In July, the Resolution Foundation, a London think tank headed by Torsten Bell, published a report entitled “Stagnation nation” which underlines that after thirty years of economic catch-up between 1980 and 2010, the United Kingdom has entered a period of stagnation , particularly with regard to wages.
How did the UK become this “land of stagnation”?
On the one hand, the United Kingdom has experienced weak growth for fifteen years; on the other hand, strong inequalities have been established during the previous four decades. It is the combination of these two elements that is toxic, especially for low- and middle-income households.
Where do these inequalities come from?
From the sharp increase in wage inequality in the 1980s, and a sharp increase in middle and high wages. At the time, the general public was not very interested in inequalities. The Conservatives won the elections in 1979, 1983, 1987 and 1992, on a kind of tacit agreement: yes, those at the bottom of the ladder did very badly, but most people thought that if high inequality is the price to pay for rising living standards, so be it. And indeed, in the 1990s and 2000s, the United Kingdom grew faster than those of France and Germany.
This changed in the 2010s, after the Great Financial Crisis…
The trend probably reversed a little before this crisis, but it is the latter which is obviously the big deal. It was more serious in the United Kingdom because the financial sector is important there. But it also exposed the country’s underlying structural challenges, particularly low investment. Between 1979 and 2019, investments represented 19% of gross domestic product (GDP), four points below the average for G7 countries. Then Brexit happened and business investment remained very weak due to economic uncertainty. Finally, the pandemic and now the war in Ukraine have reinforced this trend.
Why have wages stagnated in real terms for fifteen years, whereas they have been increasing by a third per decade since the 1970s?
This is the result of weak productivity growth. Added to this is a series of inflationary shocks. There’s the current shock, of course (UK inflation is 10.1%), not least because the country is so dependent on gas for power and heating. But there were other, smaller ones, one after the financial crisis, when energy prices rose and the pound fell, and another after the Brexit vote in 2016. The repetition of these inflationary shocks, in a context of low productivity, explains why real wages have fallen.
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