Our living standards crisis can only be solved by boosting wages


2:58 pm - August 14th 2013

by Duncan Weldon    


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As I blogged last week, the squeeze on living standards has tightened since the end of the recession.

We are currently undergoing the longest squeeze in real wages since the 1870s, GDP per capita looks set to have a lost decade and the beginnings of the great wage squeeze can be found before the crash.

The latest inflation and earnings data demonstrate the extent of the squeeze clearly:

The chart above though is subject to two important caveats. Firstly the most recent earnings data have been distorted by income shifting ahead of the 50p rate tax cut (as I’ve written about today on Left Foot Forward) and secondly because the data above deals with average rather than median earnings. The picture for median earnings is considerably worse.

But the chart above also tells us something very important about what is causing our cost of living standards crisis.

Contrary to popular belief, it is not primary down to inflation. Now of course inflation is having an impact (big rises in rail fares, food bills and energy prices are hitting people’s standard of living) but in reality the primary driver of the squeeze on real incomes has been weak wage growth.

Over the period as a whole RPI averaged 3.0% – not very far from its current level. By contrast average weekly earnings growth averaged 3.2% – well below its current level (which is a reported 2.1% this month but stripping out distortions is almost certainly closer to 1.0%).

In other words the reason living standards are being squeezed is because of poor wage growth rather than high inflation.

Policy needs to go beyond fiscal stimulus and look at wider issues about how wages are set in the UK.

The TUC has recently published a pamphlet looking at this very topic. It identifies more than could be done with the minimum wage and the living wage and notes the crucial role of collective bargaining coverage in protecting living standards.

But it also notes that in the medium term much of the work of increasing wages will require a rebalanced economy that creates more higher skilled, higher waged jobs in the first place. Achieving this means a modern industrial policy, corporate governance reform and changes to our banking system.

To solve the crisis in living standards policy makers have to realise that the crucial driver is not inflation but wages. Boosting wages is the only sustainable way to close the living standards gap.


A longer version of this post is here.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


1. PottyTraining

[deleted]

I’d love to see a similar graph showing MP’s earnings.

3. Luis Enrique

Very pleased to see this good sense from Duncan. But I still fear Labour’s focus on the cost of living will translate into inflation-mongering and against expansionary monetary policy.

How cynical are Labour being here? Balls must know that tightening monetary policy would be a bad move, but he also knows that people hate inflation, think that QE causes price inflation but not wage inflation, and associate it with Osbourne. So they can score points over the Tories.

4. margin4error

The UK competes on price and cost not on quality and standards. As such we have to accept lower living standards until we are willing to upgrade our infrastructure to 21st century standards. At the moment it is the government making this case strongest while Labour talk about the cost of living but say nothing much about economic strategy.

The same thing is happening to wages as is happening to returns on savings. Inflation is around its long-run average, but returns on savings are far lower, so savers are moaning about their savings being eroded by inflation. Similarly, wage growth is far below its long-run average, so workers are moaning that their real wages are being eroded by inflation. I really wish people could see this. The poor performance of the economy is hurting everyone except the rich, who are doing very nicely out of their asset price rises while moaning like mad about stock market risks.

As implied by Francis, if the wage hit was more equal across the issue would be less of a problem. This is fertile ground for the Left, as people hate unfairness.

I’m less sue about the problem being wages and no more. The issue may be clear for those in work, but young people face greater problems from casualisation and other significant weakening of the terms and conditions under which they work. The truth about the right is clear in this: they have always been about cheap labour.

For many, though, things aren’t so bad. We generally have more stuff and better living standards than our parents at the same stage in their lives. What people do care about is the greater uncertainty in the future, especially in job security, health care and pensions. This is where previous generations were far better off.

So it ain’t just wages, it’s the whole package.

A couple of typos, sorry. “Across all social strata” might be better, and “sure” not “sue”.

This is an oversimplification of the problem.

Firstly, it is assumed that boosting wages would be a simple solution, but no account is taken for any second order effects. Specifically, if you raise the minimum wage, what would happen to eomployment in general. The effects of an over-supply of labour (not least because of mass-immigration) is also ignored as to its effects on wages – the likelihood being they cause downward pressure.

It is also worth noting that Germany’s economic recover post-reunification was achieved not least by maintaining downward rpessure on wages, boosting profits and productivity and in turn the number of available jobs but at the costs of highe wages.

So it’s simply not as easy to say higher wages = better. It might be for those who have jobs, but it might cost jobs in the greater economy as companies shed jobs to reduce costs or become reluctant to hire.

