The Treasury has a point on living standards — but it ignores the role of inequality

Inequality is a more important explanation than rising employer costs for why the wages of the typical worker have fallen behind GDP.

One of the big surprises in today’s Autumn Statement lies in the new OBR projections. Growth has been revised up as expected—at least in the short-term. But wage forecasts are down. Amazingly, after today’s largely positive economic news, the squeeze on wages is now going to be even longer than the OBR thought in March. The updates reflect the OBR’s revised view that the crisis has caused a larger and more permanent hit to productivity than previously thought. They will also add momentum to a debate that was already gaining pace before today’s announcement: is the link between economic growth and wage growth weakening? And how soon will a recovery bring an end to the squeeze?

Earlier this week, the Treasury entered this debate by briefing its own new analysis of how the link between economic growth and living standards has changed over the longer term. Their top-line message was clear: there’s been no fundamental shift in the relationship between growth and pay. Instead, wages have simply been squeezed by rising employer costs — both pension contributions and, more pointedly, the increases in employer National Insurance introduced under Labour. But how adequate an explanation do employer costs really provide for the changing link between GDP and pay?

We can answer this by looking at a report written for the Resolution Foundation by Professor John van Reenen and Joao Paulo Pessoa. Although the paper is referenced in HMT’s briefing, they have not gone as far as replicating the wider analysis the paper covered.

In the fuller analysis we see that there are three potential culprits for why the link between GDP growth and wage growth has weakened over time. First there’s the question of whether the share of national income going into workers’ compensation has been falling, and the share going to profits rising. If so, the compensation workers receive will have lagged growth in GDP. Second, there’s the fact that not all compensation goes into wages—some goes into pension contributions and some goes into employer National Insurance. This is HMT’s focus. Third, there’s the fact that wages are not distributed evenly across the economy. If those at the top get a growing share of wages over time, wages for typical workers in the middle— at the median —are likely to lag behind.

So here, in three simple charts, is the story of how much each of these things have mattered in the last 30 years.Chart 1 shows how trends in GDP compare to trends in average worker compensation since 1972. If the share of national income going to labour was falling, we’d see a growing gap between the two. We don’t see much of this. At the start of the crisis in 2008, overall compensation had only fallen slightly behind GDP. This suggests that changes in the share of GDP going to labour don’t account for much of what’s going on.

Chart 1: The role of a falling labour share—GDP and average total compensation

What about the non-wage costs that the Treasury focuses on? Chart 2 shows that a gap has indeed opened up between a measure of average compensation, which includes these costs, and average wages, which doesn’t. This confirms HMT's basic claim that non-wage employer costs have risen, squeezing the amount left over for pay. Not all of this change is about employer NICs —rising pension contributions have played a bigger role. This is of course no bad thing in itself, although its generational implications are harsh for the young people taking a hit to their pay to fill historic pension fund deficits. Either way, the trade-off between these costs and wages is clear.

Chart 2: The role of employer costs — average total compensation and average wages

That leaves the question of how wages are distributed by the labour market. Chart 3 shows how trends in median wages—the pay of the worker in the middle of the distribution—compare to trends in average (mean) wages, which also capture growth in wages at the very top. The gap between the two shows the extent to which inequality accounts for the typical worker falling behind economic growth. As we can see, this gap is the biggest of the three. Inequality is a more important explanation than rising employer costs for why the wages of the typical worker have fallen behind GDP.

Chart 3: The role of inequality—mean wages and median wages

What should we make of all this? There’s no disguising the fact that it makes for a lousy whodunit; no single factor is to blame. And of course today’s new OBR forecasts for wages owe as much to the unusual dynamics of our post-crisis labour market as they do to the longer-term story we see in these charts.

But the findings also show how much we need a more serious, less partisan debate about these fundamental changes in how our economy works. There will be those on both sides of the political aisle that don’t much like the implication of these findings. For some on the left, it is appealing to turn to a falling labour share as an explanation for wages falling behind. They see the owners of capital hoarding ever more profits, squeezing out workers. But in 2008, such changes only accounted for around a fifth of the gap that had opened up between GDP and median pay since 1972. On the other hand, non-wage costs accounted for more than a quarter (27 per cent). That means accepting the basic truth in the Treasury account: rising employer costs put pressure on pay.

But we also need to challenge the temptation, more common on the right, to say that high or rising employer costs are a simple cause of the weakening link between growth and wages. This is inexcusably partial. Inequality accounted more than half (53 per cent) of the gap that had opened up between GDP growth and median wage growth from 1972 to 2008. Yet inequality has so far been missing entirely from government briefing on this issue. If there are still those who think high levels of inequality aren’t relevant to the living standards of ordinary workers, they too need to wake up.

A block of flats is seen on January 2, 2012 in Bath, England. Photograph: Getty Images.

James Plunkett is director of policy and development at the Resolution Foundation

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Absolutely Fashion showed what fashion week is really like: nasty, brutish and short

With fake meetings about fake covers, the documentary gave a glimpse into the abyss at the heart of the fashion world.

