Monday 29 July 2013

Wage Repression explained

Wage repression is a fairly self-explanatory term meaning the deliberate undermining of wages by employers. Wage repression is most often used by private sector employers in order to cut their payroll expenditure, but taken as a whole, the state is actually the largest employer, and is just as capable of repressing wages as the private sector.

The idea that economic efficiency can be increased through the repression of wages is an article of faith for ideological neoliberals. Witness the effects of the current Tory austerity programme on wages, or think back to the 1980s when the collective bargaining rights of millions of workers were attacked by Margerat Thatcher's government.

I say that wage repression is an article of neoliberal faith because (much like a lot of orthodox neoliberal theory) there is actually little actual evidence that wage repression is good for the national economy, and in fact, a lot of evidence that it is actually harmful.

The reason that the subject of wage repression is important now, is that the UK is currently enduring the longest period of wage repression in over a century, in which the average wage has fallen in real terms every single month for three consecutive years (every month since the Tory led government came to power).


The idea that wage repression is actually bad for the economy is hardly a new one. Quakers and other non-conformist religious groups realised early in the industrial revolution that by paying reasonable wages, and providing additional benefits such as education and healthcare, they themselves benefited from the massively increased productivity of a loyal, healthy and educated workforce (as compared to the bitterly exploited, poor, unhealthy, malnourished and ill-educated workforces of the less ethically minded of the early industrial pioneers). Probably the most famous rejection of wage repression was the high pay / low price policy of the American automobile manufacturer Henry Ford (hardly a "leftie" by any stretch of the imagination), who paid high wages and made low profit margins on his vehicles, so that his employees would return their wages back to his business through the purchase of the vehicles they themselves had been constructing.

To put the historic objection to wage repression into reasonably simple economic terms: Wage repression is bad because it reduces the disposable income of workers - When workers have less money to spend, this results in a fall in consumer spending - When consumer spending falls, aggregate demand falls - When aggregate demand falls the economy falls into low-growth, recession or depression.

I don't think it takes a lot of brains to realise that the less money the public have in their pockets, the less they are going to spend, and that this fall in spending will have a negative knock-on effect on the wider economy.

Private sector wage repression

Ever since the global financial sector meltdown of 2007-08 the private sector have gleefully used "the crisis" to justify wage repression. Millions of workers have suffered pay cuts or below inflation wage rises year, after year, after year. Meanwhile the FTSE 100 has risen to back to pre-crisis levels, British corporations are hoarding £billion in assets and executive pay is skyrocketing.

Over the last three years private sector workers have experience real terms wage cuts every single month, as the rate of inflation massively outstrips their rate of pay increase. The average British worker has lost 9% of their salary to inflation. Meanwhile the corporate executives have got fat engorging themselves on ludicrous pay hikes and bonuses. The average salary and bonuses of FTSE100 directors rose 33% in 2010, a whopping 49% in 2011, another 27% in 2012, and 14% in 2013, whilst their workers barely scraped a below inflation 1% average pay rise.

Wage repression and the welfare state

the welfare state was originally designed in order to support those that couldn't work (the elderly, the disabled, the sick, mothers with newborns) and those that found themselves temporarily unemployed.

Since the beginning of the neoliberal era in 1979, the role of the welfare state has become ever more distorted, as it has been used to facilitate private sector wage repression.

In the 1980s the Conservative government completely abandoned the idea of maintaining near-full employment and enacted policies which resulted in millions of people suffering long term unemployment. The benefits system was used to provide these millions with a subsistence income, just enough to keep them alive and available for work. The creation of mass unemployment was a deliberate strategy to aid wage repression by creating a vast standing army of unemployed people, willing to work for low wages in order to undermine workers wages. The Tory attacks on trade union rights went hand-in-hand with their policy of creating an artificial labour surplus via mass unemployment.

When New Labour came to power in 1997 they did very little to reverse the Tory wage repression policies; unemployment declined gradually, but nothing like the full employment era of the 1950s and 60s was achieved. New Labour also kept in place all of the oppressive anti-trade union laws enacted by their Tory predecessors. In fact, in some ways they allowed things to get much worse, through their refusal to legislate to prevent the rise in exploitative employment practices like Zero Hours Contracts.

