We need to go back to the 1960s

I don't think that there are too many people left who think that there isn't a problem with relative pay in the West. Those at the top of big organisations get paid too much and those at the bottom and middle, unless they happen to work for a heavily unionised section of the public sector (I give you the Tube), get paid too little by comparision.

So, thanks to a rising sense of public outrage, there is also beginning to be a glimmer of understanding of the fact that very high levels of inequality are bad for our economy: I wrote about this here, but in a nutshell, if the bottom doesn't have enough money, they can't consume and if the top doesn't have enough money, they can create bubbles. Income inequality kills opportunity,and it kills growth too.

So, if this is the problem, the question that needs answering is just how the proceeds of capitalism should be divvied up: how much should go to the workers and how much to the lucky few at the top? For an answer, I am reading Stewart Lansley's The Cost of Inequality.

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Back in 1870, when there was not much in the way of trade unions to think of, and also not much in the way of regulation, wages accounted for a little over half of national income. Improvements in pay and working conditions came slowly, and for most of the 19th century, "wealth was heavily concentrated in the hands of a very small industrial, commercial and aristocratic elite, the owners of capital property and land at most a few thousand individuals." In the 1950s and 60s, alongside reformist governments and strong unions, change came and the wage share in the UK settled at around 58-61% of national income.

That appeared to work. It didn't (as the few thousand had thought it might) undermine capitalism. Instead, it either caused or co-existed with economic success: the 50s and 60s saw a period of industrial harmony, rising prosperity and decent profits.

Then came the 1970s, a time when it seems that the pendulum might have swung too far in favour of wages. With unions now super powerful, real wages across the US, Europe and the UK rose. In the UK, wages hit a record peak of 65% of national income in 1975. At the same time, thanks to this as well as to rising competition and falling productivity, profits deteriorated rapidly (43% in the UK between 1965 and 1973).

It was the era of the profits squeeze pay might have gone up, but rising wages didn't leave enough profit to finance the investment needed for growth. It wasn't sustainable: "either labour would have to accept a decline in wages and a return to the post-war norm, or the capitalist model would face a growing risk of collapse."

By the 1980s, the share of wages was back to around 59%, a level Lansley suggests might be about right. "If wages had been allowed to settle at this level the average of the 1950s and 60s the future course of the economy would have been very different."

But that isn't what happened. Today, the share of wages comes to 53%, and could even be lower than that if you take into account the fact that the huge incomes of those at the top are less wages than massive profit shares. We are now roughly back to where we were in the 19th century, a world in which a small group of bankers, CEOs and CFOs make the real money and everyone else just about gets by. The difference of course is that in the twenty-first century, the taxpayer, via the welfare state, makes up the difference between actual wages and living wages. That's not sustainable either.

How can we get wages back to around 58% or so? The good news is that it is starting already. The TUC is on the bandwagon. Bank salaries and bonuses are falling a little and institutional investors are beginning to get a grip: note yesterday's delightfully refreshing announcement from Pensions and Investors Research Consultants(Pirc) that Bob Diamond should get no bonus at all.

And the list of possible actions we can take is getting longer by the day. All we need to watch for now is that wages don't slip back above 60%.