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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North Yorkshire has approved the UK’s first fracking tests in five years. What does this mean?

Is fracking the answer to the UK's energy future? Or a serious risk to the environment?

Shale gas operation has been approved in North Yorkshire, the first since a ban introduced after two minor earthquakes in 2011 were shown to be caused by fracking in the area. On Tuesday night, after two days of heated debate, North Yorkshire councillors finally granted an application to frack in the North York Moors National Park.

The vote by the Tory-dominated council was passed by seven votes to four, and sets an important precedent for the scores of other applications still awaiting decision across the country. It also gives a much-needed boost to David Cameron’s 2014 promise to “go all out for shale”. But with regional authorities pitted against local communities, and national government in dispute with global NGOs, what is the wider verdict on the industry?

What is fracking?

Fracking, or “hydraulic fracturing”, is the extraction of shale gas from deep underground. A mixture of water, sand and chemicals is pumped into the earth at such high pressure that it literally fractures the rocks and releases the gas trapped inside.

Opponents claim that the side effects include earthquakes, polluted ground water, and noise and traffic pollution. The image the industry would least like you to associate with the process is this clip of a man setting fire to a running tap, from the 2010 US documentary Gasland

Advocates dispute the above criticisms, and instead argue that shale gas extraction will create jobs, help the UK transition to a carbon-neutral world, reduce reliance on imports and boost tax revenues.

So do these claims stands up? Let’s take each in turn...

Will it create jobs? Yes, but mostly in the short-term.

Industry experts imply that job creation in the UK could reflect that seen in the US, while the medium-sized production company Cuadrilla claims that shale gas production would create 1,700 jobs in Lancashire alone.

But claims about employment may be exaggerated. A US study overseen by Penn State University showed that only one in seven of the jobs projected in an industry forecast actually materialised. In the UK, a Friends of the Earth report contends that the majority of jobs to be created by fracking in Lancashire would only be short-term – with under 200 surviving the initial construction burst.

Environmentalists, in contrast, point to evidence that green energy creates more jobs than similar-sized fossil fuel investments.  And it’s not just climate campaigners who don’t buy the employment promise. Trade union members also have their doubts. Ian Gallagher, Secretary of Blackburn and District Trade Unions Council, told Friends of the Earth that: “Investment in the areas identified by the Million Climate Jobs Campaign [...] is a far more certain way of addressing both climate change and economic growth than drilling for shale gas.”

Will it deliver cleaner energy? Not as completely as renewables would.

America’s “shale revolution” has been credited with reversing the country’s reliance on dirty coal and helping them lead the world in carbon-emissions reduction. Thanks to the relatively low carbon dioxide content of natural gas (emitting half the amount of coal to generate the same amount of electricity), fracking helped the US reduce its annual emissions of carbon dioxide by 556 million metric tons between 2007 and 2014. Banning it, advocates argue, would “immediately increase the use of coal”.

Yet a new report from the Royal Society for the Protection of Birds (previously known for its opposition to wind farm applications), has laid out a number of ways that the UK government can meet its target of 80 per cent emissions reduction by 2050 without necessarily introducing fracking and without harming the natural world. Renewable, home-produced, energy, they argue, could in theory cover the UK’s energy needs three times over. They’ve even included some handy maps:


Map of UK land available for renewable technologies. Source: RSPB’s 2050 Energy Vision.

Will it deliver secure energy? Yes, up to a point.

For energy to be “sustainable” it also has to be secure; it has to be available on demand and not threatened by international upheaval. Gas-fired “peaking” plants can be used to even-out input into the electricity grid when the sun doesn’t shine or the wind is not so blowy. The government thus claims that natural gas is an essential part of the UK’s future “energy mix”, which, if produced domestically through fracking, will also free us from reliance on imports tarnished by volatile Russian politics.

But, time is running out. Recent analysis by Carbon Brief suggests that we only have five years left of current CO2 emission levels before we blow the carbon budget and risk breaching the climate’s crucial 1.5°C tipping point. Whichever energy choices we make now need to starting brining down the carbon over-spend immediately.

Will it help stablise the wider economy? Yes, but not forever.

With so many “Yes, buts...” in the above list, you might wonder why the government is still pressing so hard for fracking’s expansion? Part of the answer may lie in their vested interest in supporting the wider industry.

Tax revenues from UK oil and gas generate a large portion of the government’s income. In 2013-14, the revenue from license fees, petroleum revenue tax, corporation tax and the supplementary charge accounted for nearly £5bn of UK exchequer receipts. The Treasury cannot afford to lose these, as evidenced in the last budget when George Osborne further subsidied North Sea oil operations through increased tax breaks.

The more that the Conservatives support the industry, the more they can tax it. In 2012 DECC said it wanted to “guarantee... every last economic drop of oil and gas is produced for the benefit of the UK”. This sentiment was repeated yesterday by energy minister Andrea Leadsom, when she welcomed the North Yorkshire decision and described fracking as a “fantastic opportunity”.

Dependence on finite domestic fuel reserves, however, is not a long-term economic solution. Not least because they will either run out or force us to exceed international emissions treaties: “Pensions already have enough stranded assets as they are,” says Danielle Pafford from 350.org.

Is it worth it? Most European countries have decided it’s not.

There is currently no commercial shale-gas drilling in Europe. Sustained protests against the industry in Romania, combined with poor exploration results, have already caused energy giant Chevron to pull out of the country. Total has also abandonned explorations in Denmark, Poland is being referred to the European Court of Justice for failing to adequately assess fracking’s impact, and, in Germany, brewers have launched special bottle-caps with the slogan “Nein! Zu Fracking” to warn against the threat to their water supply.

Back in the UK, the government's latest survey of public attitudes to fracking found that 44 per cent neither supported nor opposed the practice, but also that opinion is gradually shifting out of favour. If the government doesn't come up with arguments that hold water soon, it seems likely that the UK's fracking future could still be blasted apart.

India Bourke is the New Statesman's editorial assistant.