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If the economy is in good shape, why do wages keep falling?

How many Osbornes does it take to change an economic outlook? Anthony Devlin/PA Wire

An opinion poll taken in the wake of George Osborne’s Autumn statement reveals that just 27% of people think the British economy is in good shape. This was a decline compared to a survey taken just three months previously – but only a marginal one.

Given what the figures tell us about declining wages, it is surprising that even a third of respondents were optimistic. The fact is, voters have taken home less money every week the coalition has been in government.

The result should have us thinking about what we mean when we talk about the “economic crediblity” that is said to be so crucial to a party’s success in government. It possibly says more about the success of coalition propaganda than Osborne’s ability to steer the country in the right direction.

The chart below traces average weekly earnings when the cost of living has been accounted for. It begins with the 17 quarters that preceded the coalition government and then charts the 17 quarters during which the coalition has been in power.

Under the Labour government, real earnings per worker declined in six of the 17 quarters. But under the coalition, real earnings have fallen for 17 quarters in a row. There has been no increase in any single quarter.

Average monthly wages. ONS

By definition, a fall in real wages results from the rate of inflation exceeding the rate at which nominal earnings increase. There can be no doubt which of these – pay increases or inflation – has been the major driver of real wage contraction.

The average inflation rate during the 17 Labour quarters was only slightly lower than under the coalition, at 3% compared to 3.5%. The serious difference lies in the growth of earnings. Average pay rose by 3.1% in Labour’s last 17 quarters and by just 1.4% in the coalition’s first 17 quarters.

Over four-and-a-quarter years of the coalition’s “economic credibility” the UK was evidently not feeling the benefit across the board, no matter how many times ministers told voters they were “all in this together”“.

By the end of 2014, British per capita income will weigh in about 3% to 4% higher than in May 2010, while the average take-home wage will be nearly 6% lower.

Just to hammer the point home, real earnings fell in only 27 of the 140 quarters between 1980-2014 – 17 of them have been since May 2010.

There are several causes for the decline in real earnings. Perhaps most important has been the growth of low-wage and part-time employment. There are also more more people seeking the same number of jobs.

The coalition’s hostility towards trade unions gives employers a considerable advantage over employees in wage bargaining and, finally, there has been de facto wage compression in the public sector for four years.

Hardly credible

With all this in mind, it is hardly surprising that less than a third of people polled in December think the UK economy is in "good shape”. The majority of working people are certainly not in good shape.

But the fact that some 27% still do think all is well should have us thinking about what we mean when we say “economic credibility”. Clearly being economically credible does not relate to your party’s ability to help workers make ends meet.

Nor could it reasonably be said to mean your party is the most likely to get the economy moving again. A Conservative chancellor has presided over the slowest recovery from recession on record and the British Chambers of Commerce have downgraded the UK growth rate for 2014 and 2015.

The success of Tory propaganda that the fiscal deficit is the greatest economic problem facing Britain suggests that the words “economic credibility” are code for “balance the government’s books” or, more crudely: “which party is more likely to cut spending?”

So when an opinion poll asks which party should be trusted to handle the economy, the result is 27% in favour of the Tories and only 18% for Labour. That’s because people think the shadow chancellor will cut expenditure less than Osborne.

So let’s restate the “handle the economy” question with its real meaning: “Which party do you trust to bash you harder and drive your standard of living lower?” It is a mystery that the Tories do not score 99%.

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