germany – and it is interesting to note the very different fortunes of the UK and Germany in recent years, because it emphasizes how badly the UK worker is doing.

One of the reasons that wage rates often don’t fall over a recession is that unemployment rises. It is probably not surprising to anyone with half a brain that those who end up on the scrap-heap are more likely to be low productive value and thus low wage workers – and that this statistically therefore pushes up the average wage by taking lots of low earners out of the equation. (Also, it pushes up productivity for a similar reason)

Germany has not seen a similar recent dip – wages are down by about 3% on 2000, but that is for longer term reasons that saw negotiated pay reductions between unions and manufacturers under Schroder. This is particularly surprising as Germany appears even now to be running close to structurally full employment (about 5% unemployment is likely to be as close to effective 0 unemployment as a modern economy gets) – so its average wage is not boosted at all by dumping lots of low wage workers onto the unemployment column.

So why is Germany faring so much better? Partly this is likely to be far more structural than the UK is ever able to act on. Germany has a far more diverse economy than the UK’s rather service-dependent economy. Services often need generic skills so hiring and firing is easy, as is pushing down wages – while Germany has more specialist skilled workers, who are by nature of the training and education involved, harder to replace and more valuable in terms of productivity.

To fix that the UK would have to move to a more diverse economic model – and moderiise our education system dramatically (for both kids and adults). Since we have been cutting adult education for some time and given that our education secretary is trying to un-modernise our education system for kids – it seems unlikely we are set to follow the German model no matter how successful it is.

As such we should expect our nation to keep getting poorer.

This suggests something other than rec


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