A boost to wages is the route out of the UK's economic crisis

Without greater income equality in Britain, through a shift from profits to wages, the economy will continue to falter
construction workers stadium
‘The power balance between corporations and the workforce is seriously out of line.’ Photograph: Graham Turner for the Guardian Graham Turner/Guardian

Britain has now been locked in economic crisis for five years. Meanwhile, while average real wages have shrunk, the number earning more than a million pounds has doubled in the past two years. The income gap, already at historic highs, has continued to widen through the slump.

For an explanation of why the UK is still in crisis, look no further. History shows that excessive inequality brings economic deadlock. Over the past 30 years, much of the rich world, led by the UK and the US, has steered a growing share of national output to profits and the super-wealthy. Across developed nations, the share going to wages has fallen from over 66% in 1990 to less than 62% today, with an even bigger fall in the UK. The result: a slowing of ordinary living standards, the rise of a global plutocracy, and a dangerous hike in instability.

A new TUC study, How to Boost the Wage Share, shows that if the wage share in the UK had been held at its higher 1980 level, growth through the 1980s and 1990s would have been significantly boosted. Why? Because the shift from wages to profits sucked demand out of the economy fuelling an unprecedented hike in levels of personal debt to compensate for the collapse in consumer spending. Far from promoting an investment boom – as market orthodoxy predicted – the profit surge was associated with a slump in private investment and a series of asset bubbles. This helped to push the UK and the world over the cliff in 2008.

Today, rising inequality and falling wages is a serious drag on recovery. Without a more even distribution of the economic cake, the economy will continue to falter. Until a few years ago, even mention of the "distribution question" was seen as heresy. "Of the tendencies that are harmful to sound economics, the most poisonous is to focus on questions of distribution," is how Robert E Lucas – the Chicago Nobel laureate and key architect of the pro-market orthodoxy – put it in 2003.

Today, the question of distribution is being taken more seriously. We have "downplayed inequality for too long … a more equal distribution of income allows for more economic stability, more sustained economic growth," argued Christine Lagarde, the IMF boss, in January. President Obama has now made three high-profile speeches on how closing the income gap is essential for growth.

Despite such lofty speeches, the evidence is that since 2008 national income gaps have continued to widen. This is in stark contrast with what happened in the 1930s, when the global super-rich took a big hit from the fallout from 1929.

So what can be done to cap and reverse the downward trend in the wage share in the UK, now 5.5 percentage points lower than in 1980? The TUC report examines the impact of four measures: a slightly more generous minimum wage, taking it from £6.19 to £6.60; a halving of the numbers receiving less than the living wage (of £7.45 an hour outside London); an extension of collective bargaining to cover a half of the workforce currently excluded; and a reduction in unemployment.

None of these policies are utopian. They have been achieved in the past, and in other countries. Together they would lead to a much needed correction in the economy in favour of wages. With a majority of the low paid employed by large companies, the impact on costs and competitiveness would be small, while the evidence shows that higher wages lead to lower staff turnover while acting as a spur to productivity. With fewer than one in seven private sector workers unionised (one of the lowest levels in Europe), the power balance between corporations and the workforce is seriously out of line. The evidence is also clear: lower unemployment is associated with faster wage growth.

Together these policies would close a quarter of the current wage gap (the difference between the 1980 and current wage share) and narrow the dispersion of wages. Such a package could not be introduced overnight but, with a mix of political will and proper planning, could be implemented gradually.

Securing a more equal distribution is now one of the most urgent political and economic issues of the day. The evidence is clear and widely accepted at the highest levels: by boosting demand and correcting the distortions created by excessive private and corporate surpluses, a rise in the wage share (particularly among the poorest) would unlock the door to recovery and help set the economy on a more sustainable path.