The decline and fall of real pay under the UK’s “flexible labour market” system

The Taylor “Review of Modern Working Practices”, published on Tuesday, is a fundamentally complacent document:

“National labour markets have strengths and weaknesses and involve trade-offs between different goals but the British way is rightly seen internationally as largely successful.”

True, the report expresses a number of reasonable aspirations and contains a number of sensible but gentle proposals, but it fails to come up with any strong proposals for dealing with the real problems faced by insecure workers in the UK today.  It does not even make the obvious recommendation, to remove the big court fees now imposed on workers wishing to challenge their employer in an industrial tribunal.  And while noting that the UK labour market suffers from weaknesses such as real wage growth and productivity, it fails to explain that these are the necessary logical results of the model, and not aberrations.

Real wages falling heavily again

Publication of the Taylor Review was followed on Wednesday by the latest monthly employment stats from the Office for National Statistics (ONS).  These tell us that the number of those in work continues to rise significantly, but that real wages are falling at their fastest rate for nearly 3 years.  Indeed, if we take the period since the Conservative government took office 7 years ago in May 2010, we see that real wages have fallen on an annual basis for 52 months out of a total of 84 months (Tale 16, dataset A01). Average total real weekly pay (at constant 2015 prices) was £493 in May  2010, and is £487 in May 2017 – a level it first reached in August 2005.

False claims by the CBI for "flexible labour markets"

Yet despite these long-running abysmal pay statistics, the Taylor report gives prominence to claims from the Confederation of British Industry (CBI) that are simply not true.  Take this example :

“The UK’s flexible labour market has been an invaluable strength of our economy, underpinning job creation, business investment and our competitiveness. These strengths cannot be taken for granted, so it is essential that flexibility is retained and enhanced.”

The "flexible labour market" has certainly not underpinned business investment, which – having improved in 2015 - fell back in 2016.  In fact, since the start of the 21st century, business investment has grown by around 1% per year, which after allowing for population growth, means almost no increase per head at all.  The contrary case is far more plausible – that our excessively flexible labour market encourages the substitution of labour for capital and leads to low levels of investment.

The UK is (with Italy, among "advanced economies") at the bottom of the international chart for investment as a percentage of GDP, where we have long languished.  Nor has labour flexibility underpinned  an improvement in “competitiveness”, if we take our continuing large trade deficit as strong evidence.

But the false claim by the CBI I want to look at in more detail relates again to real wages.  The CBI’s evidence to the Taylor Review claims:

“Flexible labour markets tend to enjoy higher employment rates and lower unemployment than those with more rigid approaches and – as CBI research from 2014 shows – over many decades, they have better protected the labour share and delivered more real terms wage growth than more rigid systems. This is why flexibility matters.” (My emphasis).

So the claim is that over many decades, it is "flexible labour markets" which have delivered more real terms wage growth than more rigid systems…

This even fails to do justice to the CBI’s own work on the subject.  Their 2014 report, “A better off Britain: Improving lives by making growth work for everyone” simply states:

"Pay has risen faster than the cost of living throughout most of the last 50 years – and between 1990 and 2008 pay grew faster in the UK than in any other advanced economy”.

I have no reason to doubt this statement for the period to 2008 – but (a) Britain did not have what is now called a “flexible labour market” for the first big part of the 50 years, (b) real wages slowed dramatically once we did have a flexible labour market, and (c) since 2007, the UK’s real wages have fallen heavily - precisely due to our flexible labour market!  

How real pay in the UK has crashed compared to other countries

Geoff Tily gave this chart from OECD data in his Touchstone blog in 2016, showing a fall over the previous 8 years of 10% in the average UK hourly wage – next to Greece, by far the worst in class:

After a couple of years of minor growth in real pay, we are sliding back again, and the OECD sees this continuing into next year – unlike almost all comparator countries: (chart also from Tily, Touchstone blog, 7 June 2017):

The ONS long-run data on real pay trends

In order to assess the longer-term position on real pay, the ONS offer a chart from a time series which starts in 1964, and ends in 2013, using the RPI data for inflation as against the more favoured CPI (which only dates back to 1987).  It demonstrates, as the CBI indicate, that for a long time real pay was strongly positive, but progressively less so:

And also via ONS, showing the same outcome, but using nominal data for wages and RPI inflation:

Weakening workers' protections, creating the flexible labour market

But when did the celebrated British way of “flexible labour markets” begin?  Historically, there were Wage Councils for low pay, hard to organise trades (abolished by the Major government), while collective bargaining was expected to do the heavy 'lifting' on pay and conditions for most of the rest of the labour force. The process of granting individual employment rights effectively dates to the Redundancy Payments Act of 1965, with unfair dismissal rights being introduced by the Heath government in 1971, as part of an attempted more methodical overhaul of industrial relations.

