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Pay cut UK: capitalism reverts to type
The prospect for wage levels in the UK was announced by a senior economic official of the British government in July 2010. Under the headline 'Millions face four-year fall in standard of living', the Daily Telegraph reported:
Geoff Dicks, one of the three members of the Office for Budget Responsibility (OBR), told MPs yesterday that the UK will experience “falling real wages” as pay rises fail to keep pace with inflation.
Public sector workers have already had their pay frozen for the next two years, while many private sector workers have had to accept similar deals or part time work in order to preserve their jobs.
But figures from the OBR show that the rise in the cost of living will outstrip wage rises for some years to come.
Geoffry Dicks, who was formerly the chief economist at the Royal Bank of Scotland, did not express any sorrow in reference to this process of reduction in workers' pay. Rather, he blithely referred to it as an expression of the efficiency of the market:
“Our labour market works pretty well,” Mr Dicks told MPs on the Treasury Select Committee yesterday. “As evidence for that I would cite the freezes and cuts in private sector pay as people price themselves into work or accept lower pay so they are not priced out of work in a recession.
“We think the labour market will continue to do that. We’ve got falling real wages for the next three years, earnings rising less than CPI (the Consumer Price Index which does not include mortgages) and rather less, I think, than RPI for the next four years.”
The Telegraph report noted that "the Retail Price Index (RPI), [is] traditionally used as the inflation benchmark for wage settlements as it includes housing costs".
Further detail is provided in an article Gavin Kelly, published on 10th January 2011 in the New Statesman. Though the article can only be viewed on the NS website by those who pay a subscription to that magazine, its text has been republished on the web, and much of the relevant research is contained in a paper by the Resolution Foundation.
Kelly is a former New Labour advisor, who served as deputy chief of staff under Tony Blair and Gordon Brown. Nevertheless, he notes that the current and future reductions in average pay were preceded by several years of stagnating wages under the Labour government, stagnation which began well before the credit crunch:
Labour is right to say that some of the choices over cuts will hit certain groups hard - in some cases, very hard - just as the coalition is correct to say that some of the cuts would have happened whoever was in power. But the truth, unfortunately, is much less comfortable: this isn't just about cuts. The roots of this problem lie in neither downturns nor deficits. The struggle of people on low to middle incomes to meet the running costs of modern life is not new, just newly exposed. For the past seven years, real wages have been near stagnant for all but the affluent, with living standards for low-to-middle-income earners being propped up by rising tax credits and easy consumer debt - both now in reverse.
It could be added also that after 2003, when wages for low-to-middle-income earners ceased to improve to any significant extent, their conditions of life were additionally propped up by continued increases in expenditure on, and employment in, the public services- also, and massively, now in reverse.
GDP up, wages down
In 2009 there was a 'blip'- real wages (ie, workers' pay taking account of the cost of living) increased. This brief rise in living standards for those who were fortunate enough not to be made unemployed took place while the UK's GDP was falling as the crisis, which had emerged in the financial sector, spread to the 'real economy'. This is not as paradoxical as it appears. Most employees continued to receive nominal pay rises, while one effect of the economic crisis was that, for just over a year, average retail prices did not increase.
But since then, as Britain has returned to economic growth, real wages have been plummeting downwards. Gavin Kelly observes:
Over the past year [2010], real wages fell by a wallet-squeezing 5 per cent. According to government figures, this crunch is expected to continue until 2013, by which time, in real terms, the average low-to-middle-income family will be roughly £700 poorer per year than it was in 2009. The same projections suggest that many working families may be no better off come the 2015 election - after five years of resurgent "growth" - than they were when the coalition took office.
All this is before cuts to benefits or tax increases. And if interest rates spike, it could be much worse - no empty concern, given that inflation is projected to surpass its official target for the whole of 2011, bolstering the view of monetary hawks such as Andrew Sentance at the Bank of England, who has voted consistently for rate rises over recent months. In the year to come, the nightmarish scenario of anaemic growth, rising unemployment and climbing interest rates is a very real possibility.
Thus the pattern of stagnating incomes for the majority has been replaced by one of rapidly falling incomes. For workers in the private sector, recent figures show nominal pay increasing at 2.2% annually. But inflation is currently at 4.7%- so a further effective wage cut of 2.5% this year.
For public sector workers, the reduction in pay will be even steeper; not just due to the freeze on their nominal wages imposed by the government, but because of the imposition of increased pension contributions, which will reduce the incomes of public sector workers by between 3% and 5% before inflation. The cut in real take home pay for most workers in the public sector is likely to be above 10% during the next two years.
On top of that, there will be major cuts in the state benefits which families on low and moderate incomes receive. For those in private rented accommodation, Housing Benefit will be reduced. For those with children, Child Tax Credit will be cut. For families on lower than average incomes with children over sixteen, the Education Maintennance Allowance is being abolished. For families with a single wage earner on above average pay- though most of those affected by this change, especially families with two or more children, are not so much above the average income per person if the children are counted as people- the abolition of Universal Child Benefit will drastically reduce family income. The huge increase in student tuition fees in England, combined with the rise in the rate of interest which former students will be charged on their debt, will significantly reduce the standard of living of the majority of university graduates.
