UK: full employment, but falling incomes

Britain’s unemployment rate has fallen to a new 42-year low of 4.3% in the three months to July. That’s down from 4.4% a month ago and the lowest since 1975.  That sounds good news for all – until we look at what is happening to average wages for British workers after inflation is deducted.  Average weekly earnings only rose by 2.1% per year in the quarter, weaker than expected and the same as last month.  But inflation jumped from 2.6% to 2.9%.  So real wages are falling and the decline is accelerating – for the average.

When adjusted for inflation, the real value of people’s earnings has fallen 0.4% over the last year.

Why is the UK’s unemployment rate so low and how is it possible that wages are not keeping up with prices when the labour market is at its tightest for over 40 years?

Well, as several posts on the excellent Flipchartfairytales blogsite show, British employers, rather than invest in new technology that could replace labour, have opted for cheap ‘unskilled’ labour, both British and immigrant, with the full knowledge that with little employment protection and weak trade union backing, they can hire and fire as they please.

Union membership has fallen to its lowest level since the government started counting in the 1970s. This is not just a feature of the UK. In most advanced economies, union density (the proportion of those in employment who are members of unions) has fallen over the last few decades

At the same time, much of the employment increase since the Great Recession has been in low-paid self-employment as people set up themselves on-line or take jobs as taxi drivers etc that do not involve wage employment.

As the recent report on the state of the British economy (Time for Change A New Vision for the British Economy The Interim Report of the IPPR Commission on Economic Justice) states: “The UK’s high employment rate has been accompanied by an increasingly insecure and ‘casualised’ labour market. Fifteen per cent of the workforce are now self-employed, with an increasing proportion in ‘enforced selfemployment’ driven by businesses seeking to avoid employer responsibilities. Six per cent are on short-term contracts, and almost 3 per cent are on zerohours contracts. More workers are on low pay than 10 years ago. Insecure and low-paid employment is increasing physical and mental ill-health.”

“There is a huge  sense of insecurity that has persisted since the recession. Even those in full-time jobs feel less secure than they did a decade ago and, when combined with the rise in more insecure forms of housing tenure, it is hardly surprising that people lack the confidence to ask for a pay rise.” – Flipchart.

The UK is the only major OECD country where GDP has risen since the recession but wages have still fallen.

Indeed, the UK is only one of six countries in the 30-nation OECD bloc where earnings after inflation are still below 2007 levels and the UK is the worst of the top seven G7 economies.

And what is also forgotten is that, if you allow for population growth (mainly immigration), the UK has barely seen any economic growth, with GDP per person only just above the level of 2007 and real consumer purchasing power still lower than in 2007.

Indeed, according to the Bank of England, UK workers are suffering from the lowest real wage growth in 160 years!

When you run of out more workers, then growth in output is dependent on raising the productivity of each worker.  In the UK, ‘full employment’ plus low economic growth has meant low productivity growth ie overall, output per worker is hardly rising.  UK productivity is 13% below the average for the richest G7 countries and has stalled since 2008.  According to the IPPR report, “UK leading firms are as productive as elsewhere, but we have a longer ‘tail’ of low-productivity businesses, in which weak management and poor use of skills leads to ‘bad jobs’ and low wages. A third of adult employees are overqualified for their jobs, the highest proportion in the European Union. This has been enabled by a labour market that is one of the most flexible, or deregulated, in the developed world. Too many sectors have effectively fallen into a low-pay, low-productivity equilibrium.”

The irony is that, since the Brexit vote, there has been a sharp reduction in immigration from the EU. With ‘full employment’ now achieved and the UK-born population no longer increasing, if EU labour stops coming to the UK, then serious shortages will appear in important sectors like hospitals, education, farm work, leisure staff etc.  And these ‘low-skilled’ jobs won’t be filled by British citizens or even those from outside the EU.

The reason that productivity has stalled is because British capital won’t invest in new technology.  Again, here is the IPPR report: “Public and private investment is around 5 percentage points of Gross Domestic Product (GDP) below the average for developed economies, and has been falling for 30 years. Corporate investment has fallen below the rate of depreciation – meaning that our capital stock is falling – and investment in research and development (R&D) is lower than in our major competitors. Among the causes are a banking system that is not sufficiently focussed on lending for business growth, and the increasing short-termism of our financial and corporate sector. Under pressure from equity markets increasingly focussed on short-term returns, businesses are distributing an increasing proportion of their earnings to their shareholders rather than investing them for the future.”

