“This could turn out to be the defining issue of the 2015 general election”: Many British people aren't feeling the effects of recovery© Dominic Lipinski/PA Wire/Press Association Images
In November, the OECD upgraded Britain’s growth forecast for 2014 to a robust 2.4 per cent. However, many people are not seeing that reflected in their pay packets (see Oliver Kamm, p44). In Britain, Labour has been quick to suggest that growth and wages, which have long kept pace with each other, have been “decoupled” and that a “cost of living crisis” is the result.
Not everyone agrees. The long relationship between wages, growth and productivity still holds according to Paul Johnson, Director of the Institute for Fiscal Studies: “The idea that remuneration of workers and productivity have somehow become separated has gained a lot of credence recently. Unfortunately the evidence for any such thing happening is rather scarce.”
Johnson notes that “productivity has been in decline over the last four years,” and this is the cause of stagnant wages, rather than any decoupling of growth and wages. It is hard to get a sustained increase in wages without a rise in productivity—the amount of output per worker—and globalisation means that Britain is in direct competition with countries of high and rising productivity, even in services, as well as in manufacturing. What is more, he says, the slow increase in wage growth is not new: in the years up to 2008, average wages failed to keep up with growth for two reasons. The first, says Johnson, was the “increase in the value of pension contributions, and of national insurance contributions, made by firms on behalf of their present and former employees,” which restrained their ability to raise wages. “Second, the very top earners took an increasing share of the cake.”
If growth predictions for 2014 are correct but the benefits are not more widely felt, this could turn out to be the defining issue of the 2015 general election.
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