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From The Socialist newspaper, 17 January 2003

TONY BLAIR and Gordon Brown have warned the unions that wage increases could wreck the economy.

But evidence shows that over the past twenty-five years British business has systematically robbed working people of billions of pounds. JARED WOOD exposes the lies about wages and profits.

The Great British Wage Theft

A MAN, earning the median average wage, who has been in continuous work since 1979 is likely to have been robbed of over 50,000 from his wages by his bosses.

Bosses have driven down the share of company revenue given out as wages, in order to boost profits and incomes for directors and senior executives.

This theft was committed by businesses that went into battle against the trade union movement and was organised by the Conservative governments between 1979 and 1997.

Thatcher, Prime Minister from 1979 to 1990, introduced anti-trade union laws and influenced the labour market by forcing unemployed workers into low-paid jobs and removing limited minimum wage controls.

Over the period of Tory rule from 1979 to 1997 the share of national income (GDP) spent on wages shrank and the share taken by corporate profits rose.

On top of this UK income tax policy underwent a counter-revolution, shifting the burden of taxation onto lower-paid workers.

The rate paid by top earners was massively reduced. And a loophole was created for company directors and senior executives, in the form of tax-free share options.

In 1997 the Tories were finally driven from office but New Labour has now made its own position clear to the unions. The government will continue to defend business interests against workers and will fight to maintain the 'reforms' of the Thatcher era.

Government ministers have been quoted in the press as looking forward to defeating the unions as Thatcher did when the miners lost their heroic dispute in 1984 / 85.

Blair and New Labour ministers try to maintain a radical facade by talking about social exclusion and poverty amongst the poorest 20% of households. This would be more convincing if they turned their words into any sort of action.

But it is not a small minority who have lost out to the great wage theft; the majority of workers in Britain have suffered a significant cut in wages. I estimate this to be between 15% and 30%, according to circumstances.

This has been compounded by further cuts to take-home pay as a result of a shift in the burden of taxation from top earners to those on typical and lower wages.

What is a typical wage?

AVERAGE WAGES can be very misleading. An arithmetic mean average includes a small number of very highly paid individuals, some earning tens of millions, which distorts the average upwards.

Only a third of British workers actually earn as much as the mean average.

To get a better picture of what a typical worker earned when Thatcher came to power in 1979 and when the Tories lost the election of 1997, it is more useful to look at modal and median averages.

If every wage in Britain were written out in order from highest to lowest the median income is the wage that is right in the middle of the distribution.

Half of all workers earn less than the median while half earn more.

The Modal average is calculated by sorting each individual wage into ranges and then determining which range covers the greatest number of workers. The modal average is the most commonly paid wage in Britain.

Table 1 shows the real buying power of wages allowing for inflation. It suggests that workers earning around the modal or median average were better off in 1997 than they had been in 1979.

But wages could be expected to increase in line with economic growth. If GDP increases by 3% over a year, then so should wages but this was not the case after 1979.

Table1 The real buying power of wages.

1979 1997
MEAN Male 253 383
Female 171 292
MEDIAN Male 228 317
Female 158 254
MODE Male 193 261
Female 138 181

Although wages rose more quickly than inflation, the share of Britain's national income going to a typical worker fell significantly.

British workers pay for higher profits

WHEN THE Tories were elected to government in 1979 British business was suffering against a backdrop of a worldwide fall in profitability.

Economic growth had been sluggish throughout the 1970s and Thatcher had a plan to address this crisis by forcing workers to restore business profitability by accepting lower wages.

Named after Nicholas Ridley, a minister in Thatcher's first government and leading Tory strategist, the plan outlined a strategy for breaking the power of the British trade union movement.

Thatcher understood that if the unions could be controlled then so could wages. The Conservatives identified the National Union of Mineworkers (NUM) as their primary target.

The Ridley Report recognised that the defeat of the NUM, seen as the most militant and effective section of the Trades Union Congress (TUC), would erode the confidence of the whole trade union movement.

A strategy was therefore prepared to fight the miners' strike of 1984/85 even before the Tories came to power.

Details of the Ridley Report were leaked to The Economist in 1978 and included legal restrictions on the unions, the stockpiling of coal and the provocation of a strike when the timing suited the government, all important components of the eventual defeat of the NUM.

