Occupy equal ground

The Occupy Wall Street protest, and other ‘Occupy ‘ protests that are springing up rapidly in other cities around the world, have at their core, a resentment about an elite having made conditions worse for the majority and a desire to see much less inequality.

So how unequal are we?  To consider this question for England, I’ve been looking at a report published by the Resolution Foundation Commission on Living Standards (RF), in July this year.  Missing Out: Why ordinary workers are experiencing growth without gain, Matthew Whittaker and Lee Savage.  This looks at inequality as it relates to wages, although I should add here that this isn’t the only, or necessarily even the most important type of inequality.  Pole position probably goes to wealth inequality, but that will have to wait for another post.

The short version – less of the value in the economy is going to those in the bottom half of wage hierarchy, while the amount going to profit has gone up.  Sectors of the economy where the proportion of the value made is more favourable to the bottom end workers have shrunk, whilst those where a lower proportion goes to low paid workers has increased.  Most of the change in the proportion of GVA accruing to bottom end workers is because of increasing inequality within the wages paid.  During the 90s inequality grew across the spectrum but in the last decade, while the rest of wages have become stagnant, the top earners, and especially the very top have continued to increase and become detached from the rest.  In the financial sector, increases in wages have been faster than increases in jobs.  Those in the retail sector have fared particularly badly, with wages having stagnated earlier and the share that retail wages make up of the overall wage bill having reduced, while the number of employees continued to increase.  All in all, what we knew all along.  We have become more and more divided and the bankers have taken the spoils.

The longer version

The RF report looks at Gross Value Added (GVA) – that’s GDP with taxes and subsidies taken out so it covers just value generated in the economy through production, such as an employee at work or a machine producing goods.

Their analysis shows what happened to every £100 of GVA in 1977 compared to 2010.  So how did it change?  The proportion that went to capital (business profits and self employment income) went up (£36 to £39); the proportion relating to social contributions (such as employers national insurance contributions) also went up (£9 to £11); the proportion going to the top half of wages stayed the same at £39; and those in the bottom half of the wage spectrum lost out – down from £16 to £12.  The top 1% of earners increased their share of GVA from 2% to  3.1% and the bottom 10% saw their share fall from 1.2% to 0.8%. This data doesn’t include annual incentives which makes a big difference and I will come back to that.

What has changed to cause these differences?

The industrial structure of the UK economy has shifted.  Notably the importance of finance has grown substantially 16.3% in 1977 to 33.6% in 2010 while the share of GVA relating to industry has fallen 33.1% in 1977 to 15.7% in 2010.

A relativly large proportion of value generated flows to labour in the industrial sector whereas in the finance sector more is retained as profits.  The dramatic shift in the industrial structure of the UK has consequently had a strong negative impact on the labour share of GVA.

Change in wage distribution is by far the most important factor in the decline seen at the bottom end of the labour market, accounting for about 70% of the change.  During the 1980s and early 90s wage inequality grew across the range fo wages, characterised as a ‘fanning out’.  The top moved further away from the middle, which in turn moved further away from the bottom.

Since the mid 90s the ratio of middle-to-bottom earnings has levellled out, but the ratio of top-to-middle earnings continued to grow.  The ‘fanning out’ had stopped and had been replaed by a ‘detachment’ of the top from the rest.

The report quotes other work by Bell and Van Reenan, ‘Bankers’ pay and extreme inequality in the UK’, London School of Economics, 2010 – I wondered when the *ankers where going to show up.  This report shows that over the last ten years the increased share of wages going to the very highest earners in all sectors was mainly due to incentive payments – and more than 60% of that was bonus payments in the finance sector.

The RF report looked at wage distribution in the eight largest employment sectors in the UK (finance, business activities, retail, health etc, manufacturing, construction, education, and public administration).  The findings show inequality more or less static between 1999 and 2008 in all sectors but two – finance and construction.  At the start of the period wage inequality in construction was less than in other sectors and although this increased, it is still less than within other sectors.

Not surprisingly, the story for finance is different.  In contrast to other industries inequlities continued to rise in this sector.  In particular they found a sharp rise in inequlity right at the top of the wage spectrum.

The general picture on wage trends is year-on-year increases in the real value of wages up until around 2003, followed by stagnation in the period 2003 to 2008, despite strong economic growth.

In the retail sector stagnation came earlier and covers the entire period from 1999 to 2008.  The retail industry is the second largest in the UK in terms of employment share and provides more jobs for low to middle income households than any other.

In finance average wages were far higher than any other industry and pay continued to rise through the second half of the decade, so the sector has contued to move further away from others.  Within the finance sector annual pay rose much more steeply than hourly – again pointing at bonuses.

Between 1999 and 2008 manufacturing shifted dramatically from being the largest employer providing 19% of employment to just 12%.  Finance significantly increased its share of GVA but not employment – that fell by 0.5%.  The wages were increasing rather than the number of employees.  The business activities sector share grew by 3.6% for wages and 3.2% for employment.

Retail while taking a slightly higher share of employees, moved in the opposite direction for wages – it’s share of the wage bill went down by 0.6%

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