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State and the economy: a strategy for wage-led development

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  • Onaran, Özlem

Abstract

Since the 1980s there has been a clear reversal of the trends towards relatively egalitarian income distribution achieved during the post-war era, with a global race to the bottom in the share of wages in national income in the UK and elsewhere. This decline in the wage share was associated with a weaker and volatile growth performance. In the UK, similar to the US or the periphery of Europe, households increased their debt to maintain consumption levels in the absence of decent wage increases. The crisis of 2007-9, and the subsequent Great Recession has proven the fragility of this model. The recovery in Britain is built once again on the shaky ground of household debt instead of wage growth. Empirical evidence shows that in the vast majority of countries a fall in the wage share leads to lower growth; this is what we call a wage-led growth economy. The UK is a typical example of a wage-led economy. In a wage-led country like the UK, or the EU as a whole, more egalitarian policies are consistent with growth. A wage-led recovery out of the financial crisis is feasible, but will need political will to achieve. Globalisation is not an impediment to a wage-led development strategy. The UK and the EU as a whole would be the economies that would benefit most from a coordinated boost to the wage share at the global level. As such, the UK and Europe could, and should, take a step forward in terms of radically reversing the fall in the wage share. This would then create space for egalitarian growth strategies at a global level. The fall in the wage share has been a deliberate outcome of policies that led to the fall in the bargaining power of labour, welfare state retrenchment, and financialisation. The solution therefore lies in reversing this process. Policies should be in place to ensure that nominal wages increase in line with inflation and productivity. This should follow an initial gradual correction of the loss in the wage share in the past three decades. A strategy of wage-led development requires a policy mix that includes labour market policies aiming at pre-distribution, as well as redistributive policies through progressive taxes. Furthermore, distribution policies need to be complemented by a macroeconomic and industrial policy mix. Wage policies have to be embedded into broader targets of equality, full employment, and ecological sustainability.

Suggested Citation

  • Onaran, Özlem, 2015. "State and the economy: a strategy for wage-led development," Greenwich Papers in Political Economy 14075, University of Greenwich, Greenwich Political Economy Research Centre.
    • Handle: RePEc:gpe:wpaper:14075
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