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.


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.


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 

David Young
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The Tories are the zombie party: with an ageing, falling membership, still they stagger on to victory

One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.”

All football clubs have “ultras” – and, increasingly, political parties do, too: although, in the case of political parties, their loudest and angriest supporters are mostly found on the internet. The SNP got there first: in the early days of email, journalists at the Scotsman used to receive bilious missives complaining about its coverage – or, on occasion, lack of coverage – of what the Scottish National Party was up to. The rest soon followed, with Ukip, the Labour Party and even the crushed Liberal Democrats now boasting a furious electronic horde.

The exception is the Conservative Party. Britain’s table-topping team might have its first majority in 18 years and is widely expected in Westminster to remain in power for another decade. But it doesn’t have any fans. The party’s conference in Manchester, like Labour’s in Brighton, will be full to bursting. But where the Labour shindig is chock-full of members, trade unionists and hangers-on from the charitable sector, the Conservative gathering is a more corporate affair: at the fringes I attended last year, lobbyists outnumbered members by four to one. At one, the journalist Peter Oborne demanded to know how many people in the room were party members. It was standing room only – but just four people put their hands up.

During Grant Shapps’s stint at Conservative headquarters, serious attempts were made to revive membership. Shapps, a figure who is underrated because of his online blunders, and his co-chair Andrew Feldman were able to reverse some of the decline, but they were running just to stand still. Some of the biggest increases in membership came in urban centres where the Tories are not in contention to win a seat.

All this made the 2015 election win the triumph of a husk. A party with a membership in long-term and perhaps irreversible decline, which in many seats had no activists at all, delivered crushing defeats to its opponents across England and Wales.

Like José Mourinho’s sides, which, he once boasted, won “without the ball”, the Conservatives won without members. In Cumbria the party had no ground campaign and two paper candidates. But letters written by the Defence Secretary, Michael Fallon, were posted to every household where someone was employed making Trident submarines, warning that their jobs would be under threat under a Labour government. This helped the Tories come close to taking out both Labour MPs, John Woodcock in Barrow and Furness and Jamie Reed in Copeland. It was no small feat: Labour has held Barrow since 1992 and has won Copeland at every election it has fought.

The Tories have become the zombies of British politics: still moving though dead from the neck down. And not only moving, but thriving. One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.” His Conservative counterparts also believe that their rivals are out of power for at least a decade.

Yet there are more threats to the zombie Tories than commonly believed. The European referendum will cause endless trouble for their whips over the coming years. And for all there’s a spring in the Conservative step at the moment, the party has a majority of only 12 in the Commons. Parliamentary defeats could easily become commonplace. But now that Labour has elected Jeremy Corbyn – either a more consensual or a more chaotic leader than his predecessors, depending on your perspective – division within parties will become a feature, rather than a quirk, at Westminster. There will be “splits” aplenty on both sides of the House.

The bigger threat to Tory hegemony is the spending cuts to come, and the still vulnerable state of the British economy. In the last parliament, George Osborne’s cuts fell predominantly on the poorest and those working in the public sector. They were accompanied by an extravagant outlay to affluent retirees. As my colleague Helen Lewis wrote last week, over the next five years, cuts will fall on the sharp-elbowed middle classes, not just the vulnerable. Reductions in tax credits, so popular among voters in the abstract, may prove just as toxic as the poll tax and the abolition of the 10p bottom income-tax rate – both of which were popular until they were actually implemented.

Added to that, the British economy has what the economist Stephen King calls “the Titanic problem”: a surplus of icebergs, a deficit of lifeboats. Many of the levers used by Gordon Brown and Mervyn King in the last recession are not available to David Cameron and the chief of the Bank of England, Mark Carney: debt-funded fiscal stimulus is off the table because the public finances are already in the red. Interest rates are already at rock bottom.

Yet against that grim backdrop, the Conservatives retain the two trump cards that allowed them to win in May: questions about Labour’s economic competence, and the personal allure of David Cameron. The public is still convinced that the cuts are the result of “the mess” left by Labour, however unfair that charge may be. If a second crisis strikes, it could still be the Tories who feel the benefit, if they can convince voters that the poor state of the finances is still the result of New Labour excess rather than Cameroon failure.

As for Cameron, in 2015 it was his lead over Ed Miliband as Britons’ preferred prime minister that helped the Conservatives over the line. This time, it is his withdrawal from politics which could hand the Tories a victory even if the economy tanks or cuts become widely unpopular. He could absorb the hatred for the failures and the U-turns, and then hand over to a fresher face. Nicky Morgan or a Sajid Javid, say, could yet repeat John Major’s trick in 1992, breathing life into a seemingly doomed Conservative project. For Labour, the Tory zombie remains frustratingly lively. 

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

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide