Feeling the squeeze: Workers' living standards in the economic crisis

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Working class living standards are being seriously hit as the economic crisis worsens. As inflation rises and wage repression continues, households' real disposable income is falling. Laura Cooke and Kevin Devine unpick the latest statistics that show the scale of the squeeze

For the first time in over 30 years the real disposable income of British households is falling, and the degree to which this is happening is increasing as inflation continues to climb. The Office for National Statistics reports that real incomes fell by 0.8 percent in 2010, which is the highest fall in real disposable incomes since 1977. In the first quarter of 2011 it reports incomes fell by 2.7 percent, over three times this amount, confirming that money pressures are growing.

Ordinary workers have seen their incomes squeezed during the recession. Although actual pay cuts have been rare and mostly temporary, bosses have kept wage rises low, while the cost of living has skyrocketed. Across the whole economy average earnings were just 2.8 percent higher in the three months to August 2011 than they were a year earlier. Contrast this with the highest rise in the cost of living since 1991, with the Retail Price Index (RPI) inflation measure showing that prices were six percent higher in August this year than they were in August 2010.

Incomes and inflation

Real wages, that is, wages adjusted for inflation, have fallen. On average workers are 2.8 percent worse off, in real terms, than they were a year ago. The bosses have gone on the offensive, taking advantage of workers' nervousness over job losses during the recession, and passing on its costs to those who can least afford it, in an attempt to protect the profit margins of corporations.

However, fortunes vary from one sector to another. For workers in some sectors, earnings have grown even less than the national average. Workers in the manufacturing sector were taking home just 1.5 percent more in August than they were a year ago, and in distribution (which includes retail and is the largest sector in employment terms) average earnings grew by just two percent.

The public sector also saw very little pay growth in the three months to August, with a two-year pay freeze and cuts in hours and premium pay contributing to an earnings growth figure of just 1.7 percent. And public sector workers are likely to find it even more difficult to make ends meet if the government is able to push through its planned rise in pensions contributions. For some public sector workers, this could mean a stark choice between having less money to live on in the short term, or coming out of pensions schemes and giving up any chance of a decent standard of living in retirement.

And there are no prizes for guessing which is the only sector to have been spared the pain. While those working in manufacturing, construction, distribution and elsewhere have seen the amount of money in their pockets drop, the real wages of those working in finance and business services have risen. This is the only sector of the economy where the August earnings figures rose by more than inflation, with total pay in the sector increasing by 6.2 percent compared to August 2010. This figure is an average for the whole sector, with lower increases at the lower-paid end of the sector, such as counter assistants in high street banks, and even higher increases for those at the top.

For low-paid workers, the spending squeeze is most pronounced. The National Minimum Wage for workers aged over 21 was increased by just 2.5 percent from 1 October, to £6.08 an hour. This is less than most workers can afford to live on, as highlighted by the rise in campaigns for "living wages" and the fact that many minimum wage earners need to claim working tax credits in order to make ends meet.

The lack of enforcement mechanisms means that greedy bosses are able to take advantage of loopholes to pay workers less than this wherever they can. Bogus self-employment in sectors such as hairdressing and paying hotel cleaners by the room rather than by the hour are just two of the methods used. Meanwhile unpaid internships, which are particularly prevalent in the media and in politics, allow those in positions of power to take advantage of young workers hoping to gain experience in their chosen career.

For young workers aged 16 to 17, the minimum wage was raised by just 1.1 percent, to £3.68 an hour. This means that for a full-time worker aged 16 to 17 and paid the minimum wage, real wages fell by a massive 4.1 percent. Shockingly, some employers, including the employers' body the British Chambers of Commerce, have called for this rate to be frozen or even reduced, claiming that it is a cause of youth unemployment.

For low-paid workers, inflation actually feels much higher than the 5.6 percent average, since a greater proportion of these workers' incomes is spent on necessities such as food, drink and fuel. The prices of these items have increased by more than the overall figure. Major retailers have used their monopoly position to drive up food prices, for example, which have risen by 6.9 percent since August 2010. Basic items such as bread and butter account for some of the highest rises (7 percent and 13.8 percent respectively). The utility companies are playing a similar game. Fuel and light prices have gone up by 18.8 percent, while clothing and footwear have risen by 11.1 percent. Even the cost of getting to work has risen for these workers, with private bus and train operators putting fares up by 6.3 and 7 percent respectively in the year to August. It's little wonder that "Fair Share" recently found that many "working families" cannot afford even basic foodstuffs.

Pensions

In the private sector, most employers have closed their superior final salary pension schemes in favour of much worse "defined contribution" schemes. These link pension payouts to stock market performance and effectively transfer the risk from companies to individual workers.
In these circumstances, the launch next year of the National Employment Savings Trust (NEST), accompanied by automatic enrolment of workers in this or a scheme offered by their employer, has been welcomed by the TUC, among others.
But there are concerns that the requirement under NEST for workers to pay pension contributions starting at 1 percent but rising rapidly to 4 percent will force many of the low-paid to opt out of these arrangements. The fear here is that the new arrangements will not necessarily lead to greater pensions coverage. And in any case, the pensions on offer will in nearly all cases be the vastly inferior "defined contribution" schemes.

Benefits and taxation

The Lib Dems have claimed the raising of the personal tax allowance as a major coup, and a key justification of their decision to prop up the Tories as junior partners of the coalition. Their argument is that it helps the lowest paid by ensuring a lower proportion of their income is subject to tax, as a stepping stone to taking them out of the tax net altogether.

But this is a poor replacement for a more progressive system of taxation overall, which ensures that those who can afford it pay more. After all, the reductions in the top rate of tax, beginning under Thatcher, have been a major factor in rising inequality. And the coalition has no plans to reverse this. Indeed, the government's attacks on the welfare state are of a piece with their taxation policies.

A key part of their economic strategy is to balance public spending with the maintenance of a favourable tax regime for the wealthy.

Moreover, as the Joseph Rowntree Foundation pointed out in a recent report, the overall effect of the coalition's planned changes to personal taxation and benefits will be to increase relative poverty. According to the foundation, the new Universal Credit - which replaces all means-tested benefits and tax credits - may reduce poverty. But the foundation also thinks that the poverty-increasing effect of other government changes to personal taxes and state benefits will more than offset this.

These changes include the switch to the Consumer Price Index (CPI) for the uprating of benefits. These used to be increased every year by the RPI. The fact that the CPI is nearly always lower will save the government money, but will cheat millions of people out of benefits and pensions. With regard to help with childcare, the Universal Credit will mean the same amount of money distributed among a larger number of people - in effect a cut.

Public sector cuts

All this comes on top of cuts to "Sure Start" nursery provision that have already affected thousands of working class families. Meanwhile the Tories are crowing about freezing council tax. But with central government already reducing the funding for councils anyway, all this means is that councils will be forced to further cut services, or the terms and conditions of their workforces, or both.

The Tories don't care as the well-off tend to use local-authority-run services far less than the rest of us.

And plans to sell off even more council housing will add to the pressure on young people starting out. The lack of decent housing is a strategic policy to keep house prices high and the "buy to let" market lucrative - all music to the ears of the Tories' construction industry backers. Rising private rents are evidence that while the policy is working for landlords, it's penalising tenants.