Credit expansion and the perfect storm of wage stagnation : evidence from the US, Canada and the UK

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Credit Expansion and the Perfect Storm of Wage

Stagnation: Evidence from the US, Canada and the UK

Saul O’Keeffe

Master Thesis Political Science: Political Economy

June 2017

Supervisor: Prof. G. Underhill

Second Reader: Dr. S. Lim

Student ID: 11196912

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Abstract

Since around the middle of the 1970s, a large proportion

of the workforce in the OECD has faced an enduring

period of wage stagnation. Real wage growth slowed to a

crawl for many of the low- and middle-income workers

in countries such as the US, Canada and the UK. Despite

extensive research, there is still no consensus over what

exactly has caused this stagnation trend. The field of

analysis may therefore need to be widened in order to

identify additional influences on wage trends. It is known

that several factors acting together influence overall

wage trends, which is referred to here as the ‘perfect

storm’ of factors, however the parts comprising this

perfect storm in each state are unclear and could be

dictated by the systemic changes in the OECD that took

place at the same time as wage stagnation took hold.

Over the same period, OECD economies such as Canada,

the US and the UK saw a proliferation of consumer

credit, which provided an alternative to wages as a

means of consumption. Whilst it is clear credit access

helped boost the quality of life for many, the

socioeconomic effects of widespread indebtedness are

less

well

understood.

By

employing

different

interpretations of borrowers’ rationality and either

refuting or accepting life cycle explanations of credit

usage, two accounts are presented here, which describe

possible wage-supporting or wage-diminishing accounts

of a relationship between consumer credit growth and

wages. The relationship is then tested using statistical

methods, which point to a wage-supporting account of

the relationship between consumer credit and wages.

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1. Introduction

A central aspect of market economics is the need to ensure that the workforce is adequately

compensated for its labour, giving individuals the means to improve their quality of life as a result of their work. This means governments are keen to avoid wage stagnation - the phenomenon of real wage growth declining, which means wages fail to match economy-wide productivity increases and pay inequality across income groups widens. An economy with major segments of the population being underpaid or seeing no earnings growth for prolonged periods, or at least perceiving such a trend, can expect a reaction in one form or another.

For example, union unrest as a result of impatient workers will strain labour relations and, if led by a large national industry such as mining or postal services, pose a real threat to daily economic

operations. Alternatively wage stagnation could instigate a surge in the popularity of populist parties, as disgruntled voters seek to eject elites that have failed to create the desired earnings growth and enhanced earnings inequality. Another example of a risk resultant from wage stagnation could be a fall in consumer demand, as households are forced to tighten their belts amid living costs that rise at a greater rate than their earnings. Earnings growth is important as it encourages growth in aggregate demand and reduces inequality, creating more wealth and boosting the quality of life of citizens within the economy as a result. Accordingly, steadily rising wages are essential for an economy to bring real benefits to its citizens’ lives and to keep the peace within society as a whole.

Today in the OECD, an area where economists struggle to find consensus is wages and the factors that drive their growth and decline. Drawing on different theoretical starting points, researchers have attached wage-determining value to several factors, including globalisation, union density, labour market policies and inflation, with different investigations attaching varying degrees of strength to each factor. Economists do however tend to agree on two central points:

1) Wages for many lower- and middle- incomes households in the OECD have been stuck in a prolonged period of stagnation.

2) The clear relationship between productivity growth and wage growth that was observed from the end of World War II until the start of the 1970s has diminished, with various factors creating fluctuations in rates of wage growth.

In order to contextualise these two assertions, a look at wage trends in the OECD over the last 30 years is needed. From the end of World War II until roughly 1970, rises in workers’ productivity tended to reflect a similar growth in wages. This relationship is seen to have dissolved or at least been greatly diminished from around 1970, where many of the low- and middle- income earners started to see wage growth slow, despite continued growth in their productivity (Schwellnus, et al, 2017: 3).

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The resulting pay inequality was captured by Milanovic in his now famous ‘elephant curve’ (Fig 1.1.), which charted the relative gains in real per-capita income enjoyed by groups at different points of the global income distribution between 1988 and 2008 (Milanovic, 2016). The lowest point on the graph, marked B at around the 80th percentile, signifies the change for the low- and middle- income workers in the OECD – a change of effectively zero.