What New Labour did instead was to use the benefits system to boost low wages, essentially facilitating the payment of poverty wages by exploitative employers by topping up earnings with benefits like Tax Credits and Housing Benefits.

When the typical reactionary anti-benefits ranter sees these payments, they don't even think about the role of wage repression in the situation, they simply label the victims of this exploitation as scroungers without the slightest thought for who the beneficiaries actually are. The real scroungers in this situation are obviously the private companies who increase their profit margins by paying poverty wages, and then expect the taxpayer to make up the shortfall so that their workers actually have enough money to survive.

To me, this stuff hardly seems difficult to understand, however it does seem to be far beyond the cognitive skills of most Tory voting anti-welfare reactionaries to grasp that the real "scroungers" are not the underpaid workers that actually receive these benefits, but the exploitative employers that benefit from cheap labour whilst the taxpayer makes up the shortfall.

Now that the Conservatives are back in power, they are determined to undo the New Labour welfare reforms designed to mitigate the worst effects of wage repression. They have launched round after round of benefits cuts, always relying on the combination of "scrounger narratives" and the absurd "making work pay" fallacy to create pseudo-justifications for their attacks on in-work benefits.

When benefits like Tax Credits are used to mitigate the effects of private sector wage repression, cutting these benefits can be seen as a deliberate attempt to increase the effects of wage repression.

Public sector wage repression

Wage repression is not exclusive to the private sector, it is also used by the state on workers that are directly employed by the state. In 2013 the Tory led Government (with the backing of the ever servile Liberal Democrats) imposed a below inflation 1% pay cap on public sector workers (except for MPs themselves of course, they'll collect a vast 11% pay rise). To put this into perspective, 75% of local government workers earn less than £21,000 a year. Capping their wage rises at 1% whilst simultaneously giving an average £100,000 a year tax break to Britain's 13,000 income millionaires is frankly obscene.

Another way in which the Tory led government are deliberately increasing levels of wage repression is through below inflation rises in the National Minimum Wage. This means that the incomes of millions of the lowest paid workers in Britain are suffering real terms income cuts.

Less repressive economies

It is obviously very difficult to make analyses between different countries given that there are so many factors other than levels of wage repression that can influence economic growth, however I think it is worth noting that the five countries with the highest National Minimum Wages have all significantly outperformed the UK economy since the effects of the global financial sector meltdown hit in 2007-08.


It would take willful ignorance to overlook the fact that the longest period of wage repression in a Century has coincided with the weakest period of economic performance in a Century.

This period of wage repression and economic contraction has also coincided with a period of unprecedented corporate largesse, with soaring executive pay, corporate asset hoarding and lavish cuts in Corporation Tax by the Tory government.

The Tory government haven't just lavished wage repressing businesses and their highest earners with huge tax-cuts, they have joined in with the wage repression too by imposing real terms cuts on public sector workers (apart from themselves of course), on in-work benefits, and on the salaries of those unlucky enough to be earning just the National Minimum Wage.

The stagnating UK economy is a clear illustration of the kind of economic destruction that results from building an economy on a foundation of ruthless self-interest. When an economy is administered by a government that can't see the glaring flaws in their beloved neoliberal pseudo-economic theories, the ruling class will give absolute priority to serving the financial interests of a tiny economic minority and repressing the incomes of everyone else to pay for it. When this crony capitalist "serve the rich, smash the poor" mentality is elevated above all other considerations (such as long-term economic stability, stimulation of economic demand, combating poverty, increasing national productivity, cutting the trade deficit or improving general public welfare) the economic consequences can be dire. But worse than that, the social consequences of driving the majority into greater poverty in order to enrich a tiny minority are even worse, given the fact that most negative social indicators arise from poverty and inequality.

More articles from
What is ... neoliberalism?
The Golden Hammer of neoliberalism
Tory priorities: Serve the rich, smash the poor
Margaret Thatcher is dead
The Tory contempt for the rights of working people
The "making work pay" fallacy
Mixed economy vs Neoliberalism
  3D Economics: Disposable income, Demand and Debt
Tory economic illiteracy

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