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'Responsibility' starts with fair wages

We can no longer have a welfare system where recipients get something for nothing. So says the Labour leader, but before lecturing benefit claimants on their rights and responsibilities, he would do well to examine the root causes of wage inequality and unemployment in this country
Oliver Huitson
8 July 2011
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In a recent speech on welfare and responsibility, Ed Miliband raised a number of ideas which sit uneasily with many in his own party. He put chief executives and benefits claimants in the same category: people who have “responsibilities” as well as rights, whether they are at the top or bottom of society economically. New Labour didn’t emphasise the responsibility of both groups enough and in so doing, he argued, lost touch with the public. Welfare came to be seen as getting something for nothing; the hardworking subsidising the feckless. What we now need, Miliband argued, is a system built on reciprocity and contribution – fairness. This narrative resonates with the public, and the left in the labour movement can’t afford to glibly dismiss such ideas as Blairite centrism. 

Much of what the Labour leader said was right in principle. With a few exceptions, such as severe disability, people just don’t accept individuals taking from the pot without first contributing. Entitlement cannot be entirely based on “need” alone. This has led to some blatant injustices, particularly in housing, which only undermine support for welfare. Obsessing over rights while sneering at responsibilities has become commonplace. But it’s an admission of democratic impotence to presume the ruled owe nothing to the rulers. It portrays the individual as a mere serf who, in return for his docility, demands his ‘red lines’ be respected - his “rights”. It’s the mindset of the subject, not the citizen. And even if public consent is based on resignation, we are all answerable for that resignation. Civic responsibility and reciprocity must be reclaimed if we are to progress to a more participative republicanism. 

Though right in principle, however, it was wrong in the context and realities of today’s Britain. The problem with Miliband’s rhetoric, and its one he shares with the Coalition, is that those at the bottom have effectively been cut adrift for the benefit of those at the top. It’s this division that must first be healed before lecturing the unemployed on their obligations.  

A common theme of the welfare debate is that benefits must simply be too high. If people can secure a comparable standard of living on welfare, why would they choose to work? Miliband spoke of a disabled man he’d met campaigning who, despite being apparently fit to work, chose not to:

“…it’s just not right for the country to be supporting him not to work, when other families on his street are working all hours just to get by.” [i]

But people “working all hours” shouldn’t be “just getting by”. Nor should they need propping up with endless tax credits and state assistance, all of which are effectively a vast subsidy to business. When the meagre living afforded by benefits is no worse, and in some cases better, than what a low-paid job can provide, it’s little wonder some choose to stay at home. This much is not in dispute. What is contested is the cause of this convergence. Are benefits too generous, or are wages are too low?

For 30 years the earning power of low to middle-income earners has been squeezed; wealth has been redistributed upwards. In the post-war period, much flatter wealth distributions accompanied booming growth: ‘the golden age of capitalism’. By contrast, the neoliberal decades have seen not only modest growth and frequent crises, but an explosion in inequality (the high pay commission has warned that wage inequality could soon return to Victorian levels [ii]). The poor have been increasingly excluded from productivity gains.

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Projected growth in income gap between top and 50th percentile earners. [ii]

Earlier this year, the Resolution Foundation published a report by James Plunkett showing that between 2003-2008, despite growth of 11% in the UK, wages in the bottom half completely stagnated [iii]. Even by 2015, wages are expected to be no higher than in 2001. Finally severing the link between productivity gains and wages, this “decoupling” was no anomaly but the natural conclusion of our current economic orthodoxies. Far from being unique, a similar picture can be seen across a number of Western economies: 

“…an American worker on middle wages in 2009 earned no more than an equivalent worker in 1975, despite US GDP more than doubling over the period.”

Closer to home, in Germany, the median weekly wage fell by 9% in real terms in the period 2003-2008 despite the economy growing 11% in the same period. Clouded by the figures for mean wages is a splintering between those at the top and the bottom. Low to middle income earners are being increasingly shut out from the gains of the wider economy and it’s the state that is left to pick up the pieces. Where did the money go?

In abandoning the post-war consensus, the last thirty years have witnessed profound shifts in our economic structures and attitudes. A commitment to full employment, state industries and highly progressive tax systems has been replaced with the theology of the ‘free market’. The primary role of government is now to satiate the ‘wealth creators’. The state is remoulded into an overseer; rather than providing public services, it now creates and regulates a series of private oligopolies. Taxes should be largely optional, aided by a vast and unchallenged offshore web, and short term “shareholder value” must override all else. Where the state previously intervened to keep capital on a tight leash, it is now very much the other way around; ‘the markets’ now dictate to elected governments what is acceptable. Freed from any serious ideological counterbalance post-Cold War, the champions of the free-market have led a sustained attack on labour power. 