9. Man On Clapham Omnibus

‘Boosting wages is the only sustainable way to close the living standards gap’

Quite apart from the assumption that the poor are all earning wages ,we can safely say that this blog is getting more like Hello magazine each day.

Maybe you should do a follow up entitled ‘People wouldn’t be so poor if they had more money’

10. Baton Rouge

`We are currently undergoing the longest squeeze in real wages since the 1870s, GDP per capita looks set to have a lost decade and the beginnings of the great wage squeeze can be found before the crash.’

It was the wage squeeze that caused the crash because that’s what made people realise that all those loans were sub-prime and could never be repayed. The assumption of wages always going up and therefore property values so those loans could be repaid turned the whole Ponzi Scheme to shit when it didn’t happen and exposed trillions and trillions of our supposed wealth as utterly counterfeit.

Of course it is the continued squeeze on wages and the spending power of the state along with the irreversible bankruptcy of the global finance sector and the super profiteering of the cash-hoarding corporations that is driving the world economy toward inevitable depression but the simple reversal of the wage squeeze will not solve the problem but simply devalue the currency further by inflation. Wages were falling because capitalism no longer works. The economy itself needs reorganising from top to toe. These Keynesian tweaks are likely to get working people blamed for Weimar-style inflation and the far right picking up the pieces.

There needs to be full employment with each on the minimum of a living wage but the banking sector needs to be taken into public administration and its staff, estates and deposits used to form a new national bank with a monopoly of credit lending at base rate to small business and facilitating social investment in accordance with a democratic plan and sustainability but first the super profits of the cash hoarding monopolies will need to be dispropriated and their property socialised.

Increase wages? Absolutely brilliant idea. Why didn’t anyone else think of that I wonder? Let’s pass a law saying everyone’s pay goes up 10% in real terms. No – make it 50%. No – even better: 200%. This is straight out of la-la land.

The reality is that for a given GDP wages can only rise at the expense of profits (or investment). And according to a chart at Chris Dillow’s Stumbling and Mumbling blog, profits as a proportion of GDP are not inordinately high. Or to be exact, he claims they are slightly above the historical norm, but that this is explained by the increased number of self-employed. See:

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/12/on-wage-and-profit-shares.html

So not much scope for increasing wages from that quarter.

There is of course the possibility of real wage growth coming from more stimulus: that would increase real GDP, but possibly at the expense of excess inflation. However there are hundreds of people, me included, who have devoted thousands of hours to that particular problem over the last few years (more like tens of thousands of hours and 30 years in my case).

12. Luis Enrique

Ralph

“The reality is that for a given GDP wages can only rise at the expense of profits (or investment)”

why beg the question by assuming GDP is fixed? You cannot rule out wage-led growth. Hence you cannot say that legislative changes aimed at increasing worker bargaining power won’t have beneficial effects. And it’s all very well being sarcastic and saying “Why didn’t anyone else think of that?” but who is actually proposing measures to strengthen worker bargaining power? Certainly not the current government that seems intent on weakening it.

suppose GDP is 100, wages 50 profits 50. Then in next period legislation changes, wages rise to 60 profits fall to 40, GDP still 100. Then wage led growth causes GDP to rise to 120, split returns to 50/50, wages 60 profits 60.

this is just to illustrate the point that looking at profit share and saying there’s not much scope for that to fall misses the point that the level of GDP could rise even if income shares return to current proportions.

Louis,

I’ve seen dozens of your comments on various blogs, and normally they’re good. But the above is poor quality.

“Then wage led growth causes GDP to rise to 120..”. Why? I assume you have in mind the idea that wage earners spend a higher proportion of their income than profit “earners”. And yes: that would raise aggregate demand. But AD can be increased anytime as anyone with a GCSE in economics knows. A Keynsian or MMTer can also explain how to do it – assuming (and this is a big assumption) that inflation permits.

14. Luis Enrique

Ralph, re-read last para. I do not attempt to explain wage led growth.

The most effective way to increase wages is to stimulate competition for labour, which means more SMEs. Increase incentives for SMEs whilst squeezing large firms, encouraging firms to stay small. The greater the number of competing enterprises the more profits go down, prices fall, wages go up, and you have greater equality, all without draconian legislation. Anyone passionate about promoting equality shouldn’t have an ideological opposition to competition.

15

So mass production and economies of scale have nothing to do with why labour can afford to consume most products.


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