All in this together? The UK’s twin track economy

Posted: January 30, 2012 in Uncategorized

 by Stewart Lansley


It has become an iron rule of recessions that it is the lower and middle-paid sections of the workforce that bear the heaviest burden of the fallout. Of course, with the economic cake shrinking by 7%, pain was inevitable after 2008. Living standards on average were bound to slide. This recession, however, was meant to be different. “We are all in this together” became the much voiced refrain of coalition leaders. This time, it was claimed, the impact would be more evenly shared that in the past.

A new report that I’ve written for Touchstone, called “All in this together?“, shows just how empty those words have proved to be. Just as in the 1980s and early 1990s, it is those in the bottom half of the income distribution that are bearing the brunt of the rise in unemployment and the cuts in real wages. Those most likely to have lost their jobs have been skilled and unskilled workers in the lowest pay brackets.

It is similar story on pay. On average, real wages fell by 3.6% in the year to June 2010 and then by a further 3.8% in the year to June 2011. But those facing some of the deepest cuts in pay have been those on already low wages working in voluntary organizations, especially those working in social care. Cuts in real pay are also only part of the story. Across the public, voluntary and private sectors, longstanding conditions of work are being eroded, with staff contracts re-written to impose longer hours, poorer sickness and pension provision and fewer holidays.

Moreover, for most, pay levels and conditions are unlikely to return to pre-recession levels, even after recovery. The UK is heading further in the direction of a low-paying economy with weakened employment conditions. The last thirty years have already seen a continuing fall in the share of output accruing to wage-earners. One of the key effects of the crisis is to have fuelled this long-term trend. This is officially recognized by projections by the Office for Budget Responsibility which show that labour’s share of economic output will have fallen even further by four percentage points between 2009 and 2016.

Britain’s twin-track economy, a fast-track for the rich and a slow-one for nearly everyone else, has become more firmly entrenched since 2007. Far from accepting a fair share of the pain, those at the top have found ways of firewalling their own incomes and wealth. Indeed, a small corporate and financial elite has continued to grow its share of the cake through the downturn.

This is not just an issue of fairness. These same trends are also torpedoing the chances of recovery. If the share of output going in wages was the same today as it was in the late 1970s before the thirty-year long wage-squeeze began, UK consumers would now have around £60 billion more in their pockets. Instead the lifeblood of the economy is being further squeezed.

It was the increasingly skewed distribution of the national economic cake that was one of the key, if mostly ignored, factors leading to the 2008 Crash. The same factors are now driving an apparently relentless slide into near-permanent slump. If the division of the cake now stood at its level of three decades ago, much of the human cost would have been avoided, and we would be well on our way out of this mess.

GUEST POST: Stewart Lansley is the author of the Touchstone Extra, All In This Together?. He is a visiting Fellow at Bristol University and the author of The Cost of Inequality, published by Gibson Square.

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