Pay cuts are a key factor in Britain sinking back into recession. We must reverse the trend towards a low-paid economy
Over the last two years real wages have fallen, on average, by 7%, a downward trend set to continue well into 2013. Of course, with an economy that is still shrinking, some fall in wages and living standards was inevitable. But what appears to be happening is a direct attempt by the government to engineer, under the cover of the crisis, a further fall in the share of the national cake going to earnings.
This comes on top of a three-decade long downward trend in the wage-share. The proportion of the workforce in low-paid work has almost doubled over the last two decades and now stands at more than a fifth. Some groups of workers – from forklift truck drivers to bakers – are now paid less in real terms than in the 1980s, while the UK now has the second highest share of employees in low pay (after the United States) among leading economies.
Five forces are exerting downward pressure on earnings. First, the near four-year long freeze (a real cut after inflation) on public sector pay. Second, voluntary sector organisations and charities responsible for a large share of public service provision are responding to disproportionate budget cuts by imposing sharp cuts in pay. Many care home staff and those working with the homeless are facing pay cuts of up to a fifth.
Third, pay freezes have also been commonplace in parts of the private sector including distribution and manufacturing and especially in low-paid sectors such as fast food and construction. Fourth, the minimum wage rate has been increased by less than inflation for three years running, and is now back to its 2004 level. Finally, the widely floated plans for regional pay rates across the public sector will mean paying staff less in poorer parts of the country.
Many of these pay cuts are likely to prove permanent, with the falls unrestored even when the economy recovers. Much of the voluntary sector, for example, is engaged in a process of downgrading, with new staff being recruited to do the same job on lower pay scales. This is history repeating itself. In the Great Depression of the early 1930s, most developed economies followed the call made by the multimillionaire US treasury secretary, Andrew Mellon, after the 1929 crash, to “liquidate labour”. Forty-five years later, at the height of the next global economic crisis in the mid-1970s, Arnold Weber, the head of President Nixon’s wages and prices board, called on business to “zap labour”.
The “liquidationists” are back. Just how far the tightening squeeze is likely to go is revealed in a table tucked away in a report by the independent Office for Budget Responsibility. This shows a fall in the share of wages in the economy of a further four percentage points by 2016.
The government no doubt hopes that stagnant wages will boost Britain’s competitiveness. Yet much of big business is sitting on record cash piles and could afford higher wages without losing its competitive edge. Moreover, making the labour force pay a disproportionate price for a crisis for which they are not responsible is self-destructive economics. Cutting pay will simply squeeze even more of the lifeblood out of an economy already suffering from a severe shortage of demand. Indeed, falling real wages since 2009 is the key explanation for the economy sinking back into recession.
What is happening is a largely ignored rebalancing of the economy of the wrong kind. What is needed is a reversal of the long-term fall in the wage share, taking it back closer to the level of the immediate postwar decades. Indeed, both the International Monetary Fund and the OECD have acknowledged that wages-shares have been falling too sharply in many richer nations.
A continuing squeeze on pay is merely likely to prolong the crisis, while opening an even wider pay gap and taking Britain further down the road of a low-paid economy.
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