Wages: why are they not keeping up with inflation?

There has been a huge amount of concern about rising inflation in recent months, and it’s made worse by the fact that wage inflation has not been keeping up. A few workers in high-paid jobs have enjoyed higher bonuses and inflation-busting pay rises – it has just been reported that CEO pay has recovered to pre-pandemic levels for instance. But for the majority of workers, higher price inflation is now eroding the real value of what they earn.

More than a fifth of workers are struggling to afford the things they need to live. For them, the cost of living crisis is not some hackneyed political slogan but a fact of life. It spells real hardship. Its resolution calls for a rethinking of policies towards inflation and indeed the economy more generally.

Economics textbooks teach us that lower unemployment is the cause of higher wage inflation – the negative relationship between unemployment and wage growth forms the basis of the so-called Phillips curve. The textbooks also refer to the possibility of wage-price spirals, where higher prices fuel higher wages. This way of thinking gained support from the experience of the 1970s, when higher prices and higher wages coexisted, leading to a period of stagflation.

But the present shows us how price inflation and wage inflation can be decoupled. As a challenge to economic theory, workers are facing cuts in their real pay with seemingly no prospect of wages catching up with headline inflation. This is despite the fact that unemployment is low. Lower real living standards now represent the price of being in paid work and the cost of an economy that is jobs-rich.

Why the low wage inflation?

Wages have actually been in the doldrums ever since the global financial crisis of 2007-08. Real wages sank in the years immediately after that crisis, and although they were able to increase again on the back of very low inflation from 2012 onwards, they only returned to 2008 levels very recently.

The fact that this is all they have achieved in a period of low unemployment is something of a paradox. It is not entirely clear how to explain this, but several factors are potentially important.

First, there is the decline of union power together with the rise in firm power. Unlike the 1970s, British workers are not able to collectively demand and secure pay rises via union organisation. They face bargaining at an individual level, and the best way to get higher pay is often to find a new job. The increase in market power of firms also helps to explain why profits have risen: they’re up around 60% in real terms in 20 years, compared to growth in workers’ real wages of about 14%.

Second, there are other measures of unemployment. While recorded unemployment has fallen, the actual level of unemployment is higher: workers on incapacity benefits – in relatively large numbers in particular areas such as Wales and Scotland – would be in work if suitable jobs were available, but are not counted in the official unemployment statistics.

The fact that there has been a recent rise in economic inactivity, with workers (particularly older ones) exiting the labour force, also suggests some hidden unemployment. This matters because it implies that workers’ bargaining power may be less than what the headline measures of unemployment suggest.

Third, there is the role of lags. While wage inflation may not be rising by as much price inflation now, in the coming months, some argue it will begin to rise and perhaps even overtake price inflation. This argument has been put by the Bank of England Governor Andrew Bailey, leading him to call for wage restraint.

But while the possibility of above-inflation wage rises cannot be ruled out, it seems far-fetched to think that workers – in all sectors and regions – will be able to assert their power in ways that protect their real wages. Indeed, before any lags are realised, the prospect of wage inflation catching up with headline inflation may be stifled by unemployment rising in response to the economy contracting.

Time for new policies

At present, central banks in the UK and other countries are fighting inflation by raising interest rates and reversing the “money creation” that they were doing under quantitative easing. With inflation forecast by the Bank of England to peak at around 10% in the next few months, this policy approach looks less and less convincing. Rather, new policies are needed to ensure that wages catch up with headline inflation, especially if workers are not to suffer economic harm.

It is a welcome step that the government is (belatedly) offering direct financial support to the least well-off in society to help with soaring energy bills. While the government announced some time ago that it plans to increase corporation tax from 19% to 25% for most firms from 2023, it has only just decided to impose a windfall tax on oil and gas companies to help pay for this support, having previously resisted pressure to do so. The wider lesson from this U-turn is that the state has a responsibility to protect the economically disadvantaged, and that includes redistributing income in this way.

