The much vaunted economic 'recovery' won't be sustained for workers until we see real wage growth. Despite optimistic UK government forecasts, there is little evidence that that is likely to happen.
Professor David Blanchflower, a former member of the MPC and CEP, and Stephen Machin have taken a detailed look at the evidence and have concluded that unless the division of economic growth becomes more fairly shared and productivity boosted to generate wage gains for all workers, then poor real wage outcomes for typical workers may be here to stay.
They argue that median wages seem to have become ‘decoupled’ from productivity growth because of rising inequality, which means that a growing share of the value from productivity growth is absorbed by pensions and higher salaries for top earners. For significant real wage growth to reemerge, productivity would need a sharp increase of the kind experienced much earlier in the UK recessions of the early 1980s and early 1990s. There are few signs of this happening, and the problem has been magnified by the UK’s dismal investment rates.
Even if productivity were to rise rapidly, the unequal division of wages from productivity gains to the top (like bankers’ bonuses) would need to be addressed. This is a point also made in the groundbreaking work of French economist Thomas Piketty, who argues that reductions in the top rate of tax encouraged senior managers to pay themselves more, further widening inequality.
Blanchflower also states that the economy is still well below full employment and there is a large amount of slack in the labour market. There is little evidence of widespread skill shortages, which would push up wages. Another important factor from a UNISON perspective is that public sector pay restraint with continuing redundancies reduces wage growth in a big sector of the economy.
For these reasons improved economic performance doesn't necessarily result in wage growth. As Blanchflower puts it, "Firms have started to perform better so their ability to raise pay levels may have increased slightly – but so far we see no evidence of any change in their willingness to pay. In line with our discussion of inequality, this does raise a key question: why, if nothing changes, wouldn’t they continue to keep any gains to themselves? It stretches credulity to believe that all of a sudden bosses will hand over pay increases to their workers when they have shown no inclination to do so for several years."
Taking a similar line, Simon Wren-Lewis from Oxford University argues that critics of the UK government should focus on the “wasted years” of 2010-2012, and on the fall in median incomes over the last five years. The economic issues for today and tomorrow, should be a focus on inequality. He concludes, "To sum up, the recovery is welcome: it is not an illusion, but neither does it atone for the sins of the past. Above all else, it must not lead to complacency. We have still a long way to go to repair all the damage caused by the recession. Even when that has been done, the problems that led to the financial crisis have not been fixed. We remain dangerously vulnerable to any future large negative demand shock."
Desperate attempts by the Chancellor to spin wage growth shouldn't fool anyone. Until there is real wage growth and serious efforts to tackle inequality, the recovery will be at risk. Wage restraint in the public sector simply adds to that risk.