How to boost the wage share

Author/s: 
Stewart Lansley

There has been much debate on the merits of tackling inequality by prioritising ‘pre-distribution', of attempting to achieve a more equal distribution of the cake before turning to ‘redistribution’ through tax and benefits. Stewart Lansley examines the possible impact of a number of measures on wage levels and the wage share.

Above all, securing greater equality and reducing in-work poverty depends on tackling Britain’s low wage economy. Real wages have been on a downward slide since 2009, a fall which comes after a 30-year long squeeze on wages in favour of profits. The share of total national income going to wages is now 5.5 percentage points lower than it was in the late 1970s (a fall from 59.2% to 53.7%). This ‘wage gap’ is equivalent to around £85bn in today’s prices and is the principal explanation for the rise in poverty since the 1970s. Moreover, as four out of five of the 580,000 jobs created since June 2010 are low paid, this gap is likely to grow.

So what practical measures could reverse this process, returning the wage share closer to the level of the 1950s and 1960s? A recent pamphlet for the TUC How to boost the wage share examines the likely effect on the ‘wage gap’ of a number of medium- and longer-term structural measures designed to boost wages particularly at the bottom end of the distribution. These include:

  • A modest increase in the national minimum wage to restore its 2009 level in real terms (£6.60 per hour compared to £6.19 today).
  • A halving of the numbers earning less than the living wage (currently £7.45 an hour outside London).
  • Extending collective bargaining coverage.
  • Policies aimed at securing full employment to increase the demand for labour.

The combined effect of these policies (shown in the table) would be to boost pay packets across Britain by up to £20 billion, and close around a quarter of the current wage gap.  

The effect of policies on Britain’s wage share

  Gross increase in wage bill for each item Percentage of wage gap closed for each item alone Cumulative effect of combining the policies
National Minimum Wage increased to £6.60 per hour £1.0bn 1.2% 1.2%
Living Wage introduced for 50% of employees currently paid below it £3.2bn 3.9% 4.5%
Extension of collective bargaining coverage* £13bn 15.7% 20.2%
Reduced unemployment* £4.1bn 4.9% 25.1%

* Notes:

The impact of increased collective bargaining is calculated by applying the ‘wage   premium’ from trade union membership ( around 5% ) and assuming that collective bargaining agreements are extended to a half of employees currently not covered.

The impact of reduced unemployment assumes a best case scenario of unemployment falling to 3.5%, and applies the finding ( for the period 2003- 2010) that a one percentage point fall in unemployment is associated with a 0.1119% increase in median real wages.

The report shows that though a modest increase in the wage floor (through a small increase in the minimum wage and halving the number below a living wage) is important – delivering a 4.5% reduction in the wage gap – achieving a more significant impact would depend on more deep-seated reforms.

Because of the size of the 'wage premium' associated with collective bargaining, for example, the biggest impact on the wage gap would come from a rebalancing of bargaining power in favour of the workforce. A doubling of the proportion covered by such collective agreements through a new national social contract with labour is estimated to close over 15% of the wage gap. Running the economy at a lower level of unemployment would close it by a further 4.9%.

A further reduction in the gap would require more fundamental structural reforms of the UK economy aimed at altering the employment structure of the economy in favour of the type of jobs that support higher-wage employment. Over the last 30 years Britain has followed an increasingly ‘low-road` economic and industrial strategy, with labour becoming ever cheaper and discouraging – in the process - investment in more productive activity.  In effect, falling relative wages has become a driver for reduced innovation and productivity. This makes the case for an alternative ‘high-road' strategy – one which doesn’t rely on a low wage floor as the primary route to competitiveness.

The report also argues that boosting the wage share is essential to sustainable recovery. Indeed, it shows that maintaining the wage share at its 1979/80 level would have led to a significant boost in the growth rate. History shows that a skewed distribution of factor shares – either way – creates imbalances that eventually bring economic deadlock. Far from boosting investment, growth and productivity, the steering of more of national output to profits since the early 1980s, for example, has merely led to a slowing of ordinary living standards, a hike in the concentration of incomes at the top and a rise in economic instability.

Such a package could not be introduced overnight, but could form part of a medium- to long-term economic strategy. It is now increasingly widely accepted even at the highest levels that, by boosting demand and correcting the distortions created by excessive private and corporate surpluses, a rise in the wage share and a closing of the pay gap would not just reduce in-work poverty but also help unlock the door to recovery and set the economy on a more sustainable path.

Stewart Lansley is a visiting fellow at Bristol University and the author (with Howard Reed) of How to Boost the Wage Share TUC Touchstone Pamphlet.

An earlier version of this article appeared on the inequalities blog.

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Publication date: 
Sep 16 2013

Comments

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Comment: 
What do you mean by “correcting the distortions created by excessive private and corporate surpluses”? Is there an economic theory or equation on how to do this? Could you please refer me to some texts where I can better understand this theory/suggestion? Thank you, Joe

Comment: 
Joe, in response to your questions: currently cash surpluses held by the world's largest corporations stand at record levels - a tenth of US GDP and around 7% in the UK. These surpluses are - in the main ( though not entirely ) - the product of the way the economic cake is divided between wages and profits. Over the last 30 years the share going to wages has been shrinking and the share to profits rising. The problem with large corporate surpluses is that they can be very destabilising - the way they were spent added to risk in the build up to the crisis and the fact that they have been held largely in cash and not spent ( deleveraging ) is the main reason for the prolonged nature of the crisis. While it became a key principle of the market theories of the last 30 years that the 'distribution question` was irrelevant, that view is being increasingly challenged with many arguing that the wage share needs to grow and the profit share fall to achieve a sustainable recovery. For more on this , see "How to boost the wage share" http://www.tuc.org.uk/tucfiles/611/How%20to%20Boost%20the%20Wage%20Share.pdf or S Lansley, The Cost of Inequality, Gibson Square, 2011. Sasha (web moderator)

Comment: 
Thank you for your detailed reply and your references which are very helpful. I am going to get The Cost of Inequality and will let you know what I think of it once I have read it. I am really enjoying studying economics at the moment and find your essays and the articles on the site really useful. The interactive data from the surveys are also very interesting, but sometimes contradictory?

Comment: 
This article looks great and interesting. It seems like it has lot's of sourceful information. Thanks for sharing this.

Comment: 
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