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Workers' pain, while rich gain

Sustainable economic recovery can't be built by hitting workers, argues Prem Sikka

There is increasing talk of a sustainable economic recovery. Mervyn King, the outgoing governor of Bank of England and Confederation of British Industry (CBI) claim that a recovery is on the way. In sharp contrast, the International Monetary Fund (IMF) has chastised the UK government's austerity programme for prolonging the economic woes. The economic recovery after the 2008 banking crash is the slowest since 1921. The Institute for Fiscal Studies (IFS) and Institute for Government (IfG) have argued that the current economic crisis could well last until 2020.

Rather than getting carried away with the statistics about the odd percentage point of growth here and there, we need to look at the broader picture. This shows that the economic recovery is unlikely to be sustained as millions of people are facing economic insecurity. They do not have the resources to reflate the economy.

The official UK unemployment count now stands at 2.52 million. In addition, nearly 1.4 million workers work part-time because they cannot find full-time employment. Nearly a million young people aged 16-24 are unemployed, taking the rate to a depressing 21.2%. In 2007 there were 1.89 million part-time workers under 30, but by the end of 2012 the numbers have risen to 2.1 million. The number of young people on zero hour contracts has doubled from 35,000 in 2008 to 76,000 in 2012. Zero contract hours are jobs which provide no guarantee of regular work or pay and have become the preferred mode of employment for some 23% of UK employers. Many miss out on rights such as sick pay, pension and paid holidays. Many firms, and even charities and public sector organisations, are adopting zero hour contracts which are a modern form of slavery. The effects of unemployment are not just confined to the individuals concerned, but also extend to their families. The unemployed and their families are more likely to suffer from stress, depression, sickness and social exclusion. Yet the state's response is to withdraw and weaken the social security cushion.

Most of the people in jobs are facing wage freezes and loss of pension rights. The income/wealth inequalities in the UK have been increasing at more than the average for major industrialised nations and are regressing towards the disparities of the 19th century era. Since the Thatcher years, workers' share of the gross domestic product (GDP) has been ruthlessly driven down. In 1976, wages and salaries paid to employees, expressed as percentage of GDP, stood at 65.1% of GDP. Now it stands at barely 53%. A June 2013 survey by the TUC estimates that between 2007 and 2012, workers failed to keep pace with inflation and the average paypacket suffered a cut of 7.5%. My analysis of the accounts of FTSE 100 companies suggests that if the current trends continue then by the end of this decade workers' share of GDP is likely to be below 50% of GDP.

The plight of ordinary workers is even more severe because the above statistics also includes executives and fat cats who have been helping themselves to disproportionate rewards. For example, ordinary people are facing wage freezes, but a recent survey by analysts Manifest and pay consultants MM&K shows that in 2012 the remuneration of FTSE 100 chief executives increased by 10% to an average of £4.25 million. In 1998, the average paypacket of FTSE 100 chiefs was 47 times the average earnings of an employee, but in 2012 it reached a multiple of 133. Another survey by the International Labour Organisation (ILO) has reported that in Britain, CEO pay is equivalent to 238 times average employee earnings.

Millions of employees gained little even in the boom years. Research by John Hills, from the London School of Economics, suggests that during the period from 1979 to 1995, the incomes of the poorest 10-20 per cent were little or no higher in real terms, despite overall income growth of 40 per cent. Between 1977 and 2010 the share of GDP accruing to the bottom half of workers fell by more than a quarter. For every £100 of GDP they received £16 in 1977, by 2010 their share fell to £12 and after taking-out bonuses their share declined to just £10. In contrast, the top 10% of earners increased their share from £12 per £100 of GDP to £14 and after taking account of bonuses it rose to £16.

The less well-off could have mobilised trade unions to protect their purchasing power, but trade unions have been under relentless attack from the state. In 1979, some 13.2 million UK workers, or 55.4% of the workforce was in a trade union, but by 2012 this declined to around 6.5 million workers or 23% of the work force, compared to 69.2% in Finland, 68.4% in Sweden, 66.6% in Denmark and 54.4% in Norway. With virtually no countervailing UK institutions, UK workers are being ruthlessly exploited. The number of people relying on emergency food handouts, simply to survive, has trebled to 350,000. People are facing massive hikes in the price of food, electricity, gas, water, transport and other essentials and simply do not have the financial capacity to take any further hits. One survey has suggested that an increase in monthly bills of just £99 will prove to be disastrous for a large number of families.

Wealth has been transferred from workers to corporations and wealthy elites; corporate profitability rates are at historically high; corporation tax rate has been reduced from 52% in 1982 to 21% for 2014; the top marginal rate of income tax has declined from 83%, in 1979, to 45% for 2013. There are no tax cuts for ordinary people. At the end of 2011, the bottom 20% of households paid 38.2 of their income in direct and indirect taxes, compared to 33.6% for the top 20%. Despite the recession, the rich are getting richer. In 2012, the richest 1000 people, representing just 0.003% of the adult population, increased their wealth by £35 billion to £450 billion, enabling them to fund political parties and operate their own think-tanks to shape public choices. The wealthiest 1% of households have 23% of the country's cash, property and saleable assets and the wealthiest 20% of households have 62% of total wealth, leaving crumbs for others.

It is misery for ordinary people who have borrowed £1.423 trillion, almost equivalent to the country's GDP, to maintain a decent living standard. This is the highest amount of personal borrowing per capita in Western Europe. Thousands of people have become victims of the payday loans industry which does not shy away from charging interest at the rate of 4000%. Some 13.5 million people, including 1.8 million pensioners and 2.5 million children were estimated to be living below the poverty line and with a deep austerity programme these numbers will increase. A recent survey by Scottish Widows reported that 20% of workers are not putting anything away for retirement and a further 33% are not saving enough.

This situation outlines the challenges in building a sustained economic recovery. Without adequate purchasing power, ordinary people cannot stimulate the economy. The inability of the indebted to service the debt and continue consumption has been a major reason for the deepening economic crisis. Unsurprisingly, many high streets have become economic deserts. Keynes reminded us that ordinary people spend a larger proportion of their income on everyday goods and services, compared to the well-off, and thus stimulate the economy at a greater rate. But that insight has been overlooked and the erosion of ordinary worker's share of the GDP has been disastrous for the economy. Some people are relying on personal borrowing, but that cannot provide a sound foundation for economic recovery.

The ConLib government has failed to embrace progressive economics— a task that now falls to the Labour Party. It needs to build a programme of progressive taxation to redistribute wealth and commit to full employment. It will need to restructure and diversify the economy away from the obsession with financial services, which has failed to generate jobs and is now a serious threat to the wellbeing of the entire economy. All the major industries of the past, such as steel, gas, water, electricity, shipping, mining, biotechnology, telecommunications and aeronautics were built by the state, sometimes in partnership with the private sector, though often it was unwilling to invest in the new economy. The same will be necessary again.

Labour will need to invest in new technologies, manufacturing and green industries to check the rise of the shelf-stacking economy and create skilled and semi-skilled jobs. This need not necessarily mean more public borrowing as wealthy elites and corporations are avoiding and/or evading anything between £35bn and £100bn each year in taxes. A drive against this can generate large sums. In addition, workers need to be empowered to sit on company boards so that they can influence issues about investment, training and sharing of wealth. Such arrangements are a common practice in Scandinavian countries, which continue to outperform the UK and are also generally happier and healthier societies.