speri.comment: the political economy blog

Inequality Redux I

Wage decline, welfare retrenchment and the politics of austerity in Britain

Scott Lavery, SPERI Research Fellow


Scott LaveryIn the years immediately following the crisis of 2007-8, income inequality declined in Britain on some key measures. However, focusing on the labour market as well as on the changing composition of Britain’s welfare state, this post argues that real wage decline has precipitated a ‘race-to-the-bottom’ in Britain, whereby falling earnings have been used to justify swingeing cuts to the welfare state. As a result, the drop in income inequality in the post-crisis period should be seen as a temporary blip – a blip which, ironically, has served to deepen distributional disparities embedded at the heart of Britain’s political economy. 

There is a paradox at the heart of the debate around inequality in Britain.

On the one hand, inequality has emerged as a key theme in the aftermath of the 2008 crisis. Across the political spectrum there is a growing recognition that rampant distributional inequities are not only socially unjust; they are also economically imprudent and unsustainable.

On the other hand, the re-emergence of inequality as a matter of public concern came at precisely the moment when income inequality actually fell – for the first time in a long time – in Britain. As the Institute for Fiscal Studies (IFS) has shown, the gini co-efficient fell from 0.36 in 2007-8 to 0.34 in 2011-2.  This was the lowest level of income inequality recorded – at least on the gini measure – in Britain for over a decade.

This seeming paradox implies two questions: firstly, what drove this decline in income inequality in the post-crisis period?  Secondly, what does this mean for our analysis of distributional politics in Britain today?

Since the crisis broke in 2008, we have witnessed a period of unprecedented real wage decline.  In contrast to the economic downturns of the early 1990s and 1980s, where workers managed to retain above-inflation wage increases in the face of recessionary pressures, the most recent economic downturn saw real wages fall by 8% between 2008 and 2013.

The result of this was that inequality measured in terms of the ‘market income’ – the distribution of income between those who derive their income from employment, self-employment and capital – did increase in the first three years of the downturn.  Private firms effectively passed the burden of economic adjustment on to employees in the form of wage cuts and pay freezes, whilst the public sector simultaneously cut back on pay and on the size of its workforce.

However, during this period the income of non-working households remained relatively protected.  This was because welfare payments are generally indexed to inflation and therefore act as ‘automatic stabilisers’ in periods of recession.  As the income of non-working households fell less rapidly than the incomes of in-work households, this led to a decline in the overall level of income inequality between the years 2007-12.

This dynamic has been important in the debate over austerity in Britain.  David Cameron’s government – sensitive to charges that its policies have precipitated a ‘cost of living crisis’ – has argued time and again that the fall in income inequality is proof that the burdens of its austerity programme have been shared equitably across society.

However, there is a profound irony at the heart of this Conservative narrative.  The Coalition government’s Welfare Reform Act (2012) contained a series of measures which aimed to tackle Britain’s supposedly ‘lavish’ benefits system.  As part of its reforms, the government has implemented a ‘welfare cap’.  This holds increases in working age benefits below the rate of inflation – a process which impacts negatively on the incomes of those in the lower income deciles.

The tension in the narrative of the Conservatives is clear: on the one hand, the government has highlighted the fall in income inequality as evidence of the ‘fairness’ of its austerity programme; at the same time, it seeks actively to dismantle the very mechanisms within the welfare state which ensured that this reduction occurred in the first place!

As a result, the initial drop in income inequality which occurred after the crisis is being quickly reversed.  As the IFS again has argued, Conservative reforms to welfare and tax credit entitlements are projected to increase income inequality in the years ahead, with the gini co-efficient projected to approach its pre-crisis level once again by 2016.  Austerity has therefore been underpinned by a significant time-lag effect, with many of its most iniquitous consequences projected to take full effect during the next parliament.

What does this mean for our analysis of inequality and distributional politics in Britain today?

Firstly, the reduction in income inequality after the crisis should be seen as a temporary blip in an otherwise consistent historical trajectory.  The sad fact is that, since the 1980s, no political party has reversed rising income inequality in Britain.  Rather than breaking with this trend in the post-crisis period, the distributional politics associated with austerity have intensified it.

Secondly, when it comes to inequality, politics matters.  Some analyses – such as Thomas Piketty’s recent contribution – can give the impression that economic ‘laws’, such as the rate of return on capital outstripping the rate of growth, lead inexorably to certain distributional outcomes.

However, the post-crisis period in Britain reminds us that strategic political interventions remain crucial in determining which groups in society bear the brunt of economic restructuring.  Since 2010, low pay work has proliferated.  As a result, rising employment has not generated sufficient tax receipts, which has further compounded the budget deficit.

However, instead of tackling the development of low pay work – through implementing a living wage or through stimulating manufacturing investment, for example – the Coalition government has focused exclusively on rapidly cutting public expenditure.  In this way, real wage decline has helped to initiate a classic ‘race-to-the-bottom’, with falling real earnings used to justify swingeing welfare retrenchment.

Alongside changes in the income distribution we have seen a series of direct policy interventions – including Quantitative Easing and targeted interventions in the housing market – which have boosted the wealth of asset-holders at the top end of the income distribution.  Britain’s economic recovery has been secured through a process of regressive redistribution – a process of wealth concentration which is likely to further intensify distributional disparities at the heart of our already fragile political economy.

What does this mean for the centre-left?  One of the reasons that the issue of inequality attracts progressives is that it potentially provides a unifying narrative through which to mobilise a national electoral coalition.   The argument here is simple: inequality is bad for all of us – for the low-paid, the ‘squeezed middle’ and, indeed, business itself.

However, Britain’s post-crisis experience reminds us forcefully that building hegemony need not be based on the construction of a potentially inclusive ‘One Nation’ response to the present crisis.  Rather, we have seen the return of classic statecraft whereby key electoral constituencies are privileged, whilst other groups – in particular, the working poor and benefit recipients – bear the brunt of economic restructuring.

The coming election is widely viewed as one of the most uncertain in recent electoral history.   For all that, one thing is certain: in the absence of a more radical approach to fixing Britain’s anaemic labour market and its disciplinary welfare system, inequality in this country will continue to widen – with all of the social and economic pathologies which this process necessarily entails.

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Categories: Inequality, Politics and policy, SPERI Comment, Sustainability, Welfare | Tags: , , , | 1 comment

Articles and comments posted on this blog reflect the views of the author(s) and not the position of SPERI or the University of Sheffield.

Comments (1)

  1. The fall in the GINI coefficient certainly needs some explanation. The equality trust website shows that it fell sharply in 2010, around the time of the last election. Due to govt policy?? Hardly.

    http://www.equalitytrust.org.uk/about-inequality/scale-and-trends [how has inequality changed]

    Further down the same page is the trend by income band, which reveals the top 0.1% have seen a fall in gross income from £1.3 million to £900,000 – well we won’t be shedding too many tears over that.

    I would suggest that many of the highest earners are in the banking and financial sector, and that this apparent reduction in inequality actually reflects a shrinkage of investment banking. Since 2010 banks have become more risk averse, curbed the most extreme obscene bonuses, and have made significant reductions in their investment arms. All well and good – but not a lot of help to those at the bottom.

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