Shrinking wage pool costs workers £60bn a year

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date: 27 January 2012

embargo: 00.01hrs Monday 30 January 2012

The falling proportion of national output that goes on wages has meant that UK workers today are taking home £60bn a year less (in today's money) than workers did 30 years ago, according to a new report published today (Monday) by the TUC.

The finding is published in the latest TUC Touchstone Extra pamphlet All In this Together? which looks at how the recession and ongoing economic weakness has had an impact on different parts of the workforce.

All in this Together?, written by author and academic Stewart Lansley, documents the scale of the real terms pay cuts and downgraded terms and conditions that employees are facing, and warns that UK workers are at risk of a near-permanent lowering in the pattern and nature of their working conditions, with disastrous potential consequences for our future economic health.

The report shows that earnings took a sharp hit during the recession - dropping from an average increase of 4.2 per cent in 2007 to just 1.7 per cent in 2009 - and there has been no post-crash rebound. In September 2011, nearly two years on from the end of the recession, 99 per cent of pay deals were below RPI inflation - the measure most commonly used in setting pay.

At the same time the pay gap between executives and their staff has continued to widen, the report shows. While in 2000 the ratio of FTSE 100 top executive to typical employee pay stood at 47:1, by 2011 it had risen to 102:1.

But whilepoorearnings growth and increasing earnings inequality has been well-publicised in recent years, All in this Together? also shows that the UK's total wage pool has been shrinking for more than three decades.

In 1978, the total UK wage bill represented 58 per cent of GDP. By 2011 this 'wage-output' ratio had dropped to 53.8 per cent. The 4.2 per cent fall in wages as a share of national output means that UK workers took home £60bn less in 2011 than if the wage-output ratio had stayed at 1978 levels. Cumulative wage losses over the last three decades are approximately £1.3 trillion.

The falling share of wages as a proportion of national output has contributed to the rising household debt, plastered over in good times by a housing boom and easy access to credit, that helped to cause the recent financial crash, says the TUC.

The falling wage share has been particularly acute for those on low and middle incomes. The wages of the poorest fifth of workers in 2011 are 43 per cent lower than they would have been if the wage share had not fallen since 1978 and the distribution of earnings had not been skewed towards higher earners. Workers on middle incomes have experienced a 36 per cent wage loss, while the richest fifth of earners have had a wage loss of just six per cent.

The only group of workers immune from the UK's shrinking wage pool have been top execs who have weathered the recession and stock market falls to receive median pay increases of 10 per cent in 2010 and 17 per cent in 2011.

The fact that those at the top have been taking ever greater share of the UK's shrinking wage pool explains the frustrations people have about excessive pay that politicians are only just starting to consider, says the TUC.

While the depth of the recession raised the wage-output ratio in recent years, the Office for Budget Responsibility has predicted that it will drop even further by 2016, hitting living standards and causing a further drag on the economy. The TUC wants the issue of lost earnings to be addressed by making wage growth a far bigger part in the government's economic strategy.

Decent wage rises are the only sustainable way to drive consumer confidence and spending, says the TUC. Ministers can start by investigating where Britain's lost wages are going, and whether there are ways of encouraging this money to be redirected back into people's pay packets.

More collective bargaining, investment to boost workers' skills, stronger corporate governance including action to crack down on top pay, and encouraging the growth of well-paid jobs beyond financial services and the City would all help to address the UK's lost wages crisis, says the TUC.

TUC General Secretary Brendan Barber said: 'Over the last three decades workers have become more productive and yet they have been rewarded with an ever smaller share of the wealth they've created.

'The tens of billions of pounds that workers miss out on each year has been papered over by rising credit card bills and a housing boom, but the financial crash has brought home the reality of our shrinking wage pool to millions of workers and their families.

'Our current squeeze on living standards could be alleviated if the share of our national wealth that goes on wages started to return to the levels seen three decades ago.

'Low and middle income earners are understandably angry that have borne the brunt of Britain's lost wages while those at the top are completely immune.

'Politicians need to recognise lost wages as a key cause of the recent financial crash and start taking steps to ensure that a greater share of our national wealth goes to all of those that help create it, rather than a few at the top.

'Wage-led growth, based on greater collective bargaining, better skilled workers, better corporate governance and a broader base of well-paid jobs, is the only way to generate a sustainable economic recovery that everyone benefits from.'

Report author Stewart Lansley said: 'The falling real wage share over the last 30 years helped cause the recent crash by sucking demand out of the economy and making us more dependent on spiralling debt.

'The sustained falls in real wages of the last two years are exacerbating the demand deficit, and digging Britain into an even deeper hole.'

To coincide with the launch, the TUC has launched an online incomes tracker - http://touchstoneblog.org.uk/incomes-tracker - for people to work out how much they would be earning if the wage-output had stayed at 1978 levels. It shows for example that a worker earning £20,000 today would be earning £31,300 if the wage-output ratio had stayed the same, an effective pay rise of over 50 per cent.

NOTES TO EDITORS:

UK wage gap by year

Year

GDP (£bn)

Wage share (actual), per cent

Wage share (constant), per cent

Wage Gap (£bn)

1978

695

58.0

58.0

0

1981

689

56.0

58.0

-14

1986

807

54.4

58.0

-29

1991

901

55.8

58.0

-20

1996

1019

51.7

58.0

-64

2001

1223

55.2

58.0

-34

2006

1401

53.5

58.0

-63

2011

1412

53.8

58.0

-59

Source: Office for National Statistics national accounts

Wage loss by earning group, 1978-2011 (1 = lowest fifth of earners, 5 = highest fifth of earners)

Income quintile

Wage loss (per cent) since 1978

1

42.9

2

36.1

3

24.3

4

20.2

5

5.8

Source: Annual Survey of Hours and Earnings (ASHE)

- The complete table of the annual wage gap 1978-2011 which is used to calculate the cumulative wage gap of £1.3 trillion is available from the TUC press office

- All in This Together is available to download at www.tuc.org.uk/allinthistogether

- Stewart Lansley is a research fellow at Bristol University and the author of several TUC Touchstone pamphlets, including Life in the Middle and Britain's Livelihood Crisis. His latest book The Cost of Inequality is published by Gibson Square.

- All TUC press releases can be found at www.tuc.org.uk

Contacts:

Media enquiries:
Liz Chinchen T: 020 7467 1248 M: 07778 158175 E: media@tuc.org.uk
Rob Holdsworth T: 020 7467 1372 M: 07717 531150 E: rholdsworth@tuc.org.uk
Elly Gibson T: 020 7467 1337 M: 07900 910624 E: egibson@tuc.org.uk

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