Who ate all the pie?

The impact of rising pay inequality will be felt throughout the UK economy.

You probably won't be too surprised to hear that for a long time many workers have been receiving an ever smaller portion of the fruits of economic growth. But if we are to properly understand the 'trickle-up' tendencies of British capitalism we need to not only register the depressing headline but get under the surface of what brought it about.

A new report out today does exactly that: it shows that there has been a sharp fall in the share of GDP going to those in work on below average earnings at the same time as the highest earners have received an ever larger share of the national economic pie. This is not just about stagnant wages over recent years - though that has made matters worse. This runs deeper. Over a generation the wages of the bottom half of the working population have shrunk to 10 per cent of GDP, whist the top 1 per cent have seen a 50 per cent increase in their share.

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Source: Resolution Foundation 2011

So far, so predictable, you may think. But the explanation of this challenges some popular assumptions. One view, firmly held by some on the left, is that the long-term decline in wages as a share of GDP is simply the flipside of more of our national income taking the form of corporate profit. There is some truth in this - it is estimated that it accounts for around 10 per cent of the long-term wage squeeze experienced by the bottom half of earners - but this is not nearly as much many people think. (And the share of 'profit' in national accounts is if anything over-stated as it also reflects payments to the growing army of the self-employed - which isn't really what most people think of 'capital').

Another view, more often heard from those on the right and from business, is that workers' wages have been under pressure because of rising burdens on employers, such as higher national insurance contributions, which have borne down on pay. These costs have certainly risen. But again, this can be overstated: it accounts for an estimated 15 per cent of the reduced share of GDP paid out in wages to those on below average earnings.

A more predictable, and potent, explanation of why the bottom half of workers have been losing out involves rising pay inequality: of the total sum paid out in wages, a far greater share is now going to the top half of earners than used to be the case -- and within the top half, it is the top 10 per cent that have done best, and within the top 10 per cent it is the richest 1 per cent who have really cleaned up. Not surprisingly if we focus on changes in wages since the late 1990s then the role of the finance sector is key, with a staggering proportion of all of the gains to the top 10 per cent of earners in Britain flowing to a small number of people in that sector.

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Source: Resolution Foundation 2011

Take a longer view of pay inequality, going back to the 1970s, and a slightly different picture emerges. Part of the increase reflects the fact that jobs have gravitated over time from relatively 'equal' sectors like manufacturing into 'unequal' sectors like finance. But the bigger story is that almost all sectors have contributed to the rise in pay inequality: we can't pin it all on bankers. Regardless of where you work, the gap between the top and bottom is likely to have grown.

Shining a light on these trends helps focus minds on the long-term prospects for low-to-middle earners within our economy. Of course, some will just shrug their shoulders at all this. For them, growing economic inequality amongst the working population is simply what happens in advanced market economies - get over it. But many economists - and not just those on the left - are increasingly unsettled about where all this is headed. After all, you don't exactly have to be a class warrior (or even a social democrat) to believe that a country in which the wage share of the bottom half of earners is constantly falling is likely to be an increasingly volatile one: both in the economic sense, as ever more people consume all they earn, fail to save for the future, and rely on debt to try and ensure their living standards rise in line with the wider economy. And volatile in a wider political sense too. If a generation grows up believing that there is likely to be little personal gain from economic growth then they may not think the policies (and parties) that advocate the measures that generate higher prosperity are desirable or even legitimate.

Equally, you don't have to be a free-market fundamentalist to question the feasibility of the state doing ever more to compensate for escalating wage inequality through more redistributive tax and benefit policies. My own view is that there is very little prospect of the next Labour government -- or any other government for that matter - doing much more to reduce inequality via redistributive tax and benefit policies than was the case prior to 2010. This means that those who worry about inequalities in long-term living standards need to shift from a narrow focus on tax and benefit policies to the much thornier issues of achieving rising real wages and employment rates.

Anyone who claims to want a rising-tide economy, in which the gains from growth are widely shared, must recognise that this can't mean the bottom half of wage-earners being left with an ever smaller slice of the pie. Whatever tomorrow's much anticipated GDP figures turn out to be, this is the real economic question of our times. Business as usual won't do.

Gavin Kelly is chief executive of the Resolution Foundation.

Gavin Kelly is chief executive of the Resolution Foundation 

Photo: Getty Images
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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.