Workers face more pain

Families are facing a crash in living standards as severe as the 1970s, a leading economist has warned. A grim cocktail of soaring inflation, tax rises and stagnant wage growth will put a huge strain on household spending power, according to the Institute of Fiscal Studies director Paul Johnson .

According to IFS estimates, the average family will have £360 less to spend this year following a fall of ‘at least’ 1.5 per cent in household income compared with 2008. But with the prospect of years of paltry wage increases, the squeeze is set to intensify. By 2014, household budgets will ‘almost certainly’ remain below 2008 levels after taking account of inflation, and could ‘quite possibly drop’ to the 2002 level, the IFS warned.

A study shows that the share of national income going to ordinary workers has fallen dramatically over the past 30 years. The Resolution Foundation study found that inequality has increased in all sectors of the economy and was not the result of changes to the UK’s industrial structure, although the gap between top and bottom jobs was most pronounced in finance and business services and the growth of inequality was highest in finance. This rise in inequality accounted for two-thirds of the decline in the share of GDP going to employees in the lower half of the earnings distribution, with a quarter accounted for by wages and salaries accounting for a lower proportion of GDP, and a sixth by rising payroll taxes. The latter effect of a lower labour share in GDP was caused by “the shift in the economy from industry, where a relatively high share of value is distributed to workers, to the finance and business activities sector, where more value is retained as profits,” the Resolution Foundation said.

The bottom half of the earnings range have seen their pay as a share of GDP fall by a quarter – while the richest 1 per cent have seen their share shoot up by more than half. In 1977, of every £100 of value generated by the UK economy, £16 went to the bottom half of workers in wages; by 2010 it had fallen to £12. Inclusion of bonus payments reduces the bottom half’s share to just £10. ’ Workers in the top 10 per cent increased their share of value from £12 to £14 in every £100 (a 22% rise) – more than the whole of the bottom half. The share of the top 1 per cent grew from £2 in 1977 to £3.

The share of gross domestic product that goes to labour has declined relative to that which goes in profits to the owners of capital, the study says. Governments of both parties have raised employer national insurance, so more of the money paid by employers is not received by their workers. The demand for high-skill employees has risen, forcing up top wages, while those in the middle and at the bottom end have stagnated.

Gavin Kelly, chief executive of the Resolution Foundation, said: ‘If these worrying trends continue in the decade ahead, it casts doubt on whether those on low-to-middle earnings will see their living standards rise in line with economic growth.’