While the UK has returned to growth, many workers continue to suffer economic hardship as real incomes have yet to recover. This means that, just as in the past, the UK economy is relying on an unsustainable growth model where workers spending more than they earn to support the economy. Setting the UK on a sustainable path and reversing the growth of in-work poverty requires policies to raise real wages, writes David Spencer.
Rejoice. The UK economy is back to where it was before the crisis. The depression is over and sunny economic uplands lie in the future. Feel good, damn it, the economy is growing again. But there is a reason why the positive growth statistics are treated sceptically. That reason relates to the fact that real incomes have fallen in the UK. Despite the restoration of growth, workers in the UK have continued to suffer cuts in their real pay. One of the arguments for growth is that it raises real incomes – in the UK at least, the reverse is proving to be true. The economy has achieved growth, while many millions of workers have suffered increasing economic hardship with little prospect of improvement.
From a growth perspective, the grim facts of the recovery provide cause for concern. The UK economy has only been able to grow by workers spending beyond their means. Workers have run down savings and borrowed more to increase their consumption and this has driven growth. But workers can only go on behaving like this for so long. Without a rise in real pay, the spending must come to an end and with it the recovery.
There is no sign yet of net exports recovering to support consumption and any rises in business investment will need to continually confound expectations to offset the further fiscal tightening to come. Again as in the past the UK economy is relying on workers spending more than they earn to support the economy. This is a growth model that cannot be sustained and will ultimately end in disaster.
Even the most ardent backers of the government’s current policy stance must harbour some concerns about the prospects for growth in the economy. Lower real wages may help firms keep a lid on their costs but from the perspective of raising demand on a sustainable basis they place restrictions on the ability of firms to grow output. Demand side barriers will bite in the end and terminate the recovery.
But beyond growth there are deeper issues here relating to work and its relation to poverty. Work has long been heralded as the best form of welfare and the route to economic success. This view – summed up in the mantra ‘work always pays’ – has been exposed as a miserable lie. Now it seems that work for many is no escape from poverty. Working hard for a living often means struggling to keep one’s head above water.
Evidence shows that in-work poverty is on the rise in the UK. Among working age adults in low income households, the number in working families has been growing and is now greater than the number in workless families. It used to be that worklessness was the prime determinant of poverty. Now it is more likely to be low waged work.
How did we get into this situation? The underlying causes are complex and multifaceted. They include the decline of unions, the deregulation of the labour market, an inadequate training system and the rise of the service sector at the expense of manufacturing. The UK has lacked the necessary modernising forces that would have otherwise led it towards a high wage economy. Instead, it has evolved an institutional structure that has favoured and entrenched low wages.
What can be done? In the short term, policies to raise real wages in the UK would help not only to sustain the recovery if that is the concern but also to address the problem of in-work poverty. The national minimum wage, although a welcome development, has not managed to address the problem of low pay and this is where calls for a living wage come in. Raising the minimum wage to the level of the living wage would be a bold but economically sensible step to take. Critics may say that this will lead to unemployment. Yet evidence shows that minimum wage hikes have not had adverse employment effects. Indeed, their effect has been to increase productivity via higher levels of worker morale and to reduce welfare spending.
Longer-term, the UK needs to break its reliance on a low wage growth model. For this, it needs a new industrial strategy that focuses on building things rather than on making money. It needs to invest in new industries via the help of the State. Challenging vested interests particularly in the world of finance and creating a model of sustainable prosperity based not on endless growth but on the promotion of human flourishing remain the ultimate goals. Whether these goals are achievable under current conditions remains a moot point. Yet they are goals that we need to keep in our sights and agitate for.
In the end, the UK cannot afford to pay workers less. Driving real wages down is a recipe for economic stagnation and human misery. For all our sakes, we should seek a rise in real wages.
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David Spencer is Professor of Economics and Political Economy at the Leeds University Business School.