And then, of course, there will be the effects of the cuts in public services; Labour MP Michael Meacher outlined some of these cuts as they will impact on his constituency of Oldham West and Royton in Northern England:
I use my own constituency of Oldham as a microcosm for the country as a whole... On this seriously deprived town the impact of the cuts will be stark. Its current annual NHS [National Health Service] budget of £420m is being cut by £80m over the next two years (a cut of 19%), and the local authority grant from government is being cut by £41m (out of a total budget of £210m, i.e. a cut of nearly 20%). These cuts are huge, and will change the face of public services in Oldham out of all recognition.
How does this pan out for the average family in the town? In health terms there will be at least 1,000 NHS job losses in Oldham from consultants to nursing assistants over the next 3 years...
Support for the most vulnerable groups in the community, both young and adult social care as well as support for the elderly, are being specially targeted... Children and Young People’s services, including the very important Surestart centres, are being cut by £3m and Adult Social Care by a further £3.8m.
...At least 800 Council jobs are being made redundant which despite the £25m budget cuts being made next year will cost £18m in redundancy pay.
In terms of security and law and order, 120 frontline police jobs are being chopped, together with fewer Community Support Officers and and a reduction in forensic staff. Inevitably this must mean less detection and prosecution, more anti-social behaviour, and greater insecurity for the public with 10,000 prison place also cut and fewer probation officers to supervise convicted persons in the community.
...housing is being made a disaster area... the Government’s latest measures to cap Local Housing Allowance and peg Housing Benefit to the bottom third of private sector rents in each area, down from the current average. In Oldham 2,600 households will be affected by these measures. People in a 1-bed property will lose £312 a year, £260 a year in a 2-bed property, and £364 in a 3-bed property. Because a quarter of Local Housing Allowance claimants are in low-paid employment and because Housing Benefit is means-tested, these cuts will of course hit the poorest hardest.
Thus the three means by which the vast majority of people receive the economic proceeds of society- wages, cash social benefits, and direct provision of services via the public sector- are all being slashed; and meanwhile, the incomes of the rich are rising steeply. The remuneration of company chief executives increased by an astonishing average of 55% in 2010, including bonuses and share options, and the rate of Corporation Tax is being reduced from 28% to 24%.
Stairway to heaven
Focussing on the drop in wages, Gavin Kelly denoted this as a long term issue, and one not confined to the UK. Though he did not commit himself on the matter of precisely why this is taking place, he noted that it is something to do with capitalism:
The deeper cause of this longer-term wage squeeze is a point of contention and woefully underexamined. Some argue that, in advanced economies, routine middle-income jobs are being made redundant by technology, while those above and below them - in knowledge-intensive and low-skilled service roles - remain relatively immune. Pointing to the US experience, they say that the great postwar tide that created a new middle class is now receding. Others highlight the declining share of national income going to workers in the form of wages, as they increasingly lose out to profits.
In a sense, it is no surprise that the big parties are yet to embrace these issues; they are hugely unsettling for both left and right. They raise foundational questions about the nature of British capitalism that can't be answered only by spending more or less. Yet both sides will fail if they reach for knee-jerk solutions; we will neither tax nor deregulate our way to creating more decently paid jobs.
Outside the UK, the long term trend to stagnating and falling wages applies not only to the USA, where, according to the CIA World Factbook, "Since 1975, practically all the gains in household income have gone to the top 20% of households." From a somewhat later date, that has also been the case in the second and third of the world's biggest developed capitalist economies. In Japan and Germany, average post-inflation wages have not risen since the mid-1990s, despite steady increases in productivity.
Kelly remarks that the deeper cause of the longer-term wage squeeze is 'woefully underexamined', and for sure more detailed research on the underlying forces as they currently operate would be very useful. But, based mainly on the work of two German philosophers living in 19th Century England, Karl Marx and Frederich Engels, socialists of an earlier era took it as read that market forces under capitalism, with its anarchic, privately-owned, profit-hungry economy, and workers competing with each other for jobs, led not only to regular and increasingly catastrophic economic crises, but to the worsening of the living conditions of the working class majority.
After the mid-20th Century, that analysis was disputed, and for good reason. Under pressure from the trade unions and related political movements, and at the height of the Cold War needing to assure everybody that they would be better off under the Western system than under communism- capitalism was moderated, industrially and financially regulated, partly nationalised; public services were introduced and welfare benefits were widely extended. For a time, and in a significant way, the rich capitalist economies ceased to operate in the way predicted by Marx and Engels- inequality gradually reduced, and the majority of people, not merely a rich elite, benefited from the rising wealth of society.
Since then, following the economic crisis of the mid 1970s, we have had Ronald Reagan, Margaret Thatcher, the defeat of the USSR, and 'globalisation'- ie, the extension of economic competition between countries. In Britain after 1997 under Tony Blair and Gordon Brown, privatisation and deregulation continued- though at a slower rate- while increases in Tax Credits and spending on public services ensured that the majority gained some benefit from increases in GDP.
Now, under Cameron, Osborne and Clegg, the system is again reverting ever closer to its true nature. In future, the New Labour period of compromise may come to be regarded as a pause in an accelerating process; a mezzanine on the stairway back to the heaven- and hell- of pure capitalism.