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Why profits, not pay, have caused the cost of living crisis

Budgeting for a rising cost of living. Inside Creative House/Shutterstock

The Bank of England accompanied its most recent UK interest rate hike – the 12th in a row – with a warning that UK price inflation is likely to be higher for longer than expected due to soaring food costs. The bank has been hiking rates since December 2021 to try to stop a sharp rise in the cost of living. And while the rate of inflation dropped significantly in April, at 8.7% it remains well above the UK’s 2% target.

Many reasons have been given for recent price inflation: central banks have “printed” too much money, wars in other countries have pushed up energy prices. The current government and the governor of the Bank of England believe that wage increases cause inflation.

But my research, with James Meadway of the Progressive Economy Forum and Doug Nicholls of the General Federation of Trade Unions, looks at how UK price rises are more likely to have been caused by high profits, falling wages and weak production over decades.

Pay negotiations

In the mid-to-late 1970s, trade unions were able to negotiate wages through nationally organised systems of collective bargaining. This is where groups of employees, typically represented by a union, discuss wages and conditions with their employer. The gap between the wealth of business and labour at that time was significantly less, and Britain was a more equal society in terms of income.

A concerted assault on collective bargaining since then has greatly weakened workers’ ability to defend the value of their wages, at least by keeping pace with inflation. At the same time, income inequality has soared and is expected to reach a high by 2027. Research shows evidence of an inverse relationship between the number of workers organised in trade unions and their ability to use collective bargaining, versus the wealth concentrated in the hands of the richest elite.

As workers today start to realise this, it might explain recent support for strike action as unions try to maintain the value of wages in the face of persistent inflation.

But it’s also important to be aware of the deeper, historic and strategic factors that have led to relatively high levels of inflation in Britain. Addressing these issues will help get the UK out of the current cost of living crisis.

A manufacturing powerhouse

The first industrial revolution, starting in the 18th century, made the UK a leading producer of manufactured products – the “workshop of the world”. And it remained a major manufacturing power for more than a century, creating everything from cruise liners to some of the first computer programs.

But in the 1980s, Thatercherism undermined productive industry and skills development by shrinking entire sectors of the economy, such as steel-making, car-making, and coal production. At the same time, the government loosened financial regulation and removed controls on the flow of money out of the country, boosting the rule of finance.

This skewed the British economy away from its manufacturing heartlands, such as the Midlands, while inflating the political and economic power of banks and financial firms. Profits became less dependent on production.

Since 1960, British manufacturing has been in decline, both in terms of employment and output, and in comparison to other similar countries. Low business investment over the decades has held the UK back versus the likes of the US, France and Germany, leading to low productivity.

This historic shock to the productive system of the UK meant that, when demand for goods grew post-COVID, there was little domestic capacity to produce them – so the country had to rely on imports to meet demand. The costs of the most basic goods and services that we need – food, energy and housing – have since soared. These essentials, which should be a relatively low proportion of our spending, have become unaffordable for millions of people.

Of course, price controls could help to reduce this inflation. But the underlying weaknesses that facilitate inflation in the long run should also be addressed. This will require a new UK industrial policy, together with plans for skills development for the workforce.

Curbs on the flow of business and money out of the country by banks, investment funds and large enterprises will help strengthen domestic investment. New approaches to public financing via organisations such as the central bank would also reduce the reliance on private banks. Rather than its remit being linked to profit and controlling inflation, for example, the Bank of England should focus on supporting investment by directing funds toward particular sectors, especially manufacturing.

Bright blue sky behind Bank of England building with union flag flying.

The Bank of England. aslysun/Shutterstock

Britain’s extreme unleashing of market forces in the 1980s involved unprecedented privatisation and selling of public assets, wholesale deindustrialisation, and deregulation of the finance sector. During the years that followed, it included the systematic introduction of anti-union legislation and the dismantling of collective bargaining, leading to continuous downward pressure on wages as workers have less power to stand up to employers.

Corporate economic and political power was strengthened and, as a result, big businesses have been able to help themselves to extraordinary profits – often with additional government help, including tax breaks and subsidies.

Unions have recently accused big business of “profiteering” amid this cost of living crisis, and some supermarkets have started to cut prices in response to this criticism.

But no amount of windfall taxes or household subsidies will stop the current profit binge at the expense of wages. Major structural change is needed. If this is not done, the current toxic mix of weak investment, low productivity and high inflation is likely to be disastrous for our country.The Conversation

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