The Thatcher government from 1989 decided on a step-by-step approach to weakening both the collective and individual rights of workers, with Employment or Trade Union Acts in 1980 (Prior), 1982 (Tebbitt), then 1984, 1988 (Fowler), 1990, and onward under Major in 1992, 1993… all this is set out in the excellent chronology of the Institute of Employment Rights.  But in brief, we may say that by 1990, the process of deregulation and enforcement of “flexibility” was with us.  

It took, however the Cameron/Osborne government to severely diminish the last vestiges of protection, by imposing huge up-front court fee requirements on individuals, to dissuade them taking tribunal or court action. 

Private debt and financial deregulation

We should note too that the deregulation of the labour market coincided with the deliberate use of monetary policy to create very high levels of unemployment in the 1980s and into the 1990s, within the formal central bank policy goal of lowering inflation.  And just as importantly, it coincided with peak financial deregulation, with the City’s big bang and related changes.  Private debt shot up from the late 1980s – from around 130% of GDP in 1987 to around 200% in 1991, and upward and onward to 450% of GDP by 2008.  This massive increase in gross debt was heavily weighted to financial corporations, whose total rose from about 50% of GDP in 1987 to 250% in 2008.  

With the collapse of the communist system in central and eastern Europe, the "end of history" had temporarily arrived, and in the bright new dawn for liberated capital, maintaining high real pay fell down the list of strategic imperatives for governments and corporations.

Real pay by decade and era

Now, when we look at what happened to real wages decade by decade, we find that they rose at a pretty steady average of around 2.8 or 2.9% from the 1960s to the end of the 1980s, notwithstanding peaks of inflation or unemployment.  But from the start of the 1990s onwards, the position changes.  First, the rate of increase reduces by almost a half, and then, from the coming of the global financial crisis, real wages stagnate or retreat.

I have put together a table showing the average real wage change, by decade and era, to demonstrate this process.  I have used the ONS’s RPI data to Q3 2013, and then calculated myself the real wage effect using RPI for later quarters.  (RPI tends to be around 0.7% higher than CPI, so real wages calculated using CPI will be that much higher on average. See article on the difference by Ruth Miller, OBR, 2011, “The long-run difference between RPI and CPI inflation”.)

From all this, we see that 

• for the 1960s, the average increase in real pay was 2.83%, 
• for the 1970s (despite the gyrations), 2.93%, and
• for the 1980s, 2.89%.
• But from the start of 1990s, and coinciding with the “great moderation”, the rate fell dramatically to just 1.51%.
• In the 2000s, the average increase drops further, to 1.21%, and 
• in the current decade since the start of 2010 – and therefore the lifespan of the present Cameron/May government – the rate is negative, at -0.87%.

Looked at in somewhat longer term “eras”, the pre-Thatcher era, up to late 1979, saw an average real pay increase of 2.83%, while the Thatcher to present day era (from 1980) sees an average of 1.34%.  But more relevant, in the period up to 1990, the average was 2.89%, while for the 27 years since 1990, when full flexibility and financial deregulation take effect, the average real pay increase is just 0.76%. 

I have also included the annual average statistics for unemployment; which show that prior to 1970, real pay rose significantly while unemployment was low.  In the 1970s, unemployment rose, especially later in the decade, but not to the high levels to be seen under Thatcher, and real pay continued to rise at the same rate.  The 1980s experienced the mix of high unemployment and relatively high real pay rises, while the 1990s saw high unemployment and much lower real pay rises.  Since 2000 we have seen somewhat lower unemployment (but not at pre-1970s level), but also the slowdown and fall of real pay. 

Conclusion

From all this I conclude that the CBI are absolutely wrong in their interpretation.  Flexible labour markets have not "over many decades,.. better protected the labour share and delivered more real terms wage growth than more rigid systems."  When our labour market was less ultra-flexible, workers did better, by significant margins.

This is why the excessive flexibility of the "British way" of doing labour markets matters. It is a damaging dead end.  What we need is a modern economy based on high investment, good wages, and freed from the chains of debilitating austerity; an economy which provides workers with reasonable security and decent conditions.  What we are getting is an economy based on low and falling real wages, low investment, and eternally grinding austerity.; an economy which provides insecurity under the euphemistic cloak of "flexibility".