Tragically it was the role of the Labour and trade union movement's own leaders that played the most crucial role in defeating the miners.

Labour leader, Neil Kinnock refused to fully support the NUM and launched public attacks on pickets. For their part the TUC refused to act on calls for solidarity action to defend the union movement from Thatcher's attacks.

Having broken the miners' strike, Thatcher and the business interests she represented went on the offensive, most notably at Wapping when Rupert Murdoch's News International defeated the printers' unions.

Having played a major part in the miners' defeat Neil Kinnock led the Labour Party's abject capitulation to Thatcher and British business.

Together with a government-engineered decline in manufacturing industry, the stronghold of Britain's unions at that time, the labour movement leaders contributed to falling trade union membership and disorientation of activists and stewards that sapped workers' confidence.

Shareholders and directors of Britain Plc basked in their glory, squeezing more profit from workers in return for slower wage growth.

The graph shows what has happened to wages, profits and taxes on production as a share of national income between 1979 and 1997. Wages have fallen from a 58.8% share in 1979 to 53.4% in 1997, a decrease of 5.4%.

graph for article The Great British Wage Theft

graph for article The Great British Wage Theft

Profits have risen from 17.9% to 22.6%, an increase of 4.7%. Taxes on production have gone from 10.6% to 13.1%, an increase of 2.5%.

These three components of national income account for just under 90% of GDP, the rest is made up from the operating surplus of publicly owned corporations and other minor components.

This fall in wages has allowed firms to increase their profit share despite a small increase in the share of national income taken by taxes on production.

If a fall of 5.4% does not sound very dramatic, consider that if wages have fallen by an amount equal to 5.4% of GDP this corresponds to a fall of over 10% in the wage bill itself, which is only 53.4% of GDP.

That means a drop of 10% compounded year after year, eating away at workers' standards of living.

The changing distribution of wages

"OUR FINDINGS paint a picture of a dramatic social and economic change in Britain, over the 1980s, the scale and consequences of which are probably not yet fully appreciated by policy-makers or the population at large." The Rowntree Report (1995).

In 1995 the Joseph Rowntree Foundation inquiry into income and wealth found that wage inequality in Britain had grown dramatically during the Thatcher years.

Table 2 shows the changing proportion of the mean wage earned by workers earning the median and modal average wage.

All workers earning a typical wage have lost ground against higher earners and those who have lost most are the lowest-paid women who earn the modal average.

Table 2 The widening gap between rich and poor.

Median and modal wages and their proportions of the mean in 1979 and 1997.

1979 1997
MEDIAN Male 90.2 82.7
Female 92.6 86.9
MODE Male 76.1 68.2
Female 80.6 62.1

A woman earning this wage would be 23% better off today if her wage represented the same proportion of the mean wage as in 1979.

There have been many attempts to explain away this increase in wage inequality. Economists and government-sponsored studies regularly claim that income inequality is a product of modern technology, which has increased demand for skilled labour while declining manufacturing has reduced the need for unskilled workers.

This, the argument goes, pushes up wages for a minority of highly skilled workers while depressing wages for those in so called unskilled sectors.

But several important academic investigations have questioned this.

Inequality growing

Studies by Atkinson, Jenkins and Leslie and Po (details right) have found that although inequality has increased between different employment sectors, skilled and unskilled and between groups of workers according to gender, age or educational level, the growth of inequality within sectors/groups is even larger.

Wages have been redistributed from workers to directors and senior executives, irrespective of what product or service an individual firm produces.

The report by Leslie and Po estimates that trade unions increase pay by around 7% for members under collective bargaining, compared to similar workers in firms where there is no trade union recognition.

Contrary then to the warnings of New Labour that Britain cannot afford higher wages, British workers have actually given up a significant share of their incomes to their bosses over the last two decades.

The overall share of national income paid as wages has fallen and what is left has been paid to directors and senior executives.

The tax burden shifts from rich to poor

BY 1990, successive Tory budgets had cut the top rate of income tax by more than half, from 83% to 40%.

Those in the top 5% of earners received post-tax pay increases of well over 300% as a result. Even then top earners could take advantage of loopholes allowing shares to be given as wages without any tax payable at all.

What about the workers? The basic income tax rate was also cut, from 34% in 1978 to 25% by 1990.

