Duncan’s Economic Blog

The Wage Squeeze in the 1920s and Now

Posted in Uncategorized by duncanseconomicblog on February 8, 2011

Last week I had a post over at False Economy discussing real wages, the wage share of GDP and the coming squeeze in living standards.

This was inspired by Mervyn King’s recent comments that the UK is experiencing the longest squeeze in living standards since the 1920s.

That speech got me thinking about an old report from Policy Exchange (pdf). In November 2009 their report on ‘Controlling Spending’ outlined what became the intellectual foundation stone of George Osborne’s approach to the macroeconomy – ‘expansionary fiscal tightening’, or the idea that cutting government spending can lead to higher growth.

This report used 12 case studies, the first of which was the ‘Geddes Axe’ of the early 1920s. The huge cuts in government spending of that era are the best precedent for what Osborne is attempting now.

Policy Exchange hails those cuts (23% of government spending and 35% of civil servants) as a huge success:

Spending was reduced very markedly and did not rise again for at least a decade. Even when it did start to rise again, the culture was such that spending cuts were proposed. Growth was considerably stronger subsequent to the consolidation than before it. The severe recession in the immediate aftermath of the Great War gave way to the ‘roaring twenties’.

But they offer no real reason as to what drove that growth (which proved short lived in any case). Which brings us back to King’s comments on the ‘longest wage squeeze since the 1920s’. Look at what happened to real wages (the column on the right) during the area of cuts starting in 1921:

Geddes worked by reducing living standards.

This shouldn’t really surprise us – responding to recession by cutting wages is the preferred policy of the Tories.

Thus, a pattern is emerging. Depressions in twentieth-century Britain have  typically appeared at the end of an extended period of sustained expansion. The  economic pressures are perceived first in the City which reacts by calling for  cuts in public spending and other measures to restore confidence in sterling.
Industry is also faced with the need to respond to market forces. The experience  of this century suggests that British industry will also press for retrenchment  by government even if the cost is the loss of some measure of State support for  industry and the weakening of the corporatist structures in which business  leaders had a considerable stake. Thus, by the time that depression begins to  hit employment (and changes in unemployment always follow changes in the  national income), there is a considerable climate of opinion which blames the  level of government spending and the level of wages (maintained in part by the  closeness of the unions to the centre of government) for many of the economic  problems. These opinions are exposed to an electorate which had become  accustomed to annual rises in real living standards. The frustrated expectations  among the mass of the population, which in other circumstances can be a  pre-condition to revolution, are channelled in the British case towards economic
liberalism and orthodox finance. During the three depressions of this century,  organized labour has been in no position to offer a challenge to this movement.  In the British context, therefore, ‘orthodoxy’ or ‘monetarism’ are the natural  policies of depression
Booth, A (1982) ‘Corporatism, capitalism and depression in twentieth-century
Britain’, The British Journal of Sociology 33 (2)

As I’ve argued here over the past few months Labour should be questioning ‘export-led’ growth and George Osborne’s new economic model of higher exports and investment is premised on higher unemployment and lower wages. There is, as they say, an alternative.


5 Responses

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  1. Dave Holden said, on February 8, 2011 at 12:54 pm

    In your alternative you need to address the problem of civil servants/politcians picking winners and it’s associated risks of malinvestment. Exchanging one form of crony capitalism for another isn’t progress.

  2. Philip C. said, on February 8, 2011 at 7:54 pm

    Surely it is only possible for “expansionary fiscal consolidation” to produce a successful outcome if interest rates can be reduced?
    With interest rates at or near zero, wouldn’t “expansionary fiscal consolidation” be doomed to fail?
    If it was hailed as a success in the 1920s what happened to interest rates back then?
    Sorry for asking questions – shoot me down in flames if need be.

  3. Tom said, on February 9, 2011 at 5:41 pm

    Hi Duncan, please could you comment on the claim in the recent IFS report that deflationary monetary policy would offset fiscal expansion (or even less contraction)?


    This is one of the few vaguely-plausible-sounding arguments I’ve heard for the Tory position, so I’d like to have some come-back to it.

    • duncanseconomicblog said, on February 9, 2011 at 5:44 pm

      Hi Tom,

      Was going to do a post on this question later in the week.

  4. […] should go perhaps to Duncan Weldon, who has been talking about cost of living and living standards as an important issue for some […]

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