This article first appeared on Socialist Economic Bulletin.
During the current crisis the UK has experienced the longest-ever recorded fall in living standards. The biggest part of that fall is not the cuts to government spending, even though these have had severe effects. Instead the largest factor contributing to the fall in living standards is the decline in real wages. The Resolution Foundation calls this decade the worst for falling pay in over 200 years.
This fall has now resumed once more because of the combination of stagnation in wage growth and rising prices. The rise in prices is a Brexit effect, after the sharp devaluation of the pound following the referendum result in June 2016. It is ridiculous for Theresa May to suggest the falling pound and therefore the fall in real wages, is not the result of the Brexit vote.
Chart 1 below shows the recent acceleration of the inflation rate as measured by the CPI, up to 2.7% from a year ago in April. Other measures are worse. The RPI, which the ONS has replaced with the CPI shows the inflation rate at 3.5%.
Mainstream economists, including the former and current chairs of the US central bank bemoan the fact that wages are often ‘sticky’. This means that ordinarily, outside ferocious attack, authoritarian dictatorship or worse, it is hard to get workers to accept cuts in their pay in cash terms. This is regarded as a necessary condition for capitalist recovery, as wages fall and profits rise. But the most effective way of driving down real wages is to hold wages down and let prices rise. This can be supplemented by other factors, such as freezes to the pay of the public sector and casualisation of the workforce. This is what has happened.
As Chart 2 shows, the pace of the fall in real wages in the UK currently has begun to resemble the decline at the start of the recession. It is precipitate. The 1-month data and the 3-month average are both shown. The latter is highlighted by the Office for National Statistics (ONS) as it smooths out fluctuations. This now shows real wages declining once more. But the 1-month data is useful in highlighting turning-points, as SEB has previously argued. On this measure, real wages are down 0.5% from a year ago. With further devaluation-induced price rises in the pipeline, the fall in real wages has much further to run.
The cumulative scale of the decline in real wages over this crisis is shown in Chart 3 below. On a monthly basis, real weakly wages peaked at £531 in February 2008, just as the recession was about to begin. They had fallen to £497 in March of this year.
The peak in wages was in part because wages are ‘sticky’, they were still rising even as the economy was just about to slump and prices had been slowing. There was also the last hurrah of the financial boom, and reflects the City bonuses paid then.
In essence the whole of the austerity policy can be understood as a conscious effort to overcome this stickiness, that is to drive down wages and to get workers and the poor to bear the brunt of the recession while allowing big business and the rich to be shielded from it.
Average weekly earnings data only applies to those in full-time work. But it seems unlikely that those in part-time work or in the swollen ranks of the fake ‘self-employed’ will have fared better than those in full-time employment.
There are currently just under 32 million in workers in the UK. As already noted, average real weekly pay has fallen since just before the recession by £34. Even if we take the less erratic quarterly data, it has fallen to £496 from £520 in the 1st quarter of 2008. This is a real fall of £24 per week, or effectively a fall of £1,250 per year. For 32 million workers that is approximately an aggregate decline of £40 billion in real wages from the 1st quarter of 2008 to the same period in 2017. Even if only the 23.5 million full-time workers are considered and part-time workers ignored entirely, the fall in their real wages amounts to over £29 billion.
By contrast, despite severe reductions in the growth rate of public spending and cuts to all types of social welfare, Government Consumption expenditures have actually risen over the same period. According to OECD data Government final consumption expenditures have risen by £32 billion since the 1st quarter of 2008.
This may seem strange, given the harsh burden of austerity that hits workers and the poor. But the rise in real Government Consumption reflects the almost inescapable rises in government spending, on items such as pensions, the NHS, education and so on, even where these do not keep pace either with growing demand or the specific inflation in those sectors. The latest Tory Manifesto, with cuts to all types of social welfare is an attempt reduce these outlays, while maintaining tax cuts for the rich and big business.
But the maths are plain. The biggest factor in driving living standards lower is the fall in real wages. This has now resumed. The Tory Government will be hoping to turn that to good effect using the fall in wages to drive up the profit rate, where they previously failed. At the same time it will reduce the automatic rises in some areas of the Budget, further reductions on those areas of spending which otherwise rise automatically.