What findings such as Milanovic’s tell us is that wage stagnation could indeed be quite a prevalent problem within the OECD. Indeed, a simple check of year-on-year wage growth in many of the major OECD economies using the OECD Data Library gives a clear indication that wage stagnation could be present:

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FIG 1.2. Average change in hourly earnings (percentage where 10=100) Source: OECD Data

What is illustrated in Fig. 1.2 is the dramatic and far-reaching stagnation of earnings growth. Many OECD countries saw average hourly earnings rise by an average of 2% per year in the early 1970s, however by the end of the 1980s, none of these economies managed to create hourly earnings growth higher than 1% and after the year 2000 there were only 3 instances where hourly earnings managed to beat an annual growth rate of 0.5%. It is the kind of trends observed in Fig 1.2. which provide the strongest case for wage stagnation to be a pervasive and persistent problem for OECD economies. The reasons for this trend are far from being full understood. Economists have been looking at the problem with urgency for a long time, resulting in the observation of several changes within the political economy that had acted to sever the connection between productivity and wages. In addition to productivity growth as a factor, shifts in wage growth have been plausibly linked to changes in union density, rates of unemployment, minimum wage rates and inflation, as well as the effects of more globalised labour markets. One thing that is clear is that no one factor can reasonably be labelled as the sole determinant of wages; a more sensible interpretation would be that a multitude of factors acting together is what determines the final outcome in terms of wage growth, with variations in

-0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16

Average Change in Hourly Earnings year-on-year, %

Canada Denmark Finland France Germany Ireland Italy Japan Netherlands Norway Sweden United Kingdom United States

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national cases giving factors different strengths in determining wages, thanks to contrasting institutional backdrops and other interstate differences.

Here this mix of factors will be referred to as the ‘perfect storm’ of factors, which in many parts of the OECD appears to have resulted in wage stagnation. It is obvious that different national economic configurations will be susceptible to different influences, since each nation has its own array of institutions, geopolitical necessities and political culture, to name just a few of the interstate nuances that define the nature of modern economies. Each nation thus has its own perfect storm where varying factors will play important wage determinant roles, making the stagnation trend in each country the result of different national as well as international trends and developments. Nonetheless, the fact that wage stagnation is persisting in many economies and no resolution has been found tells us that more needs to be understood about socio-political changes over the last 40 years if we are to truly

understand why wage stagnation has occurred in the OECD and how it can be remedied.

So What Changed?

Between the end of the post-war consensus in the 1970s and the present day, the world has changed dramatically; with the end of the Cold War, introduction of mobile telecommunications and rapid advancements in sustainability as just a few examples of how society has evolved over this time. However some would argue that the most striking change for some economies in the OECD between the 1970s and the present day is the opening up of consumer credit markets. Starting in the 1970s, consumer borrowing became an increasingly accepted aspect of social life in countries such as the US, Canada and the UK, with the previously shunned and stigmatised institution of indebtedness being incorporated into standard financial planning for individuals and households. In all three national cases, consumer credit use grew extensively, despite the variation in institutional backdrops (such as how labour relations are governed and what services are provided publicly or privately). There is the potential for a linkage between these two phenomena, in that by providing this new means of consumption, consumer credit could have impacted the other primary tool for consumption; wages. The US, UK and Canada all expanded their consumer credit markets significantly over the period and all simultaneously observed a prolonged period of wage stagnation, despite variations in the institutions that form the backbone of each economy; it is for this reason that we focus on these three states for this inquiry1.

Consumer credit is here defined as non-housing credit and is used to finance all manner of purchases, from cars to home appliances to education. Through the introduction of risk-based pricing, credit was extended across earner groups who had previously been excluded from many forms of borrowing. The dawn of consumer credit and its expansion over the years from the 1970s to today made a huge

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difference to the quality of life for many; an entirely new and simplified form of consumption had been introduced on a massive scale that allowed consumers additional means of planning

consumption over their lifetimes. Looking at these three national cases more closely, it becomes clear that consumer credit was widely adopted over the last 40 years:

Fig 1.3. Total consumer credit owned and securitized (2015 USD) Source: Federal Reserve Data

0 500000 1000000 1500000 2000000 2500000 3000000 3500000 4000000

US Consumer Credit

US Consumer Credit 0 100000 200000 300000 400000 500000 600000

Canada Consumer Credit

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Fig 1.4. Consumer credit, outstanding balances of selected holders (2015 CAD) Source: Statistics Canada

Fig 1.5. Annual amounts outstanding of UK resident monetary financial institutions' (excl. Central Bank) sterling consumer credit (excluding credit card) loans to individuals (2015 GBP) Source: Bank of England

The use of consumer credit in all three cases has risen significantly, with a minor decline only becoming apparent during the financial crisis in 2008 – during which Canada still managed to increase the amount of credit outstanding in its economy. The weak US decline and stronger UK decline appear to be temporary deviations from what is otherwise a very clear trend of consumer credit expansion. All the while wages in each national case were stagnating across the period, as seen in Fig 1.2. If we turn our attention the real wages in these countries, we can observe wage stagnation for nearly all income quintiles in these states:

0 20000 40000 60000 80000 100000 120000 140000 160000

UK Consumer Credit

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Fig 1.6. Average US Wages by Income Quintile (2015 USD) Source: Federal Reserve

Fig 1.7. Average Canadian Wages by Income Quintile (2015 CAD)

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 19 67 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 19 94 19 97 20 00 20 03 20 06 20 09 20 12 20 15

US Average Wages

US Bottom Quintile US 2nd Quintile US 3rd Quintile US 4th Quintile US Top Quintile US Top 5% of Earners US Overall Average 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14

