Stewart Lansley: The unreported cause of the financial crisis is shrinking wages
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Independent Minds
Rising personal debt, global imbalances and reckless financial risk-taking all helped to cause the economic meltdown, but the role of wages has been largely ignored. In the 25 years from 1945, wages took a steady 60 per cent share of the UK's output. That rose to an unsustainable high point of 65 per cent in 1975, but has since fallen to a mere 53 per cent. But the better off have done much better at hanging on to their share. Living standards in the UK have nearly doubled over the last 30 years, but while the better off have done better than this, most middle- and low-income workers have enjoyed only small rises in real wages.
As a result wages, have been falling behind productivity growth. Over the past three decades, productivity has increased by 1.9 per cent a year while real wages have been rising by just 1.6 per cent a year. Since 2000 the gap has widened even further. These trends have produced an economy as out of balance as we were in the 1970s. Then, a profits squeeze caused inflation and hit investment. Today that has been reversed. The "profits squeeze" has been replaced by a "wage squeeze" and, unlike the 1970s, it has become a steady state.
This has had two economic effects. First, households have borrowed more to try to keep up. While households borrowed an average of 45 per cent of their income in 1980, they borrowed 157 per cent – more than three times as much – in 2007.
Second, excess profits have justified record dividend payments and the explosion of corporate, executive and financial remuneration. With rates of return on financial engineering exceeding those on manufacturing investment, funding for long term success gave way to short-term, fast-buck, deal-making with money moving around at speed chasing the quickest return. In the process, Britain has, over the last three decades, been steadily transformed from a relatively high wage, low debt, equal society to a low wage, high debt and much more unequal society. This must be reversed. Building a more sustainable and less volatile economy depends on improving the lot of low and middle earners.
The author has written a report for the Trades Union Congress, Unfair To Middling: How Middle-Income Britain's Shrinking Wages Fuelled The Crash And Threaten Recovery, released today
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Comments
the best advice i was ever given during my lifelong struggles to be a good socialist was not to fret over all the freeloaders exploiting state benefits -'if you didn't contribute towards keeping them they'd just come and take what they wanted from you anyway'!
This is a long predicted effect when "assets", a misleading term, have been acquired without a concomitant cost of production. These "assets" which cannot be classified as wealth, always fall into the category of monopoly. Such as location value in land, being by far the largest. Super normal profits on money creation a distant second place. Followed far behind by patents etc
Henry George predicted this 130 years ago, now, what more evidence do we need, to proceed with a solution we are confident about?
The one economic theory that all economists agree on, both orthodox and unorthodox, is Ricardo's Law of Rent. That is all production above the margin (what can be made on the least productive land available) always goes to location value in economic rent. We can see this in the latest property boom very clearly.
It must necessarily follow from this law that an increase in the power to produce wealth, loosely related to GDP in this case, whether that power comes from working harder, more technology, less corruption, greater skill and industry etc... will ALWAYS go to Rent.
This can clearly be seen in the graph here:
http://gco2e.blogspot.com/2009/11/w
I'd welcome any comments disputing or otherwise. But remember if you are disputing, you are disputing a natural law of economics that has stood the test of reason for 250 years, the beginning of the science of political economy.
I certainly don't spend as much as I did a couple of years ago. I'm trying to live very frugally and even going to the extent of covering myself with a blanket and wearing extra clothes rather than have the heating on.
Capitalism not only likes cheap labour. It also relies on buyers for the goods and services produced. That means people with money to spend.