This Tory plan is built around a Hard Brexit. Leaving the Single Market will hurt both wages and profits, as trade barriers are introduced and investment is diverted towards larger markets. In those circumstances, the Tories are attempting once more to ensure that the greater share of that loss is on wages, not profits.
By contrast, this Labour leadership is opposed to austerity in all its forms. It will attempt to shield workers and the poor from the crisis and therefore should be wholeheartedly supported even on those grounds alone.
Some on the left reject these arguments on wages, and refuse to accept that Brexit is driving living standards lower. This is an error, reflecting their misconceived support for Brexit. The left should always be the best defenders of living standards for the overwhelming majority of society, and propose arguments that would reverse the falls that are imposed during a crisis. To do that, it must first recognise reality, that real wages are falling once more from a combination of stagnant cash wages and rising prices caused by the Brexit currency devaluation. Any sober assessment would suggest that further falls in wages and living standards must be expected as the Tories attempt to get workers and the poor to pay for the Brexit crisis.
The big trade unions are sure to offer resistance to the new offensive, as will this leadership of the Labour Party. The same cannot be said of any of Corbyn’s opponents in the Parliamentary Labour Party, who either embrace austerity or offer fake opposition to it.
The left as a whole needs to be clear about the very negative consequences of Brexit and stand with the unions and the Corbyn leadership who will resist job cuts and lower pay. It also needs to be clear about how this renewed crisis came about in order to end it.
It would help if we could compare and contrast with other countries.
Are wages in countries inside and outside the EU, in real terms, falling or rising?
Has any country ended austerity, if so how?
You can’t vote to end austerity, look what happened in Iceland, Ireland, Spain, Greece or France and you can’t vote it in either. It’s not the result of any government policy. So I don’t see why the Tories are getting the blame for it, I mean, in boom times, when they are in power, do we say, “vote conservative as the economy is booming under their them.”
‘It’s not the result of any government policy.’
Sorry, but this is bollocks. Austerity absolutely is the result of deliberate government policy.
No, it’s bollocks to suggest the opposite. Austerity is imposed on them by the state of the economy.
The idea that austerity is the necessary response to economic crisis is neoliberal bullshit.
Yet it was Karl Marx who pointed this out, all those years ago.
‘You can’t vote to end austerity, look what happened in Iceland, Ireland, Spain, Greece or France and you can’t vote it in either.’
They’re all part of the Eurozone, and so don’t have the option of simply unilaterally borrowing more to invest. We do.
Borrowing more to invest? To be paid back when and by whom?
Investment pays for itself through enhanced growth, and thus increased tax receipts.
Yet by 1976, after 30 years of taxing, borrowing and spending, inflation was at 16% and unemployment had topped 1.5 million.
You cannot spend you way out of depression. That is a harsh reality. As Callaghan said all you are doing is storing up problems for later. Now you argue with the facts and tell me how more borrowing could have solved those problems? You spend more and inflation goes up, you cut spending and unemployment goes up. What would have been your answer?
You are a tiresome Tory schoolboy troll Steven. Go away and learn a lot more econonics and economic history please. The postwar period up until the late 1970’s is now seen as the Golden Era of Capitalism by economists – marked by massive levels of government economic interventionism and Keynsian demand management. It is true that , as with all capitalist economic cycles, eventually the growth phase runs out of steam, and the capitalist class, as today, strip out all the gains made by working people to feed their profit seeking needs.
This doesn’t mean that a Left Keynsizn state led economic policy can’t ameliorate the impact of this declining phase of this capitalist downwave though. But there is no permanent sl!ution to the recurrant wasteful crises of capitalism. A socialist planned economy is the only permanent solution.
But why does Left Futures tolerate the ignorant trolling of this Tory 5th year Troll ? And why yet again post up the usual pro EU nonsense from O’Leary ? Very tiresome both.
That was a recession caused in part by an external price shock, namely the 1973 oil shock, which, by the way, is what, to an extent, led to the high inflation to which you refer. Of course, borrowing to invest under those circumstances is counter-productive, as we saw.
The problem that we have, and, to a greater extent, the peripheral Eurozone countries have is different. It is one caused by lack of demand in the economy. Borrowing in order to invest and/or cutting taxes without cutting spending is the only way, under these circumstances, to resuscitate capitalism.
Tim, Wolgang Streeck (New Left Review) is right, the Lackie parties of the rich and powerful like the Tories haven’t a clue what to do and quantitative easing (electronic printing of money) is only buying them time ((£80b since the Referendum result).
