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.

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%.

  • Ellene

    The combination of central bank and government policy has hammered those in the middle and at the bottom that find themselves being marginalized. The main beneficiaries of QE have been those with enough extra wealth to be able to invest it for their future – just look what happened last week when the Fed said “No more free money, for now.” That rigs things enough. But putting austerity measures in place that mostly hits the poorer, younger and most dependent in society makes the society more unequal. The sixties were a time when the older, wealthier and established helped to set jobs and education up for the rest of society. Now the rest of society is being used to set them up!

  • Boris MacDonut

    Good article Merryn.You redeem yourself here. I like the bottom can’t consume and the top create bubbles bit. That really is IT in a nutshell. I too bought the “Cost of Inequality” but am still labouring through “Poor Economics” .
    Some of the house price nerds need to note how wages make up just 53% of UK income and used to be 65%. The HP to wage ratio is a thing of the past.

  • Critic Al Rick

    The 1960s was the decade before we joined the so-called Common Market (EU). Yes, in that respect if in no other, we need to go back to the 1960s.

    I suspect friend Boris would disagree.

  • Boris MacDonut

    #2 Rick . Of course I disagree as regards Europe, which is much better off and more politically stable now. I bet Africa would love to go back to the 1960’s though.

  • Critic Al Rick

    Boris, what good has being affiliated to Europe done for the UK apart from enriching a few unpatriotic individuals?

    It’s saddled us with stupid regulations and is pillaging our wealth; more fool us. If Europe is much better off now it’s partly been at the UK’s expense.

  • Boris MacDonut

    #5 Rick. When did we last go to war with an EU nation? When did any EU nation last go to war with a neighbour? The EU is a massive force for good in this world and a benign and civilised alternative to the US and China. I suggest you read Parrag Khanna’s book Second World and even George Friedman’s ambitious attempt to chart the “Next 100 years”. Europe is the future that most of the world aspires to, not America.

  • Segedunum

    I’m afraid coming to the conclusion that the EU is a good thing because we haven’t been to war with a European nation for some time is rather naive and just a little bit dangerous. What’s transpiring right now is that a lot of EU nations are effectively being conquered by the back door, economically. When you look at what is happening in Greece or Spain all is definitely not well at all.

    Stable? Hardly.

  • Critic Al Rick

    @ 6. Boris

    I agree with Segedunum.

    Presumably Parrag Khanna and George Friedman are basically academics. As you may have gathered, I don’t necessarily hold the opinions of academics in esteem; I prefer the common-sense approach.

    Common-sense tells me that the EU is one of the Parasitic bodies which is effectively being encouraged by treacherous UK politicians to leech the UK into oblivion. And I doubt such treachery within Europe is confined to the UK.

  • Boris MacDonut

    #7 & 8 Segedunum and Rick. It is plain wrong to get hung up over the petty bureaucracy and red tape of the EU and lose sight of the real gain that Europe and the World has. In the 50 years prior to the Treaty of Rome 62 million Europeans died and tens of millions were orphaned, left homeless or maimed during brutal and savage wars that make the middle ages look cosy. In the 50 years since we saw only the Yugoslavian conflicts,which the EU has helped settle.
    Khanna and Friedman are both Washington foreign policy strategists and advisers. Khanna is a well travelled academic worth taking note of .He is considered one of the most influential people of the 21st C.

  • Critic Al Rick


    Pedestals; hero worshipping, celebrity worshipping, doctor/professor worshipping – abysmal symptoms of our times.

    Anyone who sees fit to worship another in any of such ways has effectively been made to feel inadequate in one or more ways in themselves. Such is the power of oppression and indoctrination.

    People are voted into high office – it doesn’t mean they are competent in the way they are supposed to be; usually, far from it; all mouth and no nous.

  • Kawasakifreak

    @Boris MacDonut.

    ‘ Khanna and Friedman are both Washington foreign policy strategists and advisers. Khanna is a well travelled academic worth taking note of .He is considered one of the most influential people of the 21st C. ‘

    …………… by other academics/journalists ?

    I thought you were more intelligent than to believe any media-produced ‘top ten’ ?

  • Boris MacDonut

    #10 Rick . How on earth do you get a balanced and informed view if you ignore the writings of others? I prefer to read as widely as possible and draw my own conclusions. There are plenty of books I have read recently that I do not agree with,but am broad minded enough to entertain them. I certainly do not hero worship…..merely give credit where I humbly think it is due. I am convinced that most serious investors could do a lot worse than read Khanna’s work. He has a good handle on the direction the world is heading in. He visited over 50 countries to write it, so from that perspective I am inadequate and, but he has done the legwork.

  • Critic Al Rick

    Boris, I draw on my lifetime of experiences and observations.

    To some people optimism is a religion. Religions are bastions of delusion. I’m not complacent enough to be religious. I first saw ‘the writing on the wall’ about 25 years ago. Back then I didn’t realise how far mankind had deviated from sanity.

    WWII restored sanity for a while. Unfortunately, it’s not possible to go back to the 1960s for a rerun. It’s going to take another major catastrophe to restore it once again. Believe me, it’s coming.

