UK unemployment has fallen to its lowest level since 1975. Yet despite conditions not far from full employment, wage growth is barely positive.
Why is it that the British economy can provide jobs for all (including large numbers of EU and non-EU migrants), but a decent pay rise only for some?
Basic economics would suggest a link between the price of labour (i.e. wages) and the expansion of supply – but we also have to look at what Grace Blakely in the New Statesman calls “the UK’s international competitiveness problem.”
Evidence for this problem isn’t hard to find. For instance, there’s the UK’s poor record on productivity – the second worse in the G7. Blakely’s focus, however, is on the UK’s persistent trade deficit:
“Even as the country’s current account deficit – the difference between what we buy from the rest of the world and what we sell to it – has increased over the last 40 years (reaching a peacetime record of 6 per cent of GDP in 2016), we’ve been told that it doesn’t matter.”
Blakely rightly points out that “at no point in the last 40 years has invisible trade made up for the UK’s huge deficit in goods”. And though we’ve seen depreciations in the value of Sterling – for instance, those following Black Wednesday, the 2008 financial crash and the Brexit vote, they’ve been insufficient to close the trade gap.
So how does the UK get away with spending more than it earns? The superficial answer is that there is – and indeed has to be – a net flow of capital from abroad to pay for the net flow of goods and services in the same direction. Basically, the whole world seems to want a piece of us – whether that’s in the form of land, equity in UK businesses or some other asset class. These assets have to be paid for in sterling, thus propping up the value of the currency.
There are various reasons for the UK’s attractiveness to foreign investors – not all of them to our advantage:
“…the UK has relied on tax breaks and reduced labour costs to attract investment from abroad. Corporation tax has been reduced from 30 per cent in 2008 to 19 per cent today. Wages, meanwhile, have stagnated: most people are still earning less in real terms than they were before 2007.
“The creation of a low-tax, low-wage ‘bargain basement’ Britain has resulted in an influx of foreign direct investment through mergers and acquisitions.”
We’ve also got the world’s most sophisticated finance sector, which is all too happy to handle the cash – channeling a good chunk of it into UK property, thus inflating house prices.
There is a lot of money to be made from facilitating these capital flows – but for people stuck with static wages and rising rents it’s a story of loss not gain. In the long-term it also robs the economy of investment in genuinely productive enterprise and innovation.
Though I come from the other side of the political aisle – I can’t help agree with Grace Blakely’s key conclusion:
“The dominance of the finance sector has created an economic model based on extraction: that is, extraction from the rest of the world via capital inflows, and from the future via debt. We must rethink the decision made 40 years ago to sacrifice the interests of producers to those of extractive rentiers.”
I do have some caveats, however. Firstly, none of this is the doing of the financiers alone. They have been aided and abetted by government policy in the UK, the EU and around the world.
Nor should we see this mess as the exclusive fault of rightwing government policy. Indeed, it was under a Labour government that some of the worst decisions were made. It was while Tony Blair and Gordon Brown were in power that manufacturing employment went into rapid decline (after a period of several years of stability). It was their decision to allow a credit boom, a surge in house prices and a decline in home ownership. It was they who decided to open up the UK to unlimited immigration from the EU; they who presided over wage stagnation that set in years before the Great Recession; they who weakened financial regulation and failed to spot the signs of the impending financial crash.
The Conservative governments before and after Blair-Brown also deserve their share of the blame for bargain basement Britain. But let’s never forget that the era of ‘high neoliberalism’ – those seemingly golden years of growth , when government had the political space and the financial resources to make necessary but never-attempted reforms – were Labour years.
As we contemplate the errors of neoliberalism, let’s not forget that the the Labour Party was both present and involved.