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Government policies will further squeeze the wages of ordinary workers. Even the IMF is worried

Wages squeezedLast week Bank of England Governor Mervyn King said (pdf) that British real wages in 2011 are likely to be no higher than they were in 2005. In the years ahead living standards will be further squeezed by low wage rises, higher inflation (especially food and fuel), and tax rises such as VAT.

As King noted, one has to go back to the 1920s to find a comparable period of declining living standards. He added: "One way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.”

Stagnant real wages may be a recent development, but the squeeze in the share of national income going in wages (and the consequent rise in the share going to profits) is a much longer term trend. In Stewart Lansley's words (pdf):

“The wage share held its post-war level at between 58-60 per cent until the early 1970s and then rose to a high of 64.5 per cent in 1975. It then started drifting downwards reaching a post-war low of 51.7 per cent in 1996, largely as a result of the rise in unemployment in the slump at the beginning of that decade. From then it recovered slightly to reach 55.2 per cent in 2001 before slipping back to 53.2 per cent in 2008 – close to its post-war low in 1996.”

Wages as % of GDP

One of the drivers of the declining wage share of GDP is the existence of the corporate surplus that I wrote about on False Economy recently. As Chris Dillow has written:

“In recent years – before the crisis as well as after – firms invested less than they made in profits… This tended to depress wages, by creating unemployment. And after the crisis, consumer spending fell partly because easy credit was no longer available. That too created unemployment. These factors, though, were mitigated by government borrowing… It was the rise in the latter that raised the share of wages in GDP in 2009.”

In other words as corporations haven’t been reinvesting all their profits, investment has been low and hence unemployment higher than it might have been. This depresses wages for those in work. In recent years government spending has helped to alleviate this problem by creating employment – something Osborne now plans to reverse.

Because of this, the wage squeeze is set to continue. The Office of Budget Responsibility (spreadsheet through this link) forecast that labour's share of GDP will fall throughout 2011 and then stagnate until 2016.

(The chart below actually shows the ‘labour share’ of national income – which includes employment taxes – rather than the ‘wage share’ from the above chart. The OBR does not forecast the wage share.)

Labour share of national income

Yet while George Osborne’s own OBR says his policies will lead to higher unemployment and lower wages, the International Monetary Fund – not a body noted for its left-wing credentials – has called for the opposite approach. The IMF argues (pdf) that policies designed to increase the share of national income going to workers will mean that people will be less reliant on credit and better able to pay down existing debts:

“For long-run sustainability a permanent flow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful than a stock adjustment, unless the latter is extremely large… But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.”

In other words, to end the crisis, to avoid future financial crashes and to get the economy moving again we need more of the nation’s income to be taken by ordinary people. It’s a shame George Osborne isn’t listening.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.

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