Stewart Lansley: The unreported cause of the financial crisis is shrinking wages

Thursday 12 November 2009 01:00
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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 The "profits squeeze" has been replaced by a "wage squeeze" and, unlike the 1970s, it has become a steady state.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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