Low pay is damaging the UK economy and holding back growth
We need a new economic model that returns the wage share closer to its post-war level, with big firms devoting more of their profits to pay.
Across the United States, co-ordinated walkouts against low pay have spread from the giant retail chain Walmart to fast-food outlets and upmarket retailers. Outside branches of McDonald’s, workers have chanted the slogan – “supersize our wages” – in a campaign for $15 an hour, more than double the federal minimum wage.
With a quarter of its workers on low pay, the US sits at the top of the global low paid league table of wealthy nations. Second in that table is the United Kingdom with over a fifth on low pay, almost double the figure in the 1970s.
The spread of low pay is rooted in an economic gospel that a higher share of the cake should be taken by profits. Aided by a sustained re-direction of bargaining power in favour of big companies, the wage share has nosedived in both countries, while the profit share has soared.
As the recently released cabinet papers for 1983 reveal, Margaret Thatcher admonished Norman Tebbitt for being too timid on trade union reform, telling him we “should neglect no opportunity to erode union membership”. As Labour’s strength has tumbled, low pay has spread, driving up rates of in-work poverty and the cost of state income support.
According to the still dominant economic orthodoxy, the shift from wages to profits should have boosted investment and productivity. Yet in both the UK and the US, booming profits have been associated with falling investment. This is because the sustained squeeze on wages has created a number of highly damaging economic distortions. It has sucked out demand and encouraged debt-fuelled consumption. Because labour is cheap, firms have less incentive to invest in training and become more productive, helping to turn the UK into an increasingly low value-added and low-skilled economy.
Instead of the boost to wealth and job-creating activity promised by economic theorists, the Anglo-Saxon economies have created a series of asset bubbles while allowing a boom in wealth-diverting schemes – from lucrative but unnecessary merger activity to private equity takeovers – that have squeezed the wage base, enriched the few and stifled productivity.
Even discussion of the ‘distribution question’ – how to divide the cake between wages and profits – has been dismissed as heresy by market theorists. “Of the tendencies that are harmful to sound economics, the most poisonous is to focus on questions of distribution” is how Robert E Lucas, the Chicago-based Nobel Laureate and the principal architect of the pro-market orthodoxy, put it in 2003.
Yet the evidence is overwhelming: an excessive imbalance between these key economic aggregates leads to fragile and unstable economies and will prevent sustainable recovery. To overcome this imbalance requires a new economic model that returns the wage share closer to its post-war level, with big firms devoting more of their profits to pay.
This means a gradual raising of the wage floor through a more generous national minimum wage and the spreading of the living wage. It means taming the power of the giant corporations, more accountable and transparent boardrooms and boosting the bargaining power of the workforce.
There is now a growing consensus that economies built around poverty wages and huge corporate and private surpluses are unsustainable. Creating more economic stability and more sustained economic growth depends on securing ‘a more equal distribution of income’ declared Christine Lagarde, head of the IMF in January . President Obama has made speech after speech on the need for a higher wage share. “In the next phase of capitalism”, the leading Société Générale financier, Albert Edwards, told his clients last year, “labour will fight back to take its proper share of the national cake, squeezing profits on a secular basis.”
Yet to date, action has yet to follow the rhetoric. In both the UK and the US, the relative wage base is continuing to shrink. Securing a more proportionate distribution of the cake is now one of the most urgent political and economic issues of the day, but is a goal that will take more than a few lofty speeches to deliver.
• Stewart Lansley is a visiting fellow at Bristol University and the author of The Cost of Inequality and Rich Britain.