It Is Time To Try Something Different

Larry Elliott writes:

Profiteering is nothing new. Stanley Baldwin had a pithy description for the new intake of Conservative MPs at the 1918 general election, noting that they were “a lot of hard-faced men who look as if they had done very well out of the war”. The future Tory prime minister was right. Many companies had found a war economy greatly to their liking, securing lucrative government contracts and making a mint in the process. Profiteering was rampant.

Sharon Graham, the general secretary of the Unite union, says something similar has been happening since the war on Covid began in 2020. A study of the reports and accounts of almost 17,000 firms – big and small – showed that pre-tax profit margins were, on average, 30% higher in 2022 than they were in the years immediately before the pandemic began.

The UK’s inflation rate peaked at just over 11% in 2022 and, judging by the Unite research, many companies took the opportunity to increase their prices by more than was necessary to cover rising costs, on the basis that consumers wouldn’t notice that they were being gouged.

Workers have fared less well. For the past few months, as the annual inflation rate has come down, real incomes have been going up because wages have been rising faster than prices. But this welcome improvement in living standards cannot make up for the deep real wage cuts earlier in the cost of living crisis and, in any event, is likely to be a brief interlude unless there are changes to the way the economy operates. As Graham notes, companies can get away with fattening their profit margins because they have the power to do so. “What’s happened in the last three years is, underneath it all, a major redistribution of wealth away from workers’ wages to corporate profits.”

Unions think companies have too much power while they have too little, and that’s one reason they took such a hard line this week with Keir Starmer over Labour’s new deal for workers. The planned expansion of workers’ rights promises to shift the balance of power between labour and capital modestly in favour of the former, but no more than that. After unions made clear this was a totemic issue for them, Starmer said Labour was sticking with the planned reforms [did he?].

There are three counter-arguments to the points made by Unite in its profiteering report, and by the unions more generally. The first is that different profit numbers can be arrived at using different methodology, so there is nothing really to see here. The second is that corporate profits are vital, because they are the source of investment that creates the jobs of the future. The third is that handing more power to unions threatens to wreck Britain’s flexible labour market and will cost jobs.

The first argument would be more convincing if Unite’s report was a one-off, but the same picture emerges from elsewhere in the world. In 2021, US profit margins for non-financial companies reached their highest level since the second world war. The European Central Bank’s president, Christine Lagarde, said last year that companies in the eurozone were taking advantage of high inflation to plump up their profit margins. At the very least, there is a case for UK plc to answer.

Nor is there any real evidence of a link between profits and investment. Rather, as a paper by the left-of-centre thinktank Common Wealth points out, the bulk of the profits are finding their way to shareholders through dividends, rather than into new capital spending.

Back in the 1970s, when unions had considerably more power than they enjoy today, private non-financial corporations paid out 20p in dividend payments for every £1 of gross fixed-capital formation. In the second half of the 2010s, this figure was 95p. Payouts to shareholders rose two and a half times faster than total employee compensation between 1988 and 2019. Meanwhile, business investment over that period has been consistently lower than the average for leading industrial nations.

The original justification for putting restrictions on unions and boosting corporate power was that it would boost growth by stimulating entrepreneurship and create more, better-paid jobs.

In practice, a lack of union protection left workers wide open for exploitation. Companies were always able to find people to work for low wages, particularly once they found they could tap into global pools of migrant workers. Real wages – even after the recent small increase – have flatlined since the time of the global financial crisis in 2008.

So the idea that Britain’s flexible labour market represents some sort of gold standard for international best practice is a nonsense. The fact that labour is so cheap discourages firms from investing in new kit and in developing the skills of their workers so that they are truly flexible rather than – as they all too often are – easily dispensable.

Graham’s assessment is that life is sweet for those at the top but tough for workers, and it is hard to disagree with her. The UK has a poor record for investment, a poor record for productivity, a poor record for real wage growth and, since the pandemic, a poor record for employment. Britain’s workforce is 900,000 smaller than it was before the pandemic, in part due to inactivity caused by long-term sickness and ill health.

The “flexibility” model is based on fear, insecurity and poverty pay, and it has failed. After 40 years, it is time to try something different.