Why are incomes squeezed?

Today’s figures show that the squeeze on households’ real incomes is continuing. Wages rose by only 1.1% in the year to the three months ending January, whilst yesterday’s numbers showed that prices have risen faster. This poses the question: does this squeeze on real wages mean that capitalists are winning the class struggle? The answer is: yes and no.

One useful measure here is the own product real wage - wages divided by the product of productivity and prices. This captures the two different ways in which capitalists can increase their exploitation of workers. One way is to reduce wages relative to prices. The other is to make workers work harder for a given real wage - to raise productivity.

My chart shows the OPRW, based upon average earnings divided by the product of the CPI and GDP per hour*. You can see that since the end of 2008, the OPRW has fallen - largely because prices rose by 10.8% whist wages rose only 4.2%.

However, its possible that the OPRW rose in Q1; I say so because the 1.4% rise in hours worked in the latest data imply that productivity fell.

What’s more striking, though, is that the post-2008 drop in the OPRW merely reverses the rise that occurred in the mid-00s.

In the mathematical sense, there’s a simple reason for this; in the five years to December 2008, real wages rose 10% whilst productivity grew by just over 2%.

Now, although I have written this in crude Marxist terms, the implication is not so crudely Marxist. What this means is that, viewed in a longer-term context, the problem of the “squeezed middle” is not so much that workers are being ripped off by high price rises. Instead, the problem is that productivity growth has stagnated for some time, and lower productivity growth must mean lower growth in real incomes for someone. In the mid-00s, workers escaped this - perhaps thanks to the temporarily relatively tight labour market then. But now, they are paying the bill. Given that mass unemployment has tipped the balance of class power in favour of capitalists, they might continue to do so.

* It starts in 2000 because this is when the ONS’s current series on average earnings begins. For the purposes of this chart, the state counts as a capitalist, because the CPI includes taxes and duties and because wages include those of the public sector.

Comments

[Paolo Siciliani]

In the end, capitalists will lose too, as shown by the massive accumulation of cash in the non-financial corporate sector. This is obviously in response to the depressed aggregate demand due to squeezed household incomes - and in the absence of an export-driven rebalancing, which will hardly materialise in the future given that everyone seem keen to become (or maintain their status of) surplus countries - incidentally, following the leading example of the UK.

[Account Deleted]

Another possibility is that labour hoarding, and the consequent fall in real wages to fund this, is a strategy that for now suits both capitalists and incumbent workers, particularly middle-income workers in white-collar jobs: the aristocracy of the squeezed middle.

There may be a growing realisation that recessions accelerate job polarisation and do most damage at this middle level. With the plan B of a job in the public sector no longer available, and with low interest rates keeping existing mortagages affordable, falling real wages may be seen as temporarily acceptable to many workers in the private sector.

Equally, low productivity may be temporarily acceptable to many capitalists if it is funded out of wages (and avoided future recruitment costs), and if there is a belief that recovery is imminent.

The short-term losers are the young, as incumbents aren't freeing up vacancies. The medium-term losers will be the incumbent workers. Once recovery starts, and assuming credit is available once more, firms will look to boost productivity relative to market entrants by automating many of those mid-level jobs.