Transcript

NARRATOR

The Resolution Foundation is a think tank which focuses on those on low and modest incomes. James Plunkett is the Secretary to its commission on living standards.

JAMES PLUNKETT

This is the thing that's not widely known, that in the lead up to the recession of about '03 to '08, we saw almost no wage growth in the middle and below in the UK economy, despite the fact the economy grew by 11% in that period. Then, clearly, the recession hits and you see people's wages fall. But that fall that has happened post the recession is really a problem on top of a problem.

NARRATOR

Whilst wages for those in the middle and at the bottom of the earnings ladder began to stagnate in 2003, this was just the culmination of a much longer shift in the economy. Since the 1980s, median wages, the wages earned by those in the middle, have been failing to keep up with productivity. That is to say, as the economy has become better at producing output over the last three decades, the gains from this efficiency haven't fed through to those in the middle and below. One way to think about this is to consider the so-called wedge share. Stewart Lansley is a research fellow at Bristol University and the author of The Cost of Inequality.

STEWART LANSLEY

The wage share is basically the share of the total output in the economy that goes to the workforce in the form of wages. And essentially, what has happened over the last 30 years is that share, the wage share, has been shrinking. So the share of the economic pie, if you like, is going to the workforce as a whole. It's smaller now than it was 30 years ago. This is in contrast to what happened in the immediate post-war decades, when that share stayed roughly constant. So the gains from growth in 30 years after the war were divided, more or less, equally since then. Essentially, the workforce have been separated from the process of growth. They haven't shared equally in the process of growth, and at an accelerating rate.

NARRATOR

So what's behind this pressure on wages for most of us, while the rich have got richer? The two most common explanations from economists are globalisation and technology. Many of the gains from increased productivity and economic growth have disproportionately gone into company profits and the pockets of top earners. This challenges those who believe that improving productivity is the best way to ensure higher wages for all.

SPEAKER

It's a fallacy to think that increasing productivity automatically leads to increasing wages. If you look at manufacturing productivity, it's gone up much faster, globally, than service productivity, but that doesn't mean that manufacturing wages have gone up in the West because those jobs are now often done by people earning much less in East Asia.

NARRATOR

Alongside technology, the other major structural change in the economy since the 1970s has been the impact of globalisation.

ROGER BOOTLE

Essentially, what's occurred as a result of the opening up of world economy is that a couple of billion workers have just joined the world economy.

NARRATOR

Roger Bootle is the managing director of Capital Economics.

ROGER BOOTLE

The result of that, not surprisingly, is downward pressure on real incomes. And again, downward pressure on particular sorts of real incomes of people who are in competition, effectively, with unskilled or lowly skilled people in emerging markets.

NARRATOR

But is globalisation as important a factor as some claim it is?

JAMES PLUNKETT

I think people often go straight to globalisation as the kind of key driver of a lot of these trends. I think it can be overstated.

NARRATOR

James Plunkett from the Resolution Foundation.

JAMES PLUNKETT

For example, I'd point to the fact that a lot of the jobs in Britain that we're really worried about in these kind of conversations are in actually non-traded sectors. These are sectors where we're not really talking about competing with China and India. Jobs aren't being outsourced to India.

NARRATOR

You can't get your hair cut in China.

JAMES PLUNKETT

You can't get your hair cut in China. Likewise, hotels, an Indian worker from India cannot change a bed in a hotel room in London. And so these jobs aren't really jobs that are being outsourced to India and China, and yet are huge jobs, are very badly paying jobs. Similarly, social care is a big example. Care for the elderly in Britain is not going to happen from China. And so this is a really big part of the picture, and it's not really just down to globalisation, I think.

NARRATOR

For Stewart Lansley, politics is one missing ingredient.

STEWART LANSLEY

There were a series of acts in the 1980s that weakened the power of unions. And regulations were taken off business, particularly in relation to the labour market, which gave business more power. So effectively, what happened was that balance shifted. Industry had a lot more power.

NARRATOR

Another phrase that keeps cropping up to explain what has happened to wages is the concept of "shareholder value." This idea suggests that in the 1980s, the way corporations were run changed as they became more exposed to pressure from financial markets and concerned by their share price. Stewart Lansley again.

STEWART LANSLEY

In the 1950s and 1960s, we had a very, very different model of capitalism, in which the share price and profits were both key drivers of business activity, but only one of them. So relationships with the staff, relationships with the community, the role they played in society worked hand in hand. But what happened, then, a lot of those extra responsibilities and social responsibilities that companies accepted were all ditched.