Yet it is concerning that the support payments are one-offs. Will the government offer new cash transfers in the future if energy prices keep on rising? Its fiscally conservative instincts are likely to prevent this from happening.

In any case, support payments do not help raise wage inflation to levels that match headline inflation. This would be easier to achieve if workers had greater bargaining power.

Restoring the bargaining power of workers necessitates radical reforms. It entails reimagining corporate governance structures and giving workers more of a say in firms. It also entails strengthening union power and widening forms of public and worker ownership.

Only until we address the imbalances in power that entrench low real pay will we secure an economy that is sustainable and run in the interests of everyone, not just the few.

*** This blog was originally posted at The Conversation

Arguments for a four-day work week

“We should work to live, not live to work”, declared John McDonnell in his speech to the Labour Party Conference. He followed this up with a commitment to the goal of a 32-hour, four-day work week. The goal, McDonnell stated, was to be achieved within ten years, and importantly, was to be realised with no loss of pay.

 

The reduction of the working week to four-days would be truly transformative. Indeed, it would represent a radical break with the dominant work culture that exists in our contemporary capitalist society.

 

Yet, its radicalism also presents challenges. Will business accept a cut in the working week? What kind of legislation will be required to achieve the cut? Ultimately, can capitalism be adapted to accommodate a four-day week or will it require us to imagine – and create – a future beyond capitalism?

 

The case for working less

 

The arguments for working less are compelling. Shorter work hours would free up time for us do and be things outside of work. It would enable to live better lives.

 

Evidence shows how longer work hours are associated with various forms of sickness – both physical and mental. The reduction of work hours, in this case, could help to raise the health and well-being of workers.

 

Beyond personal benefits, we could mitigate the effects of climate change by working less. The work-spend treadmill has an environmental cost that we could resolve by curbing the time we devote to work.

 

Less work could also pay for itself by giving rise to higher productivity. Rested bodies and minds make for more productive hours and offer the opportunity to produce what we need with more free time.

 

Finally, we might also work better. If we eliminate hours of drudgery, we could leave more time for us to enjoy more rewarding work. Reducing working hours is as much about enhancing the quality of work as about reducing its burden.

 

Work’s persistence

 

But the system in which we live keeps on pressing us to work more. It was once assumed that capitalism would develop in ways that would deliver shorter work hours. Back in 1930, the economist John Maynard Keynes famously dreamed of a 15 hour work week by 2030. He thought that this outcome would be achieved through c no fundamental reform of capitalism.

 

In reality, however, hours of work in capitalist economies have remained stubbornly high and have even shown signs of increase (especially since the global financial crisis). Large differences in work hours exist between countries, to be sure. German workers enjoy shorter work hours than their US counterparts, for example.

 

But no country stands anywhere close to achieving a 15- or even 30-hour work week in the next ten years. Indeed, on current trends, most capitalist economies look set to have average working weeks more than double Keynes’s prediction.

 

The reasons for this stagnation in work hours are varied. On the one hand, there is the issue of power. Workers cannot hope to secure shorter hours if they lack the bargaining power to realise them. The decline of unions and shift towards the ‘shareholder value model’ of management has resulted in  many people working longer, or the same hours, for lower pay.

 

On the other hand, the continued force of consumerism has acted as a prop to the work ethic. Advertising and product innovation have created a culture where longer hours have been accepted as normal, even while they have inhibited the freedom of workers to live well.

 

Making it happen

 

The challenge for any political party that is committed to the goal of working less is to overcome the above obstacles. Notably, the Labour Party has rejected an economy-wide curb on work time. Instead, it favours a sectoral approach, via a renewed system of collective bargaining.

 

McDonnell has suggested that working hours (along with wage rates and conditions) could be agreed at a sector level through negotiation between employers and trade unions. Any agreements brokered on reduced working hours could then become legally binding. This approach, in some ways, follows the lead of collective bargaining arrangements in Germany, where employers and trade unions have agreed on shorter working weeks.

 

The problem here will be reviving collective bargaining in the context of low union membership. Some sectors in services (such as the retail and care sectors), for example, have a very limited union presence and curbing work hours may be difficult to achieve under this policy.

 

McDonnell has also proposed the creation of a ‘Working Time Commission’ with the power to recommend the government increases statutory leave entitlements as quickly as possible without increasing unemployment’. This is more promising in that it aims to create a new debate – and ideally a new consensus – around the case for shortening work time across the economy as a whole. One effect of this Commission might be the recommendation and implementation of a four-day work week in all sectors.

 

A wider policy agenda for shorter work hours is set forth in a new report written by Lord Skidelsky, which was commissioned by McDonnell. While there are areas to disagree on, the report itself – and the policy commitment of the Labour Party – mark a significant step forward in the discussion of reducing work time. Generally, there now seems greater pressure to secure a four-day or even three-day work week.

 

Still the barriers to change remain formidable. As seen in the reception by industry groups to Labour’s policy announcement, business will take some convincing about the merits of a shorter working week.

 

But the scepticism of business only shows how far we need to rethink the economy and life more generally. If we continue to work as long as we do, we will not just keep on damaging ourselves, but also our planet. Working less, in short, is not some luxury, but a necessary part of our progress as human beings.

** This article first appeared at the Conversation

Davos: why measures of economic progress must consider the quality of work on offer

Davos offers a place for the rich and not-so-famous to meet and exchange views on the present and future of capitalism. As in previous years, the theme of automation and the “fourth industrial revolution” has been a core of the 2019 meeting. The concern is over how technology might help to raise economic growth and add to prosperity.

Lip service, of course, is paid to wider social and ethical goals, but in truth the central concern is with the needs of the global economy. The worship of growth (measured by GDP) dominates proceedings.

But this focus diverts attention from what are pressing problems in society. In particular, it misses the costs of work. Far from the ski slopes of Davos are real people struggling in dull jobs and on stagnant incomes. Any consideration of how technology will destroy or create jobs needs to recognise that the quality of the work we do is also important.

The fourth industrial revolution includes the rise of artificial intelligence, 3D printers and driverless cars. While many fear the disappearance of jobs due to digital automation, debate at Davos recognises the capacity for technology to create new jobs. It will present new sources of demand and new work opportunities such as engineers to design and service the new digital architecture.

Yet, the prospect of jobs growth is itself a problem if it means workers working in more low quality jobs. If technology erodes the skill content of work, drives down wages, and raises the duration and intensity of work, then workers may face the prospect of having to undertake work that is much worse than now.

Work realities

The rise of the so-called “gig economy” shows the darker side of technological innovation. Advanced economies have seen a steady decline in skilled manufacturing jobs and the growth of low-skilled zero-hours contracts jobs in their place. Meanwhile, the output of large corporations continues to grow, showing how technology can be harnessed for profit-making, at the expense of the welfare of workers.

The hard realities of work in modern society speak to the limits of visions of progressive change via automation. They highlight, in particular, how technology may add to the problems of work, while sustaining people in work.

The focus on economic growth, as measured by GDP, does not help here. Consider an economy where GDP is rising. Growth may be fuelled by rising employment, higher work force participation, and/or longer work hours. But this fails to consider the costs of the work involved. The fact that GDP may depend on a substantial number of workers being exposed to toxic conditions at work is obscured. And the process of generating GDP growth often has an environmental impact, including more pollution and waste.

Automation as distraction

At Davos and other forums, it is convenient for big business to focus on the topic of automation. It creates, on the one hand, a sense of fear about the future of work. This fear is useful for capital owners because it helps to suppress wages and reduce demands for better work, as people become just so grateful to have a job at all.

The focus on automation, on the other hand, helps to win support for the status quo. Capitalism, so the story goes, is not to blame for the ills of work, but rather these ills stem from the seemingly natural processes of technological change. Technology, in this way, becomes a useful mechanism to hide the specific injustices of work linked to existing corporate structures and practices.

Davos promotes the fourth industrial revolution slogan, in part because it reflects the interests of the class that it represents.

In our society, technology does not guarantee – as it should – more leisure time and more meaningful work; rather it offers more work and, for many, greater drudgery. Paradoxically, the prospect is of work continuing, while technology advances.

The reason for this paradox relates at an essential level to unequal power. It reflects who owns and controls technology – how powerful capital owners can use it in the service of profit generation. The discussion at Davos about technological change remains closed to voices demanding real change. Yet it is only by reimagining technology – its ownership and control – that we can create a better automated future.

Meanwhile, concerns about sustaining economic prosperity must incorporate measures of the quality of work available to people. Beyond growth, we need to embrace measures of progress that capture how well work fits us as human beings. Some useful attempts to define the quality of work exist. The challenge is to use these in conjunction with other measures such as GDP to come up with broader indicators of economic and social progress. That way, we might realise ways of working and living that are to the benefit of all.


*** This blog was originally post at the Conversation

Stop working on your commute – it doesn’t benefit anyone

Our journey to and from the office has been taken over by work. Rather than reading a book, catching up with the news, or just relaxing, our commute time is now increasingly spent reading and replying to work-related emails. The transport we use to get to and from our jobs has become another venue for work.

The sad thing is that we consent to this extra work, despite it not being remunerated. Hours spent commuting are unpaid – they add nothing to our bank balances, though they save our employers the expense of higher wages.

The extension of work into commute time reflects the presence of an intrusive and pernicious “always-on” culture. It reflects an environment where we are enslaved to work, even when not physically in the office. Our busyness, however, can only come at the expense of the quality of our lives and our health. We must fight to resist it.

Work-life imbalance

Research shows how workers fit work into commute time, in part, to ease the burden of work. Answering emails on route to work can help to save time once you’re at work. Equally email can be answered on the way home from work to ease the pressure of work during the next working day. Work can also be done on the move that could not be finished at work.

But here “savings” of time and effort are likely to be illusory. Employers are not going to cut email traffic just because workers are replying to emails on the way to and from work. To the contrary the incentive is for employers to encourage email traffic outside of regular hours in order to exploit the free work of workers.

Work “saved” during commute time, in this case, may translate into more work during paid work time. Workers again may be in the position of doing more work, for no extra pay. Out-of-hours working implies that work cannot be fitted into paid hours. It suggests that workers are overworked (and underpaid) for the work they do.

Always-on culture

New technology enables us to connect with our work, beyond normal hours. Laptops and iPhones mean we have instant access to our work and workplaces. Wifi on trains and buses has helped to turn commuting into work time. But technology itself does not explain why work is performed outside of regular hours. For that we need to look at organisational culture.

Organisations increasingly demand that their employees give their bodies and lives to work. Staying late at work is a badge of honour. Presenteeism – the act of being present at work for longer than is required – is rife in workplaces and reflects on the culture of overwork that is endemic in modern society.

Working during commute time is simply an extension of the same culture. It demonstrates the way work has taken over our lives. We find time to work even when not at work because we are exposed to a culture that venerates hard work.

Few benefits

Yet, all this extra work seems to bring few economic benefits. Productivity remains low in the UK despite workers working all hours. Commuters are no more productive for answering emails on the go. Indeed productivity is likely to be lower due to the stressed out and exhausting nature of long commute and work schedules.

Research continues to show the negative health effects of long hours of work. By working more we suffer ill-health, physical as well as mental. We also neglect our families, friends and communities. And we lose the ability to think and act beyond the roles we fill as workers.

Work may now be a normal part of commuting time but its performance imposes high costs on us and society more generally. In a rational world, we would move to ban out-of-hours email, not just to protect free time, but also to safeguard health. Beyond this we would look to challenge the hegemony of work and promote ways of living that are less work-centred. Cutting work hours would be the only sane way of restoring any semblance of balance between jobs and life.

*** This article was originally posted at the Conversation