As I showed in a previous post, the rise in UK business investment since 2010, has mostly been in ‘real estate’ purchases and there has been no rise at all in hi-tech investment.  UK businesses have invested not in productive capital that could boost productivity and sustain economic growth and rising living standards but in speculative non-productive capital.  Total profits have risen as a result (red line in graph), but overall profitability against capital invested (orange line) is still below levels before the crisis.

The UK is probably at the peak in employment growth but not with inflation.  Real wages are set to fall further, while productivity and investment stagnates at best.


14 Responses to “UK: full employment, but falling incomes”

  1. Edmund Gerard O'Sullivan Says:

    National income data have always been open to challenge. This is increasingly the case because the overwhelming majority of UK workers produce intangibles. Price can’t capture the full value of what is being created in services because intangibles are by definition unquantifiable.
    National income data has always tended to undervalue service industry output (housework and childcare for example). This mismeasurement is reaching a level that should encourage a comprehensive review of the way output is defined..
    The rise of services also calls into question the claim that productivity is either stagnating or falling. Price fails to capture the full value of service value creation. For example, a teacher today may be creating more value than he or she was a decade ago due to higher levels of experience and skill and also because of the use of technology like powerpoint. But this is not captured in output data because what teachers in most UK schools produce is not traded and priced. It can be argued that teachers (as well as health workers) are more productive that they’ve ever been, even though the data doesn’t support this point.
    The claim that high-tech investment is inadequate is also open to challenge. A smart phone has the capacity to support value creation several times greater than one had a decade ago. They can now cost up to $1,000, but this is a fraction of what the same amount of computing power would cost in 2007. A company could be investing in the best possible communications technology but spending less. The data, in contrast, will suggest that it is actually investing less in technology, which is misleading.
    A further point is that more of the technology needed to operate modern smart phones is stored in the brains of users.
    The only conclusion that might be derived from the data is that the absolute degree of exploitation of the labour force has never been higher (as reflected in the market price of quoted companies). This can happen even as the profit rate, as you argue, is declining because of the expansion of the labour force.
    The other is that 90 per cent of the assets listed on the balance sheets of companies listed on the London Stock Exchange are intangible. Non-physical capital, logically, can play no role in value creation. Only people create value and physical capital like offices and computers support that.
    But intangible capital is a legal and accounting concept that purely acts as an expression of a claim on a company’s value-added.

    • Virgens Kamikazes Says:

      [forgive me in advance for my bad English, which is not my mother tongue]

      You could be right if we were not talking about a capitalist society. But we live in a capitalist society, so our analysis must always be about the real world, not the one that we think should exist.

      In capitalism, every service is a commodity, whose value can be determined by the social average time of work that takes to produce it. Therefore, it is immaterial if the commodity is a service or a tangible product. In the example you gave, the productivity of a teacher can be determined by how many students he teaches at any given period of time: labor force is a commodity, so the teacher is a producer of (specialized) labor force. The more students he/she teaches in less time, the more productive he/she is. If a powerpoint makes a teacher teach more quickly, then it’s an investment in technology for rising the productivity of the teacher (the powerpoint itself being commodity capital of Microsoft, which sells it, on the other side of the equation). Irony of your comment is that Marx uses the teacher as an illustrative example of how capitalism transforms every aspect of life into a commodity.

      That’s why, e.g. a person with a college degree earns, on average, a higher salary than a person without one, “given normal conditions of pressure and temperature” of the system: it’s more expensive (i.e. it requires more labor time) for the capitalist society as a whole to produce a college graduate labor force than a non-graduated labor force. It has nothing to do with a mythical “intangible value of knowledge”, as the post-modern philosophers preach since the end of the 80s. But this logic doesn’t apply if you’re a capitalist: Bill Gates and Mark Zuckerberg didn’t finish college — but they are capitalists — owners of the means of production — so they live by another set of rules.

      But even this “doesn’t matter”, because, in the end, commodities are exchanged by their prices of production (the value of the commodity + the average rate of profit), so you don’t need to guess the exact productivity of a certain worker is: you can take it by his/her salary, the effective trade rate of the commodity (in this case, the labor force). So, for accounting purposes, the law of value doesn’t impose a significant obstacle for the official organs of the government (unless they are cooking the books for political purposes, but that’s another case).

