John Weeks, Guest Blogger
On 11 June in reply to The Guardian asking her about the “good news” that UK total output was back to where it had been before the Great Recession hit in 2008, the secretary of the Trades Union Congress Frances O’Grady responded, “The news that the economy is returning to its pre-crash size will be of cold comfort to the millions of workers who are still thousands of pounds a year worse off compared to five years ago.”
Is that right or is it just a union leader refusing to accept the economy is on the mend under the wise policies of the Coalition Chancellor? Official statistics leave no doubt. There are two charts below with pay measured as the percentage difference compared to the beginning of 2010 (on the left) and the unemployment rate in percent of the labour force on the right.
The top diagram is labelled “how they should look.” I could also describe it as the “standard scenario” presented in economics textbooks and the business pages of magazines and newspapers. Unemployment declines (from well over 8% of the civilian labour force to about 6.5%) and by definition the labour market “tightens.” As a result of fewer unemployed workers for business to pick and choose among, weekly pay rises—the shortage stimulates a rise in wages.
And, of course, the higher pay that results from lower unemployment results in inflation that makes “consumers” worse off (does anyone ever notice that most of the “consumers” are working families that are better off due to the higher pay?). This prompts the ever-vigilant Bank of England to raise interest rates, which discourages spending, stops employment falling and ends the rise in pay.
That “low employment causes pay to rise” scenario did not happen during 2010-2014. In the top diagram I turned the actual weekly pay line upside-down. The lower diagram shows what really happened according to the Office of National Statistics. While unemployment fell, real weekly pay also fell!
Fewer idle workers and lower pay for those in work—how can that be? The answer is quite simple. As I explain in layperson’s language in my new book, the evidence over the last fifty years in Britain, the United States and on the continent show that pay increases result from lower unemployment combined with trade union militancy. That is why millions of people took to the streets on 10 July.
Recovery without union pressure on employers results in stagnant or falling wages. The second chart shows that the deterioration of real pay has been extraordinary. Pay declined 23% since the Coalition began its misrule of Britain and mismanagement of the economy. Rising employment and falling pay combine to make the fondest dream of every employer (well, at least 99.99% of them).
Weekly pay and unemployment:
how they should look, unemployment down, pay up
(pay measured on the left as percentage difference from 2010Q1,
unemployment rate measured on the right)
Weekly pay and unemployment:
how they actually look, unemployment down and pay down
(pay measured on the left as percentage difference from 2010Q1,
unemployment rate measured on the right)
The Coalition has scored a hat-trick—as they call a three-goal performance in ice hockey—reduced public expenditure, stagnant private investment (see my earlier Touchstone article) and falling real wages. And what about those exports that Cameron went to China to promote?
Exporting requires that a company be “competitive internationally.” A glance at the chart below tells you why British companies go to so much effort to force down wages. Output per hour worked in the private sector is now almost 3% lower (and stagnant) than when the calamitous Coalition formed its government. In the manufacturing sector—the great hope for exports—output per hour fell continuously for two years (2011-2013) before showing a slight recovery at the end of 2013.
A 2% increase in productivity after four years does not an international competitor make, which is why forcing down wages plays such a major role in UK corporate strategy. Productivity improves as a result of investment in improved production methods. But investment remains far below its level in 2008. This investment stagnation is the direct result of the preference of the masters and mistresses of industry to distribute profits to themselves and shareholders rather than to invest.
Output per worker hour in the private sector and manufacturing, 2010-2014
(2008Q1 equals zero)
With all this success in bashing workers in the private sector, the prime minister hopes for the same with public sector employees. The vehicle to achieve a reduction in public sector pay is the law to make public employee strikes de facto illegal. But people should not feel sympathy for public employees because we are paid most than other people, right?
Wrong, according to the Office of National Statistics. It is true that if you divide the 2013 public sector wage bill by the number of public sector workers, and do the same for the private sector, the result for the former is 3.1% more than for the latter (this and the statistics below from a March 2014 report by the ONS). David Cameron loves to cite this statistic—feckless, unproductive bureaucrats earn more than hard-working, productive private “wealth creators”.
The statistic is meaningless. Large organizations, public or private, pay more than small ones almost without exception. Most public employees are in large organizations. If we adjust for size of employer as the ONS has done—compare like to like—average pay in the public sector was “between 1.3% and 2.4% lower [in 2013] than the private sector” (from the summary of the ONS report). I need hardly point out that public pay a mere 2.3% lower than private will not satisfy any true Tory, and certainly not the prime minister.
There is worse news for the prime minister from the ONS about public sector pay. The lowest paid public-sector employees earn substantially more than the lowest paid private sector employees. To quote from the ONS report, “Looking at those who are among the lowest earners in each sector, using the bottom 5% as a cut off point, public sector workers earned on average around 13% more than private sector workers in 2013 when adjusting for the different jobs and personal characteristics of the workers” (and 20% in London).
There we have the motivation of the Coalition to ban public sector strikes. It is not because on average public employees are paid more. It is because public employee unions resist poverty wages.
The evidence is clear. Economic recovery has not and will not improve the living conditions of most households. Real wages have fallen because private employers are organized to make it happen. Real wages will rise because workers are organized to make it happen. It really is that simple.
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