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 a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue