speri.comment: the political economy blog

Income inequality and the downward wage push

The most dangerous ‘imbalance’ at the heart of the UK economy is the disproportionate bargaining power that firms have over labour

Scott Lavery, SPERI Research Fellow

Scott Lavery

Scott Lavery

Over the past thirty years, the ‘wage share’ – the proportion of economic output that accrues to labour – has declined significantly. While in 1982 the wage share in Europe was 72.5%, by 2007 it had fallen to 63.3%.  Successive decades of neoliberal reforms have resulted in these trends becoming particularly pronounced in the UK, which now has one of the most polarised distributions of income and wealth in the OECD. 

Although there has been much talk of the need to ‘rebalance’ the UK economy along sectoral or geographical lines, there has been a marked reluctance amongst the political class to address the question of income inequality. But income inequality is not only socially corrosive – it is also economically damaging.  Highly unequal societies have the tendency to generate serious economic imbalances, which both threaten stability and undermine the pursuit of growth in the long term.  Engaging with the distributional question will therefore be essential to the development of a new sustainable growth model for Britain.

Growing income inequality has been driven by three principal mechanisms which have worked together to generate the imbalanced economy that we see today.

The first driver of inequality has been wage stagnation and, in particular, the declining share of workers’ income as a proportion of overall output. As outlined above, the wage share has dropped significantly over the past three decades.  Business generally argues that lower wages and a higher profit share are signs of a ‘competitive’ economy. The problem, however, is that this position treats labour merely as a ‘cost of production’.  In fact, wages have a dual function: they are also a core component of aggregate demand.  As output increases but wages decline, the capacity of society to consume the new goods and services produced potentially slips away.

The flip-side of the declining wage share, and the second driver of income inequality, has been the growing concentration of wealth at the top of society. As Keynes demonstrated many years ago, when the income share is disproportionately skewed towards asset-holders, the likelihood that speculative, rent-seeking behaviour will de-stabilise the economy is much higher. This happens because the asset-rich tend to consume a lower proportion of their income than those lower down the income scale, meaning that more funds are available for speculative lending.

In the pre-crisis period, the huge surpluses which accrued to corporations and wealth funds were increasingly recycled through high-yielding financial instruments, rather than ploughed into productive investment.  As Stewart Lansley has shown, in the lead up to the crash, banks invested only £50 billion in manufacturing, compared to £1000 billion in property investment. The lesson is clear: a high profit share does not automatically translate into socially useful and growth-enhancing investment.

The third driver of income inequality, and of course a core component of the UK’s pre-crisis growth model, was the deregulation of the financial services sector and the massive boom in credit that accompanied it.  In the absence of domestic wage-led demand, UK household debt rose rapidly from 40% in the early 1990s to 160% in the 2000s.  At the same time, the financial services sector strengthened its position in the UK economy, with the result that, by 2011, levels of private debt in the UK had increased to over 400% of GDP  – more than that of any other comparable economy.

In sum, wage stagnation, wealth concentration at the top and financial deregulation cumulatively contributed to the massive growth of income inequality within the UK over the past three decades. This in turn left the UK particularly vulnerable to financial contagion and crisis.

What does this analysis of the economic consequences of inequality tell us about the current ‘recovery’?  Looked at through a distributional lens, it would seem that George Osborne’s economic strategy is deepening, rather than resolving, the great wage-profit imbalance at the heart of the UK economy’s malfunction. GDP growth may be rising once again and unemployment may be falling – but the distributional disparities of the British economy look likely to intensify over the years ahead.

It is revealing to compare, for example, the recent crisis period with that of other UK recessions.  For example, according to an IFS report, three years after the early 1980s recession, real wages had grown by 5%.  On the same measurement after the 1990s recession, real wages had grown by 10%. Three years after the 2008 downturn, however, real wages had been pushed down by 4%.  This wage stagnation continues today, with inflation still outstripping average increases in earnings for the fifth year in a row.

Significantly, during this current recovery employers have been able to adapt to a depressed market by passing the burden of adjustment onto their workers.  Over 40% of all workplaces have enacted a wage freeze or wage-cutting strategy, a remarkably high proportion when compared with previous downturns.  In addition, job creation has increasingly been secured through the generation of precarious jobs, such that only one in four jobs created in the years following the post-crisis recession have been full-time in nature.

As for the wage share under the current recovery, well, the proportion of output accruing to asset holders and corporations will increase, not least due to the redistributive nature of quantitative easing.  At the same time, the on-going restructuring of the labour market is likely to ensure that median income earners receive an ever declining proportion of output in the years ahead.

The key point is this. The UK is experiencing a recovery achieved by regressive redistribution premised in turn upon wage deflation and asset-price inflation.  In the end, this strategy is likely to contribute to a further drop in the wage share and the re-emergence of the UK’s debt-led growth model.  Going beyond such a recovery will require that progressives take seriously once again the declining wage-profit share and the political environment which has made this possible.

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Categories: Employment, SPERI Comment | 9 comments

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Comments (9)

  1. Pingback: Citizenship-stripping, drivers of inequality and the apolitical Olympic Games: Top 5 blogs you might have missed this week | British Politics and Policy at LSE

  2. Your blog refers to quantitative easing as if this programme was intrinsically regressive. You don’t expose the fact that QE could be used by any progressive government to provide full employment and tip the balance back in favour of labour vs capital. The problem here is that this Government has been allowed to get away with the lie that Government borrowing from itself (QE) increases public debt. It doesn’t, because any Public Purse creditor account created in the Bank of England by QE can be countered by a corresponding Public Asset account created by the Government spending the new money on creating new Public Assets, employing all the unemployed and underemployed to do so. A Government programme of investment using QE money would therefore be progressive not regressive.

  3. Your blog refers to quantitative easing as if this programme was intrinsically regressive. You don’t expose the fact that QE could be used by any progressive government to provide full employment and tip the balance back in favour of labour vs capital. The problem here is that this Government has been allowed to get away with the lie that Government borrowing from itself (QE) increases public debt. It doesn’t, because any Public Purse creditor account created in the Bank of England by QE can be countered by a corresponding Public Asset account created by the Government spending the new money on creating new Public Assets, employing all the unemployed and underemployed to do so. A Government programme of investment using QE money would therefore be progressive not regressive

  4. Andrew. You’re half right about QE but entirely wrong about Scott’s post. It doesn’t suggest QE is intrinsically regressive – I would recommend clicking through to the original article referenced to see that what is being referred to is a particular form of QE.

    Your alternative (let’s say traditional) approach to QE could be more progressive, but is neither progressive nor regressive intrinsically. Clearly it depends on where the investment goes and the effect this has on the wider economy. Full employment in a dysfunctional labour market isn’t an inarguably good thing. Also, even if you were right about QE, you don’t explain why the traditional approach would be better than simply borrowing to invest.

    • Thanks for your reply. I have already posted an answer to the original blog on QE. I stand by my criticism that the QE article appears as a general attack on QE. I don’t accept that the alternative I have suggested is ‘traditional’; I don’t believe it has ever been tried. The alternative I have suggested is progressive because it guarantees full employment. That necessarily shifts the labour-capital fulcrum back in favour of labour. The right to work is a fundamental Human Right which no one is entitled to deny. It is clear that the private sector is not realising this Human Right. Respect for and realisation of Human Rights is always progressive when they are being violated. With regard to investments, an investment is anything that retains or increases its value for the purposes of my comment. It doesn’t matter what the investment is in the sense that an investment can be sold and returned to the private sector. Clearly the investments chosen by a Government could depend on their priorities, but that does’t change the value that is important for the purposes of my comment. With regard to full employment and a ‘dysfunctional labour market’, I don’t accept that full employment in a market economy can be dysfunctional, on the contrary, an economy without full employment is always dysfunctional. If you are referring to abuses of Union power, that is hardly a problem at the present time, and abuses of power should be subjected to the normal controls in any event.
      The problem with borrowing from the private sector to invest is that it puts up Government costs through increased interest rates (you need look no further than the Eurozone to see the effect on interest rates of Governments separated from sole ownership of their own Central Banks), it benefits private banks at the expense of the Public Purse, it puts the Government in debt to the private banks if the Government borrows from them, it fails to reflate the economy. If the Government borrows from QE then the creditor is the Money Supply. This costs the Government nothing in interest, and nothing in capital. This is necessarily progressive if the Government is committed to realising Human Rights. However, if the Government is in contempt of Human Rights then progress is undermined in any case. This Government is in contempt of Human Rights.

  5. Thank you for your comment. Main focus of article is not on QE and my intention was not to say that QE is ‘intrinsically’ regressive. When I do refer to QE, my point is that it has in fact resulted in a regressively redistributive transfer under the conditions of the current recovery.There may have been scope for it to have been applied in a more progressive direction, but speculating about that possiblity is not the purpose of the article. Having said that, I do think that looking into how monetary policy could be deployed in a more progressive fashion is an important question to be asking. Scott Lavery

    • Thanks for your answer. I don’t think it is true to say that QE of itself has been regressive in the recent past for the reasons I gave in the QE article. I think that the QE programme adopted by the US is the main reason that the World economy has recovered at all. I have no doubt that the UK would still be in recession if the US had not pumped the multiplicity of billions of $US into the World economy. Your use of the world ‘speculative’ is unfortunate because it appears pejorative. What I have suggested is not speculative because what I have suggested are questions of mathematical logic, not questions of speculation.

  6. The wage-profit imbalance Scott describes sits at the nexus of a number of things, including the decline of economic production in the post-war era and the ability of this dwindling product pile to be taxed. Fiscal pressures of this sort have also served to put more pressure on the incomes of those at the bottom. A candle being burnt at both ends?

    Streeck and Schafer’s new book ‘Politics of Austerity’ is an important read on these points.

    Good piece this. Great that wage inequality is being discussed on this blog. Room for cross-national comparative view?

  7. Thank you AJBMorton for your comment. I think comparative work here is crucial.

    I think that introducing the German example could be particularly revealing in the case of the declining wage share. German workers have experienced well over a decade of particularly strong wage repression, with productivity increases far outweighing wage increases. This has meant that Germany has had the fastest rate of inequality growth of any OECD country. Nevertheless, this doesn’t present such a threat to German growth (for now) since its GDP is based on exports and on the repression of domestic demand.

    This underlines the importance of treating comparative cases not as isolated growth models which rest upon domestic institutional bases, but rather as inter-connected spaces which trade off one another’s unevenly developed capacities for economic growth

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