There
is no doubt that the last decade has been a terrible period for
average real wages in the UK, with levels still below
where they were before the Global Financial Crisis. It is very
tempting to related this to the weak baragining power of workers.
After all, we were being told before Brexit that the economy was
strong, so if the benefits were not going to wages they must have
been going somewhere else. Some people go further and say that one of
the reasons that the bargaining power of UK workers is weak is
because of high levels of immigration, and that therefore immigration
must be responsible for lower real wages.
What
people often forget is that real wages depend as much on prices as
nominal wages. If nominal wages in the economy as a whole rise, firms
can just pass additional costs on by raising their prices, leaving
real wages unchanged. Equally if nominal wages are depressed because
of weak bargaining power or immigration, firms are able to cut prices
to become more competitive, rather than keep prices unchanged and
raise their profits.
To
see what firms have done on average we can look at the chart below,
which shows the percentage shares of profits and wages in national
income over the last thirty years. (They do not sum to 100 because of
factors like self employment income and sales taxes.) The share of
wages and profits in national income have been remarkably stable over
the last two decades. It is simply not the case that bosses have been
expropriating the gains from growth over the last decade.
So
what does explain why real wages are still lower than before the
Global Financial Crisis (GC), when the size of the economy a whole
surpassed its pre-GFC level in 2013?
The
first explanation is that GDP is not the right measure to use if you
want to know about standards of living, because it can increase just
because there are more people producing things in the economy. A much
better measure is GDP per capita (GDP divided by the total
population), and that only surpassed pre-GFC peaks at the end of
2015. It is one of the great ironies of UK politics (and a big media
failure) that the growth the Conservatives like to boast about is in
good part due to immigration they want to stop.
Yet
GDP per capita is still higher than it was pre-GFC and real wages
are not. The main reason for that is the exchange rate. We have had
two very large depreciations since the GFC: one that happened as the
crisis was unfolding and one as a result of the Brexit vote. This
raises the price of imported consumer goods, which reduces real wages
relative to GDP per capita. Another way of making the same point is
that although each worker is producing a bit more stuff than pre-GFC,
that stuff buys less overseas goods than it used to, which means
workers are worse off.
The
first depreciation probably reflected in part our dependence on a
financial sector that was hit by the GFC, but the Brexit depreciation
was a completely self-inflicted wound. But that aside, the overall
message is that the main reasons for lower UK real wages are stagnant
productivity and a decline in sterling.
Does
this mean that weak bargaining power has nothing to do with weak UK
wages? There are two potential reasons why there could still be some
connection. First, there is some evidence
that individual firms that have some monopoly power now share less of
their surplus profits with workers than they used to, and that might
well reflect weaker bargaining power. Perhaps the UK aggregate profit
share might have fallen over the last decade if it hadn’t been for
these firms passing on less of their surplus to workers.
Second,
it might be the case that one reason why productivity is so poor is
that nominal wages have remained low. If nominal wages rose because
workers had more bargaining power, that might induce some firms to
investment in labour saving machinery. This is an argument I examine
in a new article
in a special edition of Political Quarterly on post-Brext policy.
We
have one clear recent piece of evidence on what happens if you raise
nominal wages, and that is when minimum wages are increased. If
George Osborne’s hike in minimum wages raised labour saving
investment and productivity then no one has noticed. More seriously,
the near consensus of the empirical literature on minimum wages is
that increases generally do not reduce employment, and that appears
inconsistent with those increases promoting labour saving investment.
Now an increase in the minimum wages is not exactly the same as an
increase in the bargaining power of workers, so this piece of
evidence is not definitive, but as yet we have no strong evidence
that greater bargaining power would spur innovation.
All
this suggests that the declining bargaining power of workers is at
best only a minor factor behind the decline in average real wages. To
increase UK real wages we need to improve productivity, and that
means not hitting investment on the head with first austerity and
then Brexit. Evidence suggests that the best way to increase
productivity is by raising demand so firms need to invest to meet
that demand. Raining public investment would be the best way to
stimulate aggregate demand.
But
that does not mean that we should not increase the bargaining power
of workers. There seems little doubt that working conditions in some
occupations are pretty bad, and a strong union presence would be an
effective way of improving the working conditions of workers. But I
also think a strong union presence in a worksplace can have a
positive influence on the distribution of real wages.
The
average wage measure in the national statistics include some some
very high wages at the top of the income distribution. Over the last
thirty years the typical or median real wage has fallen by much more
than the average, and that is because
of rising inequality, a good part of which is due to high pay rises
for the top few percent of earners. While some of that is just down
to the rise of the financial sector, some is also within a firm. Andy
Haldane at the Bank of England has also noted
(page 8) that since the 1990s the wage share of older workers has
risen, but the wage share of younger workers (below 35) has fallen.
Furthermore, as Martin Sandbu points
out, it is often inequality in the wage distribution that allows
firms to continue to employ workers on low wages to do things a
machine could do. Some of this growing inequality may have been a
consequence of weaker trade unions.
There
are therefore plenty of good reasons to want to increase the
bargaining power of UK workers. Just don't expect that to have much
impact on the living standards of workers. To raise real wages we
need higher UK productivity, and that will only come from stronger
private and public sector investment.