London Fashion Week is the sad little sister of the one in Paris, where I once attended a Valentino couture show dressed by Gap, watched what looked like live-action anorexia nervosa at Armani and got into a fight at Chanel. Did a man wearing a lion’s head on his real head look stupid? Yes, said I. No, said the fashion ­journalist, with fury.

Fashion Week had a small elegy this year – a BBC2 documentary called Absolutely Fashion: Inside British Vogue, which was fantastically misnamed. There is nothing inside Vogue, except a vague groping for novelty, which is technically an abyss. But that did not stop the programme’s director, Richard Macer, from sitting in Vogue House for nine months, watching women smell each other’s mascara. In the way of a certain type of media, he seems to have emerged more ignorant than when he began. This is the central principle of fashion: stupefy the buyer and she will pay to be reborn as something uglier.

“He doesn’t understand fashion,” said one critic, which I think meant: “He should have licked Karl Lagerfeld’s shoes while crying about belts.” To this critic, that is understanding fashion. It is a religious hierarchy. (That no one has asked Lagerfeld what he has done to his face, and why, proves this. When I met Lagerfeld in Paris, he was behind a velvet rope. I wondered if he sleeps with it.) Macer is a sexist, suggested another critic, who seemed to think that any industry that employs women in large numbers – human surrogacy farms, for instance, or Bangladeshi textile factories, or German super-brothels – is feminist. This is the stupidest definition of feminism I have yet heard and I have fashion to thank for it.

Macer was too frightened to ask questions about exploitation, pollution or the haunting spectacle of malnourished adolescents inciting self-hatred in older females in pursuit of profit, and he is not alone. I read no insights about London Fashion Week, but I do not care about clothes. He was so cowed by his access as to be undeserving of it, and Absolutely Fashion was as much about the laziness and commercial imperatives of modern journalism as it was about fashion, from which we should expect nothing.

Macer had a tiny scoop: British Vogue learned that American Vogue was running a cover of the singer Rihanna in the same calendar month. It decided to run early and people stayed up all night anxiously repaginating. He had the opportunity to ask Anna Wintour, the editor-in-chief of the US magazine, about it, but a staffer begged him not to. So he didn’t. He segued from journalist to PR. He drank the opiate – and I understand this, because if you don’t, you won’t survive. “Come again,” Jean Paul Gaultier once told me in Paris. His meaning was: “. . . but only if you love my clothes”.

In one scene, the actor Hugh Jackman was photographed in a bathtub at Claridge’s Hotel in London. He was fully clothed and looked marginally more stupid than he does dressed as the genetically mutated wolf man Wolverine, but that is not the point. “Come and see how handsome you are, Hugh,” cooed a Vogue woman. I wouldn’t have minded Jackman preening over an image of himself in private, but this exposed a truth: some journalism is celebrity PR.

Elsewhere, Kate Moss did a shoot wearing clothes that belonged to the Rolling Stones. It was based, she said, on a well-known shoot that they once did “in exile”. She meant tax exile, which was funny.

That Vogue, which is still, at least nominally, a magazine, should devote itself to this junk is not excused by an intellectual curiosity so dulled that one executive said that New York Fashion Week had “a sort of Lego element to it”.

British Vogue is edited by Alexandra Shulman, and in the manner of print media with long-standing editors – she has been there for 24 years – it is, in essence, a cult. In this case, a passive-aggressive-ocracy. (People are always surprised to learn that magazines are tyrannies, but there it is.)

I do not know whether Shulman wanted Macer there or not, or whether she didn’t have the clout to stop it, but once he was in, she treated him with the bored derision of a woman contemplating a ball gown chewed by moths. Shulman has the face of a woman who should get out while she can. In her only revealing scene, she had to choose between two front covers. One was “artistic” because it showed Kate Moss’s knickers; the other was unthreatening because it showed only Kate Moss’s face. “My heart is never allowed to rule,” she said, and she laughed. But I think she meant it.

She lied to Macer, too, holding fake meetings about fake covers so the world would not learn that Vogue had, by its cracked standards, a huge scoop: the Duchess of Cambridge would appear on the cover of the 100th-anniversary issue in a hat.

Absolutely Fashion also taught us, had we not known, that fashion is peopled by privileged creatures who are impervious to the extent of their privilege and who are, therefore, bad journalists, because they cannot even effectively interview themselves. For instance, the photographer Mary McCartney, one of Paul’s daughters, told Macer that she had never got work because her father was a member of the Beatles.

To be oblivious to reality is essential in fashion. Everyone is equal under the skirt. Yet McCartney flourishes because of the doctrine of the age: the already prosperous are more worthy of prosperity.

Not everyone seemed so disingenuous. One woman described the search for the non-existent novelty as “exhausting”. She no longer believed in the cult.

Absolutely Fashion, if you watch it critically, is more interesting than Macer perhaps allowed himself to dream. In its way, it embodied any fashion week anywhere: nasty, brutish and short. 

This article first appeared in the 22 September 2016 issue of the New Statesman, The New Times