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5 January 2022updated 06 Jan 2022 10:59am

Can the UK avoid two lost decades for living standards?

If Boris Johnson truly wants to build a “high-wage economy”, he should focus on strengthening trade unions, not reducing immigration.

By George Eaton

This decade began with Conservatives heralding a new “Roaring Twenties”. Brexit Britain, we were told, would boom and ordinary workers would benefit.

Two years on, the reality has disappointed. Having endured one lost decade for living standards, the UK is likely to suffer another. The Office for Budget Responsibility forecasts that average real wages will be lower in 2026 than they were in 2008, shortly before the financial crisis. Ironically, this makes comparisons with the 1920s more rather than less appropriate. While the US boomed, becoming the world’s largest economy, the UK was afflicted by recession and stagnation for much of the decade (prompting Britain’s first and only general strike in 1926). Will the 2020s be any different?

In recent months, Boris Johnson has broken with neoliberal orthodoxy by vowing to build a “high-wage economy” and berating businesses for “mainlining” cheap migrant labour. Britain, if Johnson is taken at his word, would abandon its bargain-basement model and embrace a more German- or Nordic-style economy. (The Adam Smith Institute responded by accusing the Prime Minister of “levelling down to a centrally planned, high-tax, low-productivity economy”.)

In some sectors, such as hospitality, retail and social care, wages have risen as employers seek to fill post-lockdown vacancies. (Amid shortages in September, lorry drivers were offered salaries as high as £78,000, compared to the average of £32,500.) But the economic rebound has proved short-lived. In October, the most recent month for which data is available, real wage growth was flat (0 per cent) and the UK’s GDP rose by just 0.1 per cent.

But it is April, as TS Eliot wrote, that may prove to be the cruellest month. Inflation, which stands at 5.1 per cent, is expected to peak at around 6 per cent this spring. In April, energy costs are forecast to rise by 50 per cent (pushing the average bill to almost £2,000). Finally, the Conservatives’ manifesto-busting 1.25 percentage point increase in National Insurance (NI) will also take effect.

Much has been made of how the UK tax burden is approaching its highest level since the early 1950s (36.2 per cent of GDP). But far less has been said of the consequences for the poorest: workers earning as little as £10,000 will now pay an NI rate of 13.25 per cent. If student loan repayments are included, graduates earning more than £27,295 will pay a marginal rate of 42.25 per cent.

Despite their low-tax reputation, the Conservatives have historically not been shy of raising taxes on the poor: it was the former chancellor Geoffrey Howe who increased VAT from 8 per cent to 15 per cent in 1979, and George Osborne who increased it from 17.5 per cent to 20 per cent in his 2010 Budget.

Although the UK is being assailed by a new wave of Covid-19, workers have never been less protected from its economic consequences. As the Resolution Foundation has noted, owing to the end of the furlough scheme and the withdrawal of the increase in Universal Credit, a single earner on £15,000 who loses their job will see their income fall to 30 per cent of their previous earnings, compared to 40 per cent if they’d lost their job earlier in the pandemic, or more than 80 per cent if they’d been furloughed.

Where does this leave Johnson’s promised high-wage nirvana? It suits the Prime Minister to pretend that the UK’s parlous living standards are the result of excessive immigration. But dismal productivity (reflecting a lack of investment) and enfeebled trade unions are more important culprits.

In countries such as the Netherlands and Norway, for instance, industry-wide collective bargaining has long ensured that lorry drivers are not vulnerable to a race to the bottom on pay and conditions. But in the UK, only 26 per cent of workers are covered by collective bargaining agreements, compared to an EU average of 61 per cent and 98 per cent in Austria, 94 per cent in France, 90 per cent in Sweden, 78 per cent in the Netherlands and 54 per cent in Germany.

Under such conditions, it is not surprising that real wages have remained stagnant. Yet in the political universe of most Conservatives – with the exception of MPs such as Harlow’s Robert Halfon – trade unions only ever feature as ideological foes. Johnson may be prepared to will the end of high wages but he is less prepared to will the means.

A notable exception is the UK’s national minimum wage, which has grown twice as fast as average earnings and will rise to £9.50 in April, making it the eighth highest in the world. But the proliferation of insecure, casual employment in Britain, combined with cuts to in-work benefits, means that a higher minimum wage does not guarantee higher living standards. Two-thirds of the growth in employment from 2010 onwards was accounted for by self-employment (which is not covered by the minimum wage), zero-hours contracts and agency work. As a consequence, the proportion of people living in poverty who live in a working household has reached a record high of 56 per cent.

With the aid of a house price boom (stoked by ultra-low interest rates and mortgage subsidy schemes), tax cuts for the affluent and ring-fenced pensioner benefits, the Conservatives have been able to survive in office despite a decade of wage stagnation. But the depth and breadth of the approaching living standards crisis may force a reckoning. Libertarians are right to fear that the pandemic has heightened expectations of government action. As Boris Johnson and his cabinet are about to discover, it is hard to be only a little bit interventionist.

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This article appears in the 05 Jan 2022 issue of the New Statesman, Johnson's Last Chance