The historians’ view: is wage stagnation a modern phenomenon?

Is today's lacklustre wage growth as exceptional as some commentators would have us believe? Two historians offer their verdicts...

Public sector workers taking industrial action protest in the centre of Bristol on July 10, 2014. (Photo by Matt Cardy/Getty Images)

This article was first published in the January 2015 issue of BBC History Magazine

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Nicholas Crafts, professor of economics and economic history at the University of Warwick:

There have undoubtedly been similar episodes of wage stagnation before. As far as we can tell, there was zero real wage growth during the years between about 1835 and 1848 – and that probably went on for a bit longer than the difficulties we’re experiencing now. However, when the economy recovered from this dip, real wages jumped by about 10 per cent in two years – so quite a bit of the bad news was reversed.

That pattern of zero real wage growth (taking into account the effects of inflation), followed by a swift recovery, was repeated between 1874 and 1882 and again from 1919–26. Following that latter period, wages bounced back and rose by about 7 or 8 per cent over the next three years.

It may surprise people that wages did not stagnate or fall during the Great Depression. What happened in the early 1930s was that real wages remained reasonably healthy for those still in employment – that was the key feature. And there was a real fall in the price of imported foods. Obviously that was cold comfort for the 15 per cent of the workforce who were unemployed by 1933. But the problem was high unemployment, rather than falling real wages. That’s in direct contrast to today when we’ve had stagnant real wages for many in employment, but unemployment levels that haven’t exceeded 8 per cent – far below 1930s levels.

What’s happening now undoubtedly marks a change from the post Second World War trend, when real wages have grown pretty steadily – somewhere around, on average, 2 per cent a year. What we face today perhaps is a period in which, for the first time in decades, productivity has taken a backward step. In the long run, real wage growth and labour productivity go mostly hand in hand.

Also, since the 1980s, the ability of trade unions to mark wages up over market levels in the private sector has pretty much disappeared. After the First World War, the labour force became quite unionised – union membership doubled during the conflict. In response to wartime labour unrest, there was increasing collective bargaining – partly institutionalised by the state – through, for example, wage boards. These changes made for a less flexible labour market, which led to the high levels of unemployment seen later.

What’s happened since the 1980s is that – partly with the weakening of union power, and partly due to changes made to unemployment benefit rules – we have seen wage behaviour become more flexible. And these days, particularly in the private sector, the economy is much more exposed to international competition than it was in earlier periods.

In the past, union leaders took for their workers a portion of the supernormal profits that would have accrued through the market power of firms. Once that market power is eroded by international competition, unions have less to go at, and therefore less to offer their members. So it’s not surprising that union membership has collapsed in the private sector.

So overall I’m surprised by the magnitude of current wage stagnation – but not by the general direction of travel. Wages have taken more of the strain, and employment rather less. That’s a difference from what you would have expected either in the 1920s and 30s or in the 1970s and 80s.

Jane Humphries, professor of economic history at the University of Oxford, and author of Childhood and Child Labour in the British Industrial Revolution (Cambridge, 2010):

We’ve come to assume that every generation can expect to be better off than its predecessor. This expectation is associated with the industrial revolution. Industrialisation is viewed traditionally as the gateway to modern economic growth, delivering an ever improving standard of living. The British industrial revolution was unique. It was the very first industrial revolution, and so pioneered this transition. But it did not provide a dramatic increase in the standard of living or even, for a significant part of the population, any increase in the standard of living.

There is now general agreement that there was no consistent improvement in real wages from the late 18th century until about the 1830s. We only really got consistent rises from that decade onwards, and even then we suffered severe setbacks, such as the ‘Hungry Forties’ (1840s), when unemployment was at levels that some historians think rivalled those of the 1930s.

Furthermore, the standard of living at this time, as today, was determined by how much money actually reached households, not by the size of men’s pay packets. Some male breadwinners weren’t always as disciplined as we’d like to believe. Wages were ‘top-sliced’ – men believed they deserved to spend some of their money in the pub. Even within households, they often enjoyed a disproportionate share of resources.

Industrialisation also undermined the ability of other family members to earn and add to household incomes. For many agricultural labourers, family incomes had been shored up by the contribution of wives and daughters, not only through employment in agriculture but also through handicraft activities like spinning.

But the emergence of the new factory system eventually wiped out large chunks of the traditional economy. For example, female hand-spinning – women producing yarn for the dramatic increase in textile production – boomed in the middle of the 18th century but was then destroyed in a matter of 30 years by mechanisation. If spinning had been a male occupation there’d be shelves of books about it.

But because it was a woman’s job, it has by and large been relegated to footnotes. Yet hand-spinning provided work for thousands of women, and so a key element of household income disappeared.

And that’s partly why the industrial revolution also saw a boom in child labour. We have underestimated the burden of children in poor households (in 1826 almost 40 per cent of the population was under 15), or in the many households where husbands and fathers were absent or, in this still high-mortality society, no longer living. For all these reasons, there was pressure on family living standards, manifesting itself in the supply of child workers.

So men’s wage rates are a helpful indicator of wellbeing and family income. But economists and historians have spent far too much time scrutinising them. We also need to know how long people are working, how regularly and what different family members are contributing. We should also scrutinise other sources of income such as welfare, how many children there are, and whether a family has other sources of subsistence – for example, an allotment or income from taking in lodgers. And we should be doing all this for the past, as well as the present.

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Interviews by Chris Bowlby, a BBC journalist specialising in history.