In a world of full employment, employers simply didn’t have the leverage to drive down wages. What was needed to keep labour in check was continuous, large scale unemployment – the waste fumes of the neoliberal model. Though ostensibly to combat inflation, it certainly had other benefits: 

“I was involved in making a number of proposals which [were] put in play by the government. Now, my worry is … that there may have been people making the actual policy decisions … who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that it would be a very, very good way to raise unemployment, [an] extremely desirable way of reducing the strength of the working classes… [this] re-created a reserve army of labour and has allowed the capitalists to make high profits ever since.” (Sir Alan Budd) [iv]

Accompanying the transition was a protracted assault on collective bargaining, driven through by aggressive anti-union legislation and cheered in the media. The ‘race to the bottom’ frenzy of globalisation saw low-end wages squeezed further still; intransigent workers faced the threat, often realised, that their jobs would simply be moved offshore. Workers not only had to compete with cheap labour abroad but, in the New Labour years, increasingly on their doorstep. The effect of this on low wages is typically negative – it makes the poor even poorer [v]. In this wider context, what is often described as a left-wing cultural project seems more a right-wing economic policy – the CBI, for instance, have always been outspoken supporters of Labour’s open border approach. When combined with technological advances that have displaced many manual workers, the overall impact of these factors on low-end wages has been substantial.

As the bottom of the labour market has been squeezed, increasingly bigger chunks of the nation’s wealth have been swallowed up by exorbitant executive salaries and share dividends. As a proportion of GDP, wages have fallen from 64.5 percent in the 70s to 53.2 percent in 2008 (ibid). The effect of this on the low-paid is exacerbated by the growing inequality within the wage distribution; not only is less money going to wages overall, it has also become increasingly concentrated at the top. 

“In 2010, the average annual salary of FTSE 100 chief executives was more than £3,747,000, 145 times greater than the national median full-time wage of £25,800… the report predicts that by 2020 the ratio will have spiralled up to 214:1.” [vi]

Within just the last ten years this ratio has more than doubled. The same report found the top 0.1 percent of earners currently account for 4.5 percent of national income, set to rise to 14 percent by 2030 on current trends. This is less “trickle down”, more cascade up. As the purchasing power of labour declined, and with it the cost of wages, supply would naturally begin to outstrip demand. This was the inherent instability of the system: it’s one thing to appropriate someone’s wages, but there comes a point where they can no longer afford your goods. The answer was debt.  

In the UK, household debt soared from 45 percent in 1980 to 157 percent in 2005 [vii]. Cheap credit flowed in all directions; 125% mortgages, equity release schemes, remortgages, second mortgages and credit cards given out like confetti. Yet by 2008, the fiction started to unravel. Poverty dressed up in debt and a triple A name badge is still poverty. When these premium assets turned out to be junk the whole system collapsed. At the root of the crisis is the reduced power of labour:

“… high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis… [potentially]as a result of a shift in bargaining powers over incomes.” (IMF) [viii]

The situation it has left us in is hardly suitable for lecturing the unemployed and disabled on their work ethic: 400 people are chasing every job. The Coalition is keen to focus on “structural deficit” but says little on the causes of our structural unemployment beyond attacking welfare and the disabled. Yet encouraging a fairer distribution of the national wealth would have substantial benefits. Aggregate demand, for instance, can be expanded by spreading resources to those with the highest propensity to consume – the poor. This has knock-on effects for the deficit: benefits are lowered and tax receipts grow (the poor seem to have a much higher propensity to pay their taxes too). Not only is this more sustainable and just than credit bubbles but it would reduce inequality and all its attendant ills – ills which are themselves serious burdens on the state finances [ix]

If Miliband wants to rebuild responsibility, he could start with a commitment to full employment and living wages; people are happy to work when they are given a fair share of the proceeds. The destabilising currents of the last thirty years need to be reversed; wealth needs to be shifted back from the top to the bottom.


 

Notes: 

[i] “Ed Miliband speech in full”, Politics.co.uk, 13th June 2011           

[ii] “More for Less: what has happened to pay at the top and does it matter?”, The High Pay Commission, May 2011

[iii] James Plunkett, “Growth without gain? The faltering living standards of people on low-to-middle incomes”, Resolution Foundation, May 2011

[iv] “Alan Budd on the Tories’ real motives”, The Other Taxpayers Alliance, July 7th 2011

[v] Dr Martin Ruhs, “The Labour Market effects of immigration”, The Migration Observatory, 21st March 2011

[vi] Deborah Hargreaves, “Pay gap widening to Victorian levels”, The Guardian, May 2011

[vii] Stewart Lansley, “Unfair to Middling”, TUC, 2009

[viii] Michael Kumhof & Romain Ranciere, “Inequality, leverage and crises”, The IMF, November 2010

[ix] “Why more equality?”, The Equality Trust, 2009

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