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Britons need a payrise, and soon

16 June 2013

pay day

Since the banks triggered the credit crunch and the resultant recession way back in 2008, average pay rises have generally failed to keep with price rises and real incomes have fallen for the majority of working people in the UK, making living standards tumble right across the country, and leaving far too many earning too little to get by.

Overall, the real terms value of UK pay packets has fallen by 7% since the 2008 crash. Average earnings today are no higher than they were in 2000 and it is set to take until 2017 for pay to return to its pre-crash level.

This is a problem that many people faced even before the recession. After accounting for inflation, the wages of ordinary full-time workers barely grew between 2003 and 2008 and were negative for the lowest earners, despite relatively healthy economic growth. It was only the very richest – the top 5% – who experienced faster wage growth.

In fact, the wages pie has been gradually shrinking since the 1970s. For the last thirty years the British economy has seen a steady shift in the way national income has been distributed, away from wages and towards profits. The poorest half of the population have borne the brunt of Britain’s shrinking wage pie, and now receive just 12p of every pound of UK GDP – a 25% fall since the late 1970s.

And things don’t look to be mending again any time soon. Across the public sector and in much of the private sector pay is frozen or rising far more slowly than inflation.

Now, going for a pay freeze can sometimes be good medicine for short-term economic illness. Trade unions were in many cases willing to make these kinds of deals when the recession hit in order to save jobs. This willingness to share the pain was a good example of solidarity between working people, and unions are well-placed to make sure that employers are not simply freezing pay to increase profits.

However, the same is not true in the longer term, as rising real incomes are a necessary condition for achieving sustainable economic growth, productivity increases and job creation in the longer term. Put in simple terms, too much pay freeze = no more spending = no customers = no business = continued economic depression. Customer-facing sectors like retail are first to feel the pinch, but the effect can be swiftly felt throughout the whole economy.

This weak pay growth is a function of an economic cycle that has become stuck at the bottom, at a time when unions do not always have quite the heft in wage setting that we would like, and recovery is continually hampered by a government entirely focused on driving austerity, thus depressing what Keynes called the “animal spirits” of optimism needed for recovery.

In these circumstances it is no surprise that UK corporations are sitting on a record amount of reserves at the moment – some £725 billion. They are simply waiting to see whether the government can get the economy going again. If even a small fraction of that amount went into wages we would all enjoy real pay growth again and there would be no more need for pay freezes.

It would be very naïve to think that employers always pay as much as they can afford. Indeed, a recent study suggests that employers could bring about four million employees up to the living wage (about 89% of those currently below) without any detrimental effects on their demand for labour. Such a move would generate a £6.5 billion increase in gross annual earnings.

A government that can deliver good pay rises and good levels of employment is certain to trump a government that abandons either of these things. Such a government needs to work constructively with working people and their unions to deliver the rising living standards benefits that we all want and need.

What’s your story?

Have you got a story about the economic situation where you live? Are you struggling to make ends meet as pay shrinks and the bills keep growing? We want to hear from you. Please add a message via this site – We’ll be collating them for a public report that we’ll be presenting to government.

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