UK: Power To The Workers

Last Updated: 29 March 2017
Article by Ian Stewart

The Governor of the Bank of England, Mark Carney, recently lamented Britain's "first lost decade" since "Karl Marx was scribbling in the British Library" in the 1860s. He was referring to the fact that wage growth for the average British worker has stagnated in the decade since the financial crisis.

Last year earnings for the median worker in the UK, the person in the middle of the wage distribution, were almost 7% below their pre-recession level in real terms. The latest official forecast shows that real earnings are unlikely to return to pre-recession levels until 2021.

The recent weakness of real earnings has exacerbated the much longer-running shrinkage of labour's share of GDP. Since the early 1970s the share of GDP paid in wages has fallen, while the share going to profits has risen.

Similar forces have been at work in the US. Between 1973 and 2014 earnings for the median US worker rose by just 0.2% a year compared to annual productivity growth of 1.3%. Productivity growth has translated into good increases in profits but only small gains in middle earners' incomes.

Many factors have operated to weaken wages. Employers have responded to sub-par growth by cutting costs and bolstering cash reserves, leaving them less able to raise pay. Economic uncertainty has weakened employee bargaining power and has made people less willing to seek better paid-jobs elsewhere.

The Resolution Foundation reports that young British workers have prioritised job security over pay increases. Just 1 in 25 'millennials' (those born in the mid-1980s) have moved jobs before reaching the age of 30, about half the rate for those who were born a decade before ('Generation X'). These workers have been forgoing the typical 15% pay rise those in their mid-20s can expect from changing jobs.

On the supply side sharply higher rates of inward migration into the UK since the turn of the century may have added to the downward pressure on pay. Of the 3.5 million new jobs created in the UK since 2004, 83%, or 3.0 million, have gone to workers born outside the UK.

But after a long squeeze on wages the balance of power may be starting to tilt back from capital to labour.

Employers have got used to an abundant supply of labour over recent years, but that is changing. With the UK unemployment rate is at its lowest level since 1975, and the employment rate at a record high, there is not much spare labour sitting on the side lines. In a sign of rising confidence UK workers are becoming increasingly willing to change jobs in search of better pay.

The recent resilience of the UK economy has clearly helped. Forecasts for UK growth have risen since last summer's Brexit vote. Indeed, the latest official forecasts foresee an acceleration in growth in 2017.

The political climate also seems to favour labour. A long squeeze on wages has depleted consumer spending power and has fuelled concerns about the situation of low and middle income workers.

In the UK Theresa May came into office promising to help those who, "were just about managing".  Government policy is operating to raise wage costs. The National Living Wage (NLW), and before, it, the minimum wage, has lifted incomes at the bottom of the wage scale and also for those above as differentials are maintained. This April the NLW is set to rise by 4.2%, roughly twice the rate of growth of average earnings or inflation. April also sees the introduction of the apprenticeship levy, a 0.5% tax on pay bills of large employers to fund training. Pension auto-enrolment, which currently requires a minimum employer's contribution of 1% of relevant earnings, will rise to 3% by October 2018.

On the supply side Brexit seems, like Mr Trump's election, to presage a less open approach to immigration than has been seen in recent years. In the UK migrant flows have already started to slow. Against this backdrop immigration seems unlikely to account for such a high proportion of the growth in the UK workforce in the next decade as it has in the last.

A tight labour market, government policy and slower growth in immigration all tend to favour labour. Yet so far wages show little sign of responding. Last week's official data showed wage growth slowing. Over the next year rising inflation will provide a test of whether the balance of power really is tilting to those in work.

Britain's inflation rate is on the rise and is likely to reach over 3.0% by early 2018. The last time inflation surged, in 2010-11, unemployment rates were much higher than today. Wage growth failed to keep up with prices and those in work saw a sharp decline in spending power. This time, with the unemployment rate at a 40 year-low, the response from wages to higher inflation may be different.

The financial crisis was followed by the sharpest and most prolonged squeeze on British wages since Victorian times. Growth in earnings remains weak. But low unemployment, government policy and a reduced supply of overseas labour are likely to put upward pressure on pay. Such an outcome would erode profits' share of GDP but it would give employers greater incentives to use labour more efficiently and to undertake productivity-enhancing investment.

In the last few years the supply of labour has been abundant while growth in wages, and productivity, has been poor. The happy outcome for the UK now would be if a reduced supply of labour helped bolster wages and productivity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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