Someone again in New Left Review argued it has all occurred since stagflation in the 80’s and I would argue Neo-Liberalism has painted itself in a corner with a drive for cheap labour (reducing purchasing power) and perhaps the dangerous levels of personal debt (the old credit card) is also keeping the economy ticking over to compound the private sector strike on investment and attacks on variable capital (wages and increasing the length of working years).
State-led public investment plus public ownership and windfall taxes on big business is the answer though some so brainwashed by Neo-Liberalism believe humans can’t intervene in the market.
But when natural phenomena occur like a run of hot weather sales of some products put 1-2% on the economy so if these can so can’t we whilst regular right wing political imbeciles who have taken to invading this site do a raindance.
If other countries then follow our example then confidence returns to the World and with independent Foreign policy which treats all countries as equals and values all human life then hope in the world.
Solidarity!
He wants to end austerity but of course capitalism will impose its own imperatives on his government and he will of course choose to enact them. The last time the British state was this bankrupt was 1815 but a Second Industrial Revolution is no longer an option. A Corbyn government, in fact a May government, will be like some kind of Weimar affair: printing, cutting, disintegrating under the impact of the Bankers’ Versailles. There really is only one option if the working class and indeed Britain is not to descend into Third World status and even a hell of a lot worse and that is Socialist Revolution. The mega-profits and the property of the corporations and the super rich need to be socialised. We need a state bank, full employment and workers’ democracy. Yes we must Stop May and put the left opportunists in power but only if that is a step on the road to the socialist transformation.
The trouble with putting left opportunists in power is that there is no nice way to run capitalism. They too, are unable to provide full employment and have to attract jobs to the UK. This will mean offering lower tax rates, incentives, lower wages etc. As if taxes and wages are too high employers will shift production elsewhere. As for taxing the rich, even Dennis Healey wanted to tax them till the pips squeaked. He then found out they either leave, meaning you get nothing, or they transfer their money offshore, again you get nowt.
As I’ve said before, there is indeed no nice way to run capitalism. That’s why, as far as I’m concerned, this whole rotten system needs to go up in flames – literally, if necessary.
John P is you believe that the period from 1945 to 1976 was a golden era of capitalism then you are the Tory and not me!
As the Tories were in power for the majority of that period and you are praising their economic management of this period.
Though what you can find to cheer in the period from 1970 – 1976 is beyond me!
If anyone else thinks I am a Tory for saying the period 1945 – 1975 was not an economic golden age, then they must have forgetton what MacMillan said in 1957:
“Let us be frank about it: most of our people have never had it so good. Go round the country, go to the industrial towns, go to the farms and you will see a state of prosperity such as we have never had in my lifetime – nor indeed in the history of this country.”
So you are the conservatives, not me!
Of course, 1945-76 wasn’t a golden age because no period in the history of capitalism is a golden age. It was a golden age compared to any other period in capitalism’s past, but that’s not really saying much.
Exactly , David Parry. The term “golden age” of post WWII capitalism is about capitalist growth and profitability – NOT about the tens of millions who died in WWII to produce the rebuilding boom on which early post 1945 growth was based. Or the millions who died from smaller wars and poverty worldwide as capitalism thrived globally. Steven is too much of a no nothing moron to even understand the irony of the 1945 to late 1970’s “Capitalist Golden Age” expression !
Yes I always remember a working class socialist star after hearing Macmillan say: “You have never had it so good.” He said: “We have never had it!”
Corbyn wants to end austerity
Jeremy Corbyn is doing much better than most of us expected. He did very well in the debate last night. Whilst of course I want a united party will those doom sayers now even partly admit the membership got it right? NO? I thought not. I sincerely hope that those Labour M.Ps elected will now support the manifesto they were elected on and the Leader the membership,in our wisdom, chose. If they dont they should be expelled from the party. We can see where a ‘Progress Party ‘ would be less than 7% in the polls.
Blairite troublemakers should be deselected.
It is unacceptable that many Labour Party members are expected to go out and canvass/campaign for Labour candidates who, as MPs, have supported the privatisation of the NHS, have supported lunatic military interventions and have sought to undermine a democratically elected leader who brought 100,000s of new members into the Party.
Enough is enough.