At the same time the tax-free allowance, the amount an individual worker can earn before paying tax, was increased faster than the rate of inflation, so the effective rate of income tax fell even further.

This cut to the basic rate was partly offset by an increase in National Insurance (NI) contributions from 6.5% to 9%.

And because there is an 'upper earnings limit' beyond which no more NI is paid, this hit basic-rate payers much harder than higher earners.

In his study of UK tax policy Chris Hamnet has estimated that when other tax allowances are taken into account, the net position of workers earning less than the mean wage is broadly neutral, while those earning above the mean wage are now much better off.

But this is only part of the story of Thatcher's tax policies. Although a typical worker was treated fairly neutrally by direct taxation (income tax and NI) they ended up paying far more in indirect tax.

The very first Thatcherite budget of 1979 more than doubled Value Added Tax (VAT) from 6% to 15%, rising again to 17.5% in 1991.

Because VAT is charged on over half of all consumer expenditure, this tax increase has a significant impact on workers' overall tax burden.

VAT is a regressive tax that falls more heavily on the lower paid who spend a higher proportion of their incomes on consumer goods and consequently pay a higher proportion of their incomes in VAT.

Other indirect taxes charged specifically on luxury goods were cut to further shift the tax burden from rich to poor.

In 1997 the modal average wage was 260 (male) or 180 (female). Many families with one earner at this level, the most common level of wage in Britain, would be entitled to state benefits.

Cuts in such benefits since 1979 will have further eroded the wages, net of tax and benefits, of many workers.

The great wages theft: How much has been taken?

TABLE 3 shows an expected pre-tax wage. This is the wage that typical UK workers, male and female, earning the modal or median average wage, would have been earning by 1997 if the share of GDP taken by wages and the distribution of wages between income groups remained as it was in 1979.

Actual wages Expected Wage Shortfall %
1979 1997
MEDIAN Male 82 317 382 17
Female 57 254 298 15
MODE Male 69 261 322 19
Female 50 181 260 30

Typical men and women earning the median average have lost around 15% - 20% of their expected income. Women earning the modal wage have fared even worse, losing around 30%.

Despite the protests of Blair and Brown that the country cannot afford higher wages the fact is that British business has enjoyed nearly 25 years of wage restraint to boost profits.

The wages lost in Table 3 are pre-tax. The extra tax burden on British workers comes on top of the cut in pre-tax wages.

With New Labour defending the gains made by business at the expense of workers, the task facing the unions and British workers is to re-build and launch a counter attack against its class enemies.

One source of confidence for British workers is the slowdown since 1990 in the rate at which the transfer of income from wages to profit has taken place.

Most of the shift from wages to profit had already been achieved by 1990. The following thirteen years have yielded only a slight further shift in favour of business.

British business and government are finding that trying to extract more and more from their workers is provoking a reaction that has been threatening to explode ever since the Tories were finally forced from office.

British business should not be confident of Blair's ability to maintain the spoils of Thatcherism.


This article has been produced from a report by the same author. The full report and comprehensive list of sources can be obtained from woodj at red1017.fsnet.co.uk


Sources:

Atkinson (1999), The Distribution of income in The UK and OECD countries in The Twentieth Century, Oxford review of Economic Policy Vol.15 No.4.

Commission for Social Justice (1994), Social justice: strategies for national renewal: the report of the Commission on Social Justice. (Vintage)

Dilnot and Kay (1990), Tax Reform in The UK, Ch9 in World Tax Reform, edited by Michael J. Boskin and Charles E. McLure. (Eurospan)

Hamnet (1995), A stroke of the chancellor's pen: The social and regional impact of the Conservatives' higher rate tax cuts, Environment and planning A, Vol 29.

IFS (2000), Institute of Fiscal studies, A survey of the UK tax system.

Jenkins (1996), Recent trends in the UK income distribution: What happened and why? Oxford review of Economic Policy Vol.12 No.1.

Leslie & Po (1996), What caused rising earnings inequality in Britain? Evidence from time series 1970-93, British Journal of Industrial Relations, 34:1.

New Earnings Review, Department of Employment. ONS, Office of National Statistics, on-line at www.statistics.gov.uk

Rowntree (1995), Joseph Rowntree Foundation inquiry into income and wealth.

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