Canada Average Wages

Canada Bottom Quintile Canada 2nd Quintile Canada 3rd Quintile Canada 4th Quintile Canada Top Quintile Canada Overall Average

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Source: Statistics Canada

Fig 1.8. Average UK Wages by Income Quintile (2015 GBP) Source: UK Office for National Statistics

What these graphs show is that as consumer credit expanded across each period, the real wages of many income groups saw only a relatively small increase. In each case, the bottom three quintiles have observed relatively little wage growth, whilst the wealthiest have managed to improve their wages considerably and pay inequality has clearly widened. The lower down the income scale one goes, the more clear the stagnation appears, with what is essentially a flat line depicting the real wages of the bottom quintile of earners in Canada and the US. Whilst low earners in the UK appear to have improved their lot marginally better than their counterparts in the US and Canada, the stagnation trend and rising pay inequality is still fairly obvious.

This clear depiction of wage stagnation and a rise in consumer credit growth, despite the cross-country institutional variations, makes these three states ideally suited for use in an investigation of whether this rise in credit genuinely did influence wage trends. By testing the strength of the

relationship between credit levels and real wages in these most obvious examples of credit expansion, as well as several other known wage-determining factors, it is possible to shed light on the forces that possibly drive this stagnation trend, whilst testing for an entirely new relationship that has not been examined before. By taking these three countries, we can test the effect of expanding consumer against different accompanying economic structures, such as how trade unions are governed and

0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

UK Average Wages

UK Bottom Quintile UK 2nd quintile UK 3rd Quintile UK 4th Quintile UK Top Quintille UK Overall Average

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minimum wage policies, to see whether there are indeed any cases where consumer credit can play a role in the determination of wages.

The reason for investigating how debt and credit expansion affects wages is because of debt’s role as a social institution which creates social, political and economic spillover effects. David Graeber’s writings on debt have made clear that debt is a social tool that has different influences and effects dependent on the context in which it is applied and how it is enforced; with societies bearing distinct identities and outcomes as a result (Graeber, 2012). The societal shift brought about by the expansion of consumer credit from the 1970s onwards inevitably changed the means by which individuals could boost their quality of life. Life-cycle theorists argued that it helped the less well-off by allowing consumers to borrow against future earnings for the purpose of consumption that was desired in the present. This in turn had the effect of boosting individual welfare by giving them greater control of what they consume and allowing them to utilise earnings from low-spending times (such as one’s 50s or 60s) during high-spending times (such as one’s 30s and 40s). However little is known about what modern conceptions of debt mean for our society as a whole, meaning we know little about whether widespread indebtedness created by expanding consumer credit has impacted other areas of the economy in some way. Marxists such as Soederberg (2012) argue that the institution of indebtedness in the modern context created new obligations for workers that reduced their rights and ability to improve their circumstances, presenting the new flow of credit as a replacement for rising wages and social institutions that were better suited to improve the welfare of low- and middle-earners in society. Accordingly it may have affected the behaviour of the workforce at large, since consumer credit spread the institution of indebtedness into new segments of the income distribution.

Since the growth of consumer credit was one of the most important aspects of economic change which took place in parts of the OECD from the 1970s onwards, it may have impacted national economies in ways we have not anticipated until now. No study has previously been conducted to check whether any kind of connection exists between these two phenomena within the political economies of the OECD. This investigation will therefore expand the analysis of wage stagnation; alongside the generally accepted factors such as union density and unemployment and how they relate to current wage trends, the analysis of wage trends will examine whether the proliferation of

consumer credit was a contributing factor in countries where consumer credit levels rose significantly. This study presents two accounts of consumer credit and its possible relation to wages; the ‘wage-supporting’ account and the ‘wage-diminishing’ account.

These two opposing accounts draw on different interpretations of the social obligation of indebtedness and whether one refutes or accepts life cycle explanations of borrowers’ behaviour in regard to consumer credit. Life cycle explanations are the common-held understanding of borrowers’ behaviour in regard to debt, proposing that rational consumers use credit to invest at points in the life cycle when

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it is most needed, drawing on future earnings and providing a more efficient means of using the earnings generated within one’s lifetime. The wage-supporting account follows life cycle

explanations and asserts by providing additional finance options to individuals and allowing them to smooth their consumption, consumer credit expansion supported rising wages. This is because workers are able to improve their quality of life through credit financing, making workers more competitive and adaptable, as well as less reliant on their employers as the primary source of finance. Contrastingly the wage-diminishing account draws on a more Marxist perspective and refutes life cycle explanations, saying the oppressive market obligation of indebtedness led workers to be more risk averse in regard to their income stream, since the loss of wages will render them at risk of delinquency and losing their ability to access credit. This in turn leads to added stress on workers and improves the bargaining position of employers, who may see a worker’s threat of exit as less credible if said worker has a large debt obligation to maintain. These accounts are fully explained in chapter 3. If there is a relationship to be observed, