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State intervention for wage-led development

Since the 1980s there has been a clear reversal of the trend towards relatively egalitarian income distribution achieved during the post-war period, with a global race to the bottom occurring in the share of wages in national income in the UK and elsewhere.

This decline in the wage share was associated with a weaker and more volatile growth performance. In the UK, similar to the US or the periphery of Europe, households increased their debt to maintain consumption levels in the absence of decent wage increases. The crisis of 2007-9, and the subsequent Great Recession have proven the fragility of this model. The recovery in Britain is built once again on the shaky ground of household debt instead of wage growth.

Empirical evidence shows that when the share of wages in national income decreases four things happen. First, consumption decreases, since workers consume more as a proportion of their income compared to the owners of capital; hence when there is a redistribution from wages to profits, domestic consumption in the national economy unambiguously decreases. Second, although private investment may increase due to higher profits, this increase is insufficient to offset the negative effects on domestic consumption. Third, net exports (exports minus imports) increase due to a fall in unit labour costs, but in the majority of countries this increase is not enough to offset the negative effect on domestic demand. Finally, in an environment of the global race to the bottom in the wage share, most of the positive effects on net exports are wiped out as labour costs fall simultaneously in all countries, and their international competitiveness relative to each other does not change significantly. Thus, in the vast majority of countries a fall in the wage share leads to lower growth; this is what we call a wage-led growth economy. The UK is a typical example of a wage-led economy. 

In a wage-led country like the UK, or the EU as a whole, more egalitarian policies are consistent with growth. A wage-led recovery out of the financial crisis is feasible, but will need political will to be achieved. Globalisation is not an impediment to a wage-led development strategy. The UK and the EU as a whole would be the economies that would benefit most from a coordinated boost to the wage share at the global level. As such, the UK and Europe could, and should, take a step forward in terms of radically reversing the fall in the wage share. This would then create space for egalitarian growth strategies at a global level.

The fall in the wage share has been a deliberate outcome of policies that led to the fall in the bargaining power of labour, welfare state retrenchment, and financialisation. The solution therefore lies in reversing this process. Policies should be in place to ensure that nominal wages increase in line with inflation and productivity. This should follow an initial gradual correction of the loss in the wage share in the past three decades. 

A strategy of wage-led development requires a policy mix that includes labour market policies aiming at pre-distribution, as well as redistributive policies through progressive taxation. Furthermore, distribution policies need to be complemented by a macroeconomic and industrial policy mix. Wage policies have to be embedded into broader targets of equality, full employment, and ecological sustainability.

This paper makes the following policy recommendations for sustainable wage-led development to be achieved:

  • Strengthen the bargaining power of labour by re-regulating the labour market, improving union legislation, widening collective bargaining and ensuring an active role for the state in institution building to facilitate sectoral bargaining structures.
  • Increase statutory minimum wage and put processes in place for the incremental increase of minimum wage to the level of a living wage. Expedite this process through the use of public contracts.
  • Introduce and enforce pay ratios.
  • Restore the progressivity of the tax system through increasing corporation tax and top rates of income tax, along with more effective taxes on wealth.
  • Restore and strengthen the welfare state and re-orientate macroeconomic policies towards ensuring full employment in order to rebalance both power relations and the wider economy.
  • Reverse the process of financialisation through regulating finance.
  • A pro-labour and pro-jobs strategy requires a public investment programme centred on substantial public investment in ecological investments and social infrastructure.  
  • End regressive wage policies such as public sector pay freezes.
  • Substantially shorten working time in parallel with the historical growth in productivity.