      • Edmund Gerard O'Sullivan Says:

        You said: “the productivity of a teacher can be determined by how many students he teaches at any given period of time: labor force is a commodity, so the teacher is a producer of (specialized) labor force. The more students he/she teaches in less time, the more productive he/she is.”
        The issue is this: what is created by teaching is the result of iterative interaction between the teacher the the student(s) and takes the form of students with greater knowledge and teachers with greater experience in effective teaching.
        Both outputs are intangible and unquantifiable.
        The pupils will acquire better knowledge but the value of this will depend upon his/her subjective evaluation of the session. There is no reason why one pupil’s subjective assessment of the value of a teaching session will be the same as other’s.
        In fact, a student might say the value of a teaching session was zero or even negative (isn’t this an experience we’ve all had?)
        The teacher’s assessment of the teaching session is also subjective.
        He/she might say it was brilliant. The students might say it was rubbish and a waste of time.
        This too also conforms with our experiences.
        The point is that value in services in intangible and only be subjectively evaluated at the level of the individual. Price — whether is it determined by the free market, administratively fixed by the business corporation or set by government planners — is inherently incapable of dealing with the ergonomic chaos that prevails in any service interaction.
        It’s misleading, regardless of whether it’s capitalism, socialism of communism that prevails.
        In economies dominated by services, the market doesn’t just not work.
        It doesn’t exist.

      • Boffy Says:

        Productive for Marx means productive of surplus value. If its a private school the productivity of the teacher is measured by the amount of new value they create, in the shape of student fees, minus the value of the teacher’s labour-power, in practice their wages.

        As Marx and Engels describe, there is no real difference where such wage labour is employed by state capital as opposed to private capital. The only difference, in the case, for example of welfare states, is the method by which the state capital obtains the payment for the education provided. (The same applies for the healthcare provided etc.) In welfare states, the payment is made via collective payments from workers wages, compulsorily deducted via the tax and national insurance system.

        Given that, in Britain, public sector workers over the last decade have suffered continual real wage cuts, whilst the amount collected by the state capital has risen, largely due to the rise in VAT etc., its then clear that, especially as the number of those public sector workers employed by state capital has also been reduced, their productivity has risen considerably, and the state capital has extracted a greater degree of surplus value from them.

        I think that Alan Freeman some time ago in “Quantitative Marxism” showed that in every year since WWII, the amount that British workers have paid into the welfare state, in taxes etc. exceeded what they received back in the form of services, benefits, pensions and so on, indicating that the state capitalist is not only exploiting the wage labour it employs, but is also realising at least a portion of the produced surplus value.

        Of course, even were that not the case, it would not mean that the wage labour employed by state capital was not producing surplus value, only that private capital was being subsidised as a result. That happened with the prices charged to private capital for commodities such as coal, steel, electricity etc. By subsidising the prices of those commodities, the nationalised industries realised less of the surplus value their workers produced, and that surplus value was thereby transferred to the profits of the private capitals that consumed those subsidised commodities. That, of course, happens all the time, as part of the process of the formation of prices of production, where those capitals that produce higher than average annual rates of profit, have prices of production lower than their exchange value, so that a proportion of their surplus value, is transferred to those spheres where there is a lower than average annual rate of profit.

        One of the reasons that capital introduces welfare states is that in addition to regularising the supply of labour-power, it also acts to subsidise private capital in its provision. If workers had to pay for private education, they would need higher wages to do so, as the value of labour-power would rise. The same is true if they had to pay for private healthcare – one reason why car makers etc. in the US complained they were at a disadvantage due to their healthcare costs compared to European car producers, whose workers enjoyed socialised healthcare.

      • Edmund Gerard O'Sullivan Says:

        Thank you.
        You wrote:
        “Productive for Marx means productive of surplus value. If its a private school the productivity of the teacher is measured by the amount of new value they create, in the shape of student fees, minus the value of the teacher’s labour-power, in practice their wages.”
        I shan’t dwell on Marx’s conception of labour value other than noting it is a construct derived through logical elimination rather than empiricism.
        “If then we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour.” Capital, Vol 1, C1, c12th sentence.
        (All Marx’s concepts of value — use, exchange, labour — are intangible and therefore only subjectively perceptible at the level of the individual.)
        In tangible good (commodity) production, all value perceived to have been embedded in a good is either transferred from seller to buyer or wasted. Tangible good production involves a linear process starting at each stage of production with a less developed good and ending with final consumption.
        In intangibles, in contrast, there are no physical outputs, only ideas in the minds of people involved with the creation of that intangible (education and wellness for example).
        The process of value creation is not linear; it’s iteratively interactive. The output, since it has no physical characteristics, cannot be scientifically measured only subjectively perceived.
        This means there is no “market” for intangibles, since each service interaction is unique and effectively incomparable although custom and practice can lead to the view that an hour of music tuition is worth £50 regardless of the effective of the teaching/learning that takes place.
        There is, therefore, is no reason why the payment for a teaching session will equal the value of what has been created in an educational interaction between a teacher and students.
        In services, the supplier also benefits from the interaction (the more experience a doctor, lawyer or teacher has, the greater value he/she can create in interaction with buyers of services).
        This way of looking at value creation in services is intuitively appealing and makes more sense that imposing the view that the creation of intangibles conforms with the way tangible goods are manufactured.
        Economists tend to find this line of reasoning objectionable because it leads to the conclusion that price, in services at least, is not the critical vector.

