Could ‘pre-distribution’ boost the wage share?

In a guest post, Stewart Lansley captures the key findings from his latest TUC pamphlet (with Howard Reed) on how to reverse the increasing share of national income going to profits rather than pay packets.

cartoon - chess There has been much discussion in the UK of the merits of tackling inequality by prioritizing ‘pre-distribution` – of attempting to achieve a more equal distribution of the cake before turning to ‘redistribution’ through the tax and benefit system. Central to the securing greater equality is what can be done about Britain’s low wage economy. Real wages have been on a downward slide since 2009, a fall which comes after a thirty year long squeeze on wages in favour of profits. The share going to wages is now 5.5 percentage points lower than it was in the late 1970s ( a fall from 59.2 per cent to 53.7 per cent ). This ‘wage gap’ is equivalent to around £85bn in today’s prices. As most of the jobs now being created are low paid, this gap is likely to grow.

So what practical measures could reverse this process, returning the wage share closer to the level of the 1950s and 1960s?

A new pamphlet for the TUC – How to boost the wage share – examines the likely effect on the ‘wage gap’ of a number of medium- and longer-term structural measures designed to boost wages particularly at the bottom end of the distribution. These include:

  • A modest increase in the national minimum wage to restore its 2009 level in real terms (£6.60 per hour compared to £6.19 today).
  • A halving of the numbers earning less than the living wage ( currently £7.45 an hour outside London ).
  • Extending collective bargaining coverage.
  • Policies aimed at securing full employment to increase the demand for labour.

The combined effect of these policies ( see the table ) would be to boost pay packets across Britain by up to £20 billion, and close around a quarter of the current wage gap.

The effect of policies on Britain’s wage share


* Notes on how these were estimated:

The impact of increased collective bargaining is calculated by applying the ‘wage premium’ from trade union membership ( around 5% ) and assuming that collective bargaining agreements are extended to a half of employees currently not covered.

The impact of reduced unemployment assumes a best case scenario of unemployment falling to 3.5%, and applies the finding ( for the period 2003-2010 ) that a one percentage point fall in unemployment is associated with a 0.1119% increase in median real wages.

The report shows that though a modest increase in the wage floor ( through a small increase in the minimum wage and halving the number below a living wage ) is important – delivering a 4.5% reduction in the wage gap – a more significant impact would depend on more deep-seated and longer term structural reforms.

Because of the size of the ‘wage premium` associated with collective bargaining, for example, the biggest impact would come from a rebalancing of bargaining power in favour of the workforce. A doubling of the proportion covered by such collective agreements is estimated to close over 15% of the wage gap. Running the economy at a lower level of unemployment would close it by a further 4.9%.  A further reduction in the gap and rise in the wage share would depend on an economic and industrial strategy aimed at supporting more skilled and better-paid jobs.

The report also argues that boosting the wage share is essential to sustainable recovery. Indeed, it shows that maintaining the wage share at its 1979/80 level would have led to a significant boost in the growth rate. History shows that a skewed distribution of factor shares – either way – creates imbalances that eventually bring economic deadlock. Far from boosting investment, growth and productivity, the steering of more of national output to profits since the early 1980s, for example, has merely led to a slowing of ordinary living standards, a hike in the concentration of incomes at the top and a rise in economic instability.

Such a package could not be introduced overnight, but could form part of a medium- to long-term economic strategy. It is now increasingly widely accepted even at the highest levels that, by boosting demand and correcting the distortions created by excessive private and corporate surpluses, a rise in the wage share and a closing of the pay gap would help unlock the door to recovery and set the economy on a more sustainable path.

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