Stewart Lansley: Low pay and soaring profits a lethal mix for economy

FOR Britain’s growing army of low paid workers, George Osborne’s conversion on the national minimum wage will be welcome news. His call for a rise comes after years of collapsing real pay for the 1.3 million working for the minimum rate of £6.31, now 10 per cent lower than in 2004.

But the 1.3 million on the minimum wage are only part of the story of Britain’s increasingly low-paid economy. Almost another four million earn less than the living wage – £7.65 (£8.80 in London). The proportion working for low pay now stands at over a fifth, almost double the proportion two generations ago.

As a result, Britain has the second highest proportion of low paid workers – after the United States – amongst the world’s richest nations.

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Moreover, the numbers on low pay are continuing to swell. More than three out of every five jobs created during the crisis years have been in low paid sectors, from restaurants and hotels to social care and contract cleaning.

The relentless spread of low pay has had profound social and economic effects. For the last three decades, Britain has allowed the proportion of national income going to wages to fall, from an average of 60 per cent in the two post-war decades to 53 per cent today, in favour of corporate profits.

This has boosted in-work poverty, driven up the cost of benefits and weakened the incentive to work. According to economic orthodoxy, this shift from wages to profits should have boosted economic health. Instead, it has created a number of highly damaging distortions fracturing demand, promoting debt-fuelled consumption, raising risk and stifling investment. While profits have boomed, the share of GDP going to private investment has been in steady decline. Because labour is cheap, firms have less incentive to become more productive, helping to turn the UK into today’s low value-added and low-skilled economy.

Not only can Britain afford a collective pay rise, it is an economic imperative. The evidence is overwhelming: an excessive imbalance between wages and profits breeds fragility and weakens growth.

According to the International Labour Organisation, nearly all large economies – including the UK and the US – are “wage-led” not “profit-led”. That is, they experience slower growth when an excessive share of output is colonised by profits. This imbalance has also contributed to the prolonged nature of the crisis. While living standards have been falling across rich nations, corporate profitability has reached new heights. In the UK, corporate cash piles have climbed to a record £165bn.

It is a similar story elsewhere. American corporations are sitting on cash reserves of $1.45 trillion, the equivalent of over a tenth of the American economy, and up a remarkable 50 per cent since 2010.

The world is now awash with spare capital – a mix of corporate surpluses and privately-owned liquid wealth. This is money that could have launched a sustained investment and job-creating boom. Instead, most of it is lying idle – “dead money” according to Mark Carney, the Bank of England Governor.

To build a sustainable economy requires a new economic model that gradually returns the wage share closer to its post-war level. Both Christine Lagarde, head of the IMF, and President Obama have argued for a boost to wage shares.

The risk is that without such a move, this growing wage /profit imbalance will steer the economy to the edge of the cliff again. Consumer credit levels in Britain are rising at the fastest rate since 2008, while another property bubble is only a matter of time.

Meanwhile, global cash surpluses are likely to feed another round of high-risk financial activity aimed at corporate self-enrichment. The American finance corporation, Citigroup, is promoting a new version of the lucrative collateralized debt obligation, the financial product that wreaked so much havoc in the build-up to 2008.

In the UK private equity groups now hold more cash than at the height of the leveraged buy-out boom before 2007. The private equity giant, the Carlyle Group, has $50bn and Blackstone nearly $40bn of “dry powder” waiting to pounce. This will trigger an artificial boom in share prices and add millions to the bank accounts of a few hundred executives, paid for by staff lay-offs.

The lessons of 2008 have yet to be learned. Economies built around poverty wages and huge corporate and private surpluses are unsustainable. As Larry Summers, former White House adviser, has argued, the Anglo-Saxon economic model seems only able to achieve decent growth by creating asset bubbles.

Unless measures are put in place that create a more equal distribution of the cake and break up the great concentrations of income, today’s artificially 
created recovery will prove very short-lived.

*Stewart Lansley is a visiting fellow at Bristol University and the author of The Cost of Inequality.