      • Edmund Gerard O'Sullivan Says:

        The labour theory of value is not in dispute. Only people create value. Things can’t and don’t.
        The difference in view is about the way people create value in services (which by definition have no physical inputs and no physical outputs though things play a role by supporting people creating value).
        Value-creation in services — which involves iterative constructive interaction — is technically different to value creation in tangibles in which labour power is combined with physical inputs and the value-added is embedded in the thing produced.
        The end result is the same. Total value is equal to the value created in total by people. But in services, it’s intangible and only subjectively perceptible and can’t be measured.
        The amount paid expresses the relationship among the parties involved and is in effect a gift rather than a payment even when exploitation is involved.
        And this means there is no need to attempt to reconcile prices and values since there is no equivalence.

      • Boffy Says:


        You are constructing the same kind of artificial division between material and immaterial production that confused Adam Smith, and which enabled his critics to attack the labour theory of value as he presented it. Marx dismantles those arguments in Theories of Surplus Value Chapter 4 and Chapter 7.

        I would suggest reading my translation of those Chapters on my blog, and for a shorter account, my summary of Marx’s definition of Productive Labour.

        Is the effect of music on the ear, any different to the effect of food on the digestive system, as part of the process of the reproduction of labour-power? The value of the music is determined in the say was as the value of the food. A performance by a singer, has a value that is determined by, for example, the value of the wear and tear of the fixed capital of the theatre, the value of the auxiliary materials for heating and lighting etc; and the quantity of labour provided by the singer, the stage workers and so on.

        The only question here is the translation of the quantity of concrete labour of the singer into simple labour. But, that is no different than the question of the translation of the concrete labour of a weaver into simple labour, for example. As Marx says, that can, in practice only be determined a posteriori in the market.

        We might, therefore, wish to see how much consumers are prepared to pay for private tuition, as a guide to the value produced in an hour of teaching labour, or what they might be prepared to pay for the labour of a privately employed, doctor or nurse, to make a similar determination.

      • Edmund Gerard O'Sullivan Says:

        You write
        “Is the effect of music on the ear, any different to the effect of food on the digestive system, as part of the process of the reproduction of labour-power?”
        This suggests there is no difference between tangibles and intangibles. Intuitively, logically, semantically and scientifically, the difference cannot be greater.
        A tangible can be seen, touched, smelt, touched and, when dropped, heard. It’s existence can be scientifically tested.
        An intangible can be objectively perceived but exists solely in the mind of the beholder.

      • Boffy Says:

        I would suggest that the person whose labour-power is made possible, or enhanced by the action of the teacher, is a positive contributor to the value of that labour-power. I suspect the person about to die, whose life is saved by the intangible labour of a surgeon would also disagree with you!

      • Boffy Says:

        As Marx puts it,

        “Diamonds and song are both congealed labour and can—like all commodities—be converted into money and as money into capital.” (Theories of Surplus Value, Chapter 9, p 137)

      • Edmund Gerard O'Sullivan Says:

        And he also wrote in Chapter 1, Vol 1 of Capital

        “The value of commodities is the very opposite of the coarse materiality of their substance, not an atom of matter enters into its composition.”

        “The fact that the substance of the exchange-value (of a commodity) is something utterly different from and independent of the physical-sensual existence of the commodity or its reality as a use-value is revealed immediately by its exchange relationship. For this is characterised precisely by the abstraction from use-value. As far as the exchange-value is concerned…commodities are first of all simply to be considered as values, independent of their exchange relationship or from the form, in which they appear as exchange-values. Commodities as objects of use or commodities are corporeally different things. Their reality as values forms, on the other hand, their unity.”

        This seems to suggest that Marx recognised that commodities could be intangible as well as tangible.
        If they are intangible, they can’t be quantified and consequently can’t be priced.