  • Boris MacDonut

    ]#13. Blimey Rick. Sounds like you are trying to predict a grim future based on a reasonable past. Still, at least with that level of pessimism you will be pleasantly surprised when things go well.

  • Critic Al Rick

    Boris, with that level of realism I will, if I’m still alive, be staggeringly surprised IF things do go well; I genuinely hope they do.

    You say I am trying to predict a grim future based on a reasonable past. I didn’t think you considered the recent past of ever more prolific (in your parlance)”‘snouts in the trough” to be reasonable behaviour.

    You don’t really consider that trend is going to reverse other than by the intervention of some major catastrophe, do you?

  • Me

    Wages have reduced because of mass immigration. People have flooded into the UK from low wage areas of the Eu and the rest of the world.

    This has degraded the incomes of the local workers, for a time this was hidden by the credit fueled ‘boom’ .

    All this mass immigration disaster has achieved is provide a pool of people prepared to work for low wages to enrich buy to let property owners and directors of companies.

  • Fender Belly

    Interesting debate. We’ve been reading about this issue for some time now, but I’ve still yet to see a convincing explanation of exactly why it has happened.

  • Mé Féin

    Merryn, why don’t you rail against the £800K plus that lightweight CEO over at Alliance trust gets paid that you have been fawning over (cf past blogs), or are women exempt from your criticism?

  • Vineet

    I come from India where the entire economy was built on the success of the public sector. Even though, over the last couple of decades the private sector has made huge contributions to its economy, the biggest banks, air lines, mining, oil exploration, power generation and distribution, railways, and numerous other infrastructure development companies are state owned, whose employees all get exactly the same salary and wages based on their grade.
    True, there is huge waste there too, but certainly not as much as it is at the top in the west.
    I suggest all QE should be channelled through state supported banks only (RBS?) and its employees should get exactly the same benefits as any other public service such as NHS, Defence or whatever is left that we haven’t already sold.

  • mortifiedour

    I agree with Me. Mass immigration has not helped the average British worker. It is not as if we have attracted the best – brain surgeons or something. The majority have been unskilled or semi skilled in the scheme of things. This has therefore had the most
    adverse impact on those at the bottom. ( And I am a landlady.
    The housing market is still way too expensive and rents do not relate sufficiently to capital values). I feel desperately sorry for the young.
    Unless they are in the top 5% in brains or wealth what future can we offer them? At one time I was in favour of the EU, but on all fronts it has proved a disaster.

  • Boris McaDonut

    #20 mortiefiedour. It is patently ridiculous to suggest the EU has failed on all fronts. Just the avoidance of a major European conflict is worth any number of petty rules. Dislike of the EU seems motivated by narrow Little Englander sentiments and nit picking. You fail to see the big picture, so are likely to fail as an investor.

  • 4caster

    This debate seems to have strayed off the subject, into wars or the lack of them, the EU and immigration.
    The turning point was the winter of discontent of 1979, when rubbish rotted on the streets and the dead were left unburied, due to strikes for leapfrogging wage claims. That was when I joined the trade union movement, as a moderating influence. I feared that if trade unionists did not act more responsibly we would get a right wing government that would castrate the movement. And that was one of my better forecasts.
    But Margaret Thatcher did bring some benefits to trade unionism. She introduced the secret ballot, and ended the closed shop, mass picketing and the show of hands at mass meetings.
    It is time to empower us, the beneficial owners of capital, because the managers who run most of our shareholdings will never vote to reduce boardroom pay and bonuses. They are on the same scam themselves.

  • Bob

    #9. Boris,

    “In the 50 years since we saw only the Yugoslavian conflicts,which the EU has helped settle.”

    I suggest you read Fools Rush in by Bill Carter to read a first hand account of the woefully inept & morally bankrupt response by the EU to one of the most shameful episodes in recent human history, occurring within a few hours of Brussels.

    Your beloved behemoth was as beset by dithering self-interest then as it is now.

  • Boris MacDonut

    #23 Bob. How many died in the Yugoslav war? How many died in WW2? Divide B by A and you’ll see the extent of the EU’s success.

  • Bob

    Like I said, read the book and post with your interpretation of “success”. Random statistics do little to further your argument.

  • Boris MacDonut

    #25Bob. 47 million dead in 6 years is not a random statistic it is utterly horrifying and the EU helps ensure it is never repeated. Your niggles about EU bureaucracy are like complaining about a Hospital’s administrator but ignoring the good the existence of a hospital does.

  • Bob

    For clarity, my ‘niggle’ has nothing to do with bureaucracy. My niggle is that in its response to the Yugoslavian conflict the EU was not successful as you state. 140,000 people lost their lives while Europe wrung its hands – also utterly horrifying I’m sure you’ll agree.

    Clearly EU diplomacy has been a stabilising factor since WW2 but I don’t share your confidence in its ability to act decisively during conflict to avoid further such atrocities.

    All way off topic of course and I think we’ll have to agree to differ on this one.