Monday, December 03, 2012

Third World Britain

Investment as a share of national output, which at 13.9% is the lowest since records began in 1955. Robin Chater, the secretary-general of the Federation of European Employers explains: labour is dirt cheap in Britain and that encourages firms to boost output by hiring or retaining workers rather than by investing in new plant and machinery. Since 2005 capital replacement has been falling faster in Britain than in any European country.   Underemployment ( people working 20 hours week when they would actually like to be working 40.) in the economy has risen by 1 million since the recession began. Governments of both left and right have said their aim is to turn Britain into a high-wage, high-productivity economy. The opposite appears to be happening.

"The UK is turning into an old-style third world country with low pay growth for most workers below managerial level, widening pay differentials and poor levels of capital investment,"
Chater says.

In the UK economy, labour's share of national income fell from 59% in 1977 to 53% in 2008 and the share of profits went up from 25% to 29% over the same period. Over the same period, median earnings failed to keep pace with growth in the economy as measured by gross domestic product. Had they done so, median earnings for full-time workers would be £7,000 a year higher than they are. Workers have got a smaller share of the national cake. Research by Howard Reed and Jacob Mohun Himmelweit,to be published by the TUC,  attribute it to a combination of technological change, globalisation and the reduced bargaining power of trade unions and the increased financialisation of the economy.

"Firms are increasingly able to invest in financial assets as an alternative to direct investment in productive capital (ie, plant and machinery) and they are also able to invest abroad instead of at home,"
the paper says. It has also empowered shareholders to put constraints on companies designed to make life tougher for employees. This has been especially marked in the case of private equity deals where companies are loaded with debt and under pressure to cut costs aggressively.

Capitalist theory says that a rising profit share leads to higher investment, which in turn leads to stronger growth and rising employment. Workers gain in the end because companies expand and become more productive. Supply-side economics has failed to deliver. There has been little evidence that the squeeze on labour's share of national income has led to higher investment. While the profit share rose from 25% to 30% of GDP between 1980 and 2010, investment fell from 20% to 15% and is still falling. It is a similar picture for spending on business research and development, which has been dropping steadily since the mid-1980s. What appears to have happened is that the rising profit share went to the financial sector.   

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