  2. Bill Sheppard Says:

    Edmund says the report underestimates productivity and investment because the official data doesn’t deal adequately with services (and he significantly includes housework in this). Virgens applies (as I understand it) the Labour Theory of Value to services focusing on how much measurable output in produced in period of time. But whatever the differences, the conclusion seems to be that productivity is a lot higher when services (public, private and domestic) are put at the centre of analysis. My own amateur view on this is that these service jobs are considered “unproductive” from a Marxist standpoint because they don’t produce surplus value. This may of course be a big problem with Marxist theory but this is hardly a concern for IPPR which is presumably coming at things from a Keynesian standpoint. In other words, the report Michael refers to is further confirmation that the level of aggregate demand is becoming central to left debates rather than debates over value and what constitutes productive labour. The implication is that socialist proposals to reverse the very long under-investment in UK manufacturing industry through socialisation under workers’ control and management won’t get much of a hearing.if the debate is dominated by IPPR and Archbishop of Canterbury.

    • Edmund Gerard O'Sullivan Says:

      Bill Thank you for summarising the essence of my point more eloquently than I managed.
      That companies are not investing enough in manufacturing is not an issue if value creation is sufficient and the proceeds fairly shared. The big issue is not the lack of manufacturing industry, it’s the insufficiency of physical infrastructure — from homes to efficient energy production and distribution.
      Without physical infrastructure, the capacity of people to create value — whether in manufacturing, farming or services — is constrained.
      The problem is that intangible capital of various forms dominates contemporary British capitalism. On average, around 90 per cent of the assets of the largest companies listed on the London Stock Exchange are non-physical. It can play no role in value creation since it’s wholly parasitical.
      A practical approach to this might involve requiring;
      * any company selling to customers resident in the UK to maintain a UK operations balance sheet that reflects the value of turnover (perhaps £1 in assets for every £1 of sales revenue).
      * half the total assets on company balance sheets to be held in a tangible form and/or in government infrastructure bonds.
      This would force the 25 most valuable companies listed on the LSE to raise their investment in tangible assets by about £2trn. Creating physical assets, unlike intangible ones, stimulates manufacturing and employment. Reducing the role of intangible capital in corporate balance sheets (the creation of which mainly involves lawyers and accountants) will also cut capital volatility and tax evasion.

  3. Boffy Says:

    “The problem is that intangible capital of various forms dominates contemporary British capitalism. On average, around 90 per cent of the assets of the largest companies listed on the London Stock Exchange are non-physical. It can play no role in value creation since it’s wholly parasitical.”

    So, then say a railway which produces no physical commodity produces no value, and is wholly parasitical??? A mobile phone network, which produces no physical commodity, but earns its revenue from enabling users to make phone calls, or access the Internet etc., creates no value, and is wholly parasitical.

    If that is the case, and given that 80% of the economy of nearly every developed country now is made up of service industries, the amount of value being created in the remaining 20%, must be absolutely phenomenal, and the rate of profit must have risen to astronomical levels so that all of this parasitical 80% of the economy can extract profits from it, and so that the state can extract taxes, and so on!

    That is inconceivable, even given the huge rise in productivity that has been seen in the last 50 years. As Marx says, its quite clear that say a prostitute creates value by their labour, otherwise why would anyone pay them money? Such exchanges are as Marx describes exchanges of equal amounts of value, an amount of value in money handed over by the client, in exchange for an equal amount of value in the form of the labour of the prostitute. The only question here, as Marx sets it out, is whether this labour is productive of surplus value.

    That depends upon whether the prostitute sells a commodity, or labour service directly to the buyer, or whether they sell labour-power itself as a commodity to a capitalist. If the former applies, they exchange one amount of value for an equivalent amount of value. No surplus value arises, in the capitalists sense here, because the prostitute only obtains an amount of value equal to the value they have expended in another form, i.e. in the form of a quantity of labour.

    Where the latter is the case, the prostitute sells labour-power to a capitalist brothel keeper, and it is then the brothel keeper who sells a commodity/service to customers. The value of these services is equal to the quantity of labour performed by the prostitute (discounting the constant capital), and this is greater than the value of the prostitute’s labour-power, which means that the capitalist obtains a surplus value, because they receive back a greater quantity of value than they have laid out.

    Similarly, domestic labour also produces value. It produces use values (by definition, even more so than speculatively produced commodities). The labour undertaken to produce those use values is thereby directly value creating. What it does not produce, because it does not produce commodities, is exchange-value, and also because it does not exchange as wage labour with capital, it does not produce surplus value.

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