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30 January 2019

The dark side of the UK’s jobs boom

A financialised economy and weak trade unions mean record employment has done little to increase workers’ pay. 

By Grace Blakeley

Ask government supporters to comment on the state of the UK economy and they will likely point you towards the jobs market. Employment, as we’ve been periodically told in recent years, is at a “record high”.

This statement is deeply misleading – after all, the population itself is also at a record high. But the unemployment rate stands at just 4 per cent, the lowest recorded level since 1974-75.

Many rightly point out that a significant share of this employment is part time (26.2 per cent), temporary (5.6 per cent) or self-employment (15.1 per cent), including the insecure gig economy. Some of these workers are underemployed – they want to work more hours than they are offered. But involuntary part-time employment is lower in the UK (10.5 per cent) than the EU average (26.4 per cent) and has fallen in recent years.

By any measure, then, British employment is high. There is considerable divergence across the country, with unemployment ranging from 3.2 per cent in the south-east to 5.5 per cent in the north-east, but the downward trend is consistent.

The true problem is not a lack of jobs but a lack of adequately paid ones. Ten years on from the financial crisis, Britain’s wage performance was dismal: among OECD countries only Greece and Mexico fared worse. We are currently enduring the longest period of peacetime wage stagnation since the Napoleonic Wars. With labour so cheap, many businesses have chosen to hire more staff rather than invest in new machinery.

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These trends have conspired to reduce the UK’s productivity (the amount of output produced per hour worked), which determines long-term growth rates. High employment, however, is supposed to drive up wages by reducing the supply of extra labour. What explains the discrepancy?

Some economists argue that falling labour productivity causes low wages, rather than the other way around. According to mainstream economic theory, workers should be paid a wage in line with their “marginal productivity”. In other words, a worker is paid based on the value they create for the company. For whatever reason, UK workers are simply less productive than their German, French and US counterparts, inevitably resulting in lower pay.

This isn’t entirely untrue. Before the 2008 crisis, much of Britain’s productivity growth was driven by illusory gains in financial and professional services, which have now evaporated. Our financialised growth model gave rise to a highly imbalanced economy, with the finance and property sectors sucking in capital from the rest of the world, driving up the value of sterling and damaging our more productive manufacturing exporters. These sectors have also attracted the highest-skilled workers and domestic investment, leaving less for knowledge-intensive industries. The result has been a preponderance of low-paid, low-productivity employment in the services sector.

Since about the 1970s, in most developed economies productivity has risen faster than wages. This meant shareholders and corporate executives keeping more of their businesses’ profits for themselves. In the UK, the story is a bit more nuanced. Though many workers at the bottom of the income spectrum are paid less than their marginal productivity, many at the top are paid more.

Financiers and those in professional services are often able to use their power to extract economic rents from the production process, inflating their pay packets. Yet for those on low incomes with little bargaining power, work is no longer a route out of poverty. Research from the Joseph Rowntree Foundation last year found that a record 60 per cent of those in poverty in Britain live in working households. In other words, we live in an economy in which a tiny elite monopolises the gains from growth, leaving little for everyone else.

Many mainstream economists have failed to account for what every boss and every trade unionist knows all too well: wages are determined by the balance of power between capital and labour, not simply the abstract laws of supply and demand.

Today, British trade unions are so enfeebled that it has become effectively impossible for workers to organise in order to demand pay increases in line with inflation, let alone productivity. This, combined with low productivity, explains the UK’s notably poor wage performance since 2008. Two sharp falls in the value of sterling – one in 2008 and another in 2016 – drove up the price of imports and ate into workers’ pay packets.

In this sense, the problems with Britain’s labour market are structural – they are based on imbalances of power woven into our economic and political system. The only way to challenge the prevalence of low-paid, insecure employment is to definancialise our economy and radically re-empower our unions.

Grace Blakeley is the NS’s economics commentator

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This article appears in the 30 Jan 2019 issue of the New Statesman, Epic fail