In work, but poor: barriers to sustainable growth and the need for a living wage

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 governments 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 ones 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. 

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Featured image credit:

About the Author

David Spencer is Professor of Economics and Political Economy at the Leeds University Business School.

Why the gap between rich and poor has narrowed. And why it won’t last

The narrowing of inequality is almost certainly a blip

Money no copyrightj“The rich get richer and the poor get poorer,” as the saying goes. It’s widely accepted that, in recent years, economic inequality has accelerated in the West. As the best selling author Thomas Piketty has noted, this is the scale of income inequality we are now dealing with:

“In a few weeks, Wimbledon will return to our television screens. The top tennis players in the world will compete for prize money that, boosted by broadcast income from more than 200 countries, will this year total £25  million.

“Forty years ago, the total prize money was £91,000. Taking into account the rise in the cost of living, the players will receive 33 times as much this year compared with in 1974. Over the same period, average real hourly earnings in manufacturing have merely doubled.”

 

As the below graph helpfully demonstrates, from the late 1970s up to the current recession the share of income going to the top tier of the population increased significantly. The top 1 per cent have a 14 per cent share of national income today, compared to less than 6 per cent in the late 1970s, according to the World top incomes database.

Income inequalityj

And yet contrary to popular wisdom, since the onset of the recession income inequality in Britain has actually narrowed. Indeed, believe it or not the better off were the hardest hit in the early years of the downturn, while the very poorest were sheltered to some extent by their reliance on benefits and tax credits.

The fall in income since the recession has been “largest for the richest fifth of households. In contrast, after accounting for inflation and household composition, average income for the poorest fifth has grown over this period (6.9 per cent), according to the Office for National Statistics.

As the prime minister claimed during a session of PMQs late last year, inequality in Britain is at its lowest level since 1986.

This seems bizarre when you consider that we hear it said so often that the government is waging some kind of war on the downtrodden through its austerity agenda. It’s almost as if the coalition were enacting the economic agenda of the left or something.

But hold your horses for just a second. Inequality has narrowed in recent years, but it’s unlikely to stay that way; for while the incomes of the wealthiest fell the most during the initial stages of the economic downturn, it is the poor who are now feeling the squeeze and who will be the hardest hit as changes to the benefits system take effect.

The Independent Institute for Fiscal Studies (IFS), which has looked in detail at the cumulative impact of the government’s welfare reforms, said last year that much of the pain for lower-income groups was “occurring now or is still to come because these groups are the most affected by cuts to benefits and tax credits”.

“If the OBR’s macroeconomic forecasts are correct, then most of the falls in real incomes associated with the recession have now happened for middle-and higher-income groups,” senior research economist at the IFS Robert Joyce said.

If we look at some of the coalition’s reforms to the welfare system, it’s fairly easy to see why that might be the case, for many of the changes have only recently come into effect:

The Bedroom Tax – introduced in April 2013

Universal Credit – introduced in April 2014 (ongoing)

The Benefit Cap – introduced in April 2013

Changes to child tax credits – introduced in April 2012

Changes to Working Tax Credits – introduced in April 2012

In other words, and as the IFS has recognised, many of the government’s welfare reforms have only really started hurting the poor in the past year or so – and the pain will continue in the years to come.

At the other end of the income scale, pay is already outstripping inflation (wages including bonuses in the January to March period grew by 1.7 per cent. Significantly, for those who don’t receive a bonus pay is still lagging behind inflation). Top pay is also on the rise again. Research from last year found that the UK’s top 100 chief executives were paid £425m in 2012 – up by £45m 2011.

So what does this mean? It means that the narrowing of inequality is almost certainly a temporary blip. The recovery is well in motion for the rich, but there is a great deal of pain still to come for those at the bottom.

http://www.leftfootforward.org/2014/05/why-the-gap-between-rich-and-poor-has-narrowed-and-why-it-wont-last/

FT journalist in Piketty takedown accused of ‘serious errors’ of his own

New analysis by the economic consultant Howard Reed supports Piketty’s view that inequality is on the rise

Thomas PikettyjRight-wing journalists and commentators were cock-a-hoop this time last week after Thomas Piketty, whose bestselling book Capital in the 21st Century has taken the left by storm, was accused of cherry-picking data to support his view that inequality in on the increase.

The Financial Times was at the forefront of the attacks, with its journalist Chris Giles highlighting what he perceived to be “a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics”.

But new analysis by the economic consultant Howard Reed supports Piketty’s view that inequality is on the rise. And Reed has hit back at Piketty’s critics, accusing Giles of making “serious errors” of his own.

According to Reed, the apparent discrepancies in Piketty’s account were caused by the author making allowances for the different estimates of wealth in the data sources he used to calculate the trend since the early 19th century. Giles, Reed says, failed to adjust for these “discontinuities” in the data:

“Taken as a whole, these discontinuities imply that the estimate of the top 10 per cent share of wealth is 22.5 percentage points lower by 2010 than it would have been if the wealth statistics had been collected on a consistent basis after 1974, as they were before 1974. As I show, the main difference between the Piketty time series for UK inequality and the Giles time series for UK inequality is that Piketty corrects his data series to allow for this 23 percentage point drop (caused by changes in the methodology used to measure the wealth distribution) whereas Giles does not.”

The coup de grace comes later, however, when Reed says that it is Giles himself who is guilty of an inaccurate portrayal of the figures:

“To believe that the Giles series represents an accurate picture of the evolution of wealth inequality in the UK over the last 50 years, one would have to believe that the wealth share of the top 10 per cent really did fall by 12 percentage points during the 1970s, and by another 11 percentage points between 2005 and 2006. Does anyone really believe this? Of course not.”

He also accuses Giles of making “serious errors of his own”:

“However, Giles then goes on to make a very serious error of his own in handling the UK data: he treats changes in the way wealth inequality is measured over the decades as if they were real changes in the underlying distribution of wealth. This error leads him to the misleading conclusion that wealth inequality fell in the UK between 1980 and 2010, whereas in fact it has increased (although not by quite as much as Piketty’s published results would suggest).”

Reed does, however, acknowledge that Giles has “uncovered some errors and inconsistencies which Piketty will hopefully address in future work”.

You can read Reed’s full blog here.

http://www.leftfootforward.org/2014/05/ft-journalist-in-piketty-takedown-accused-of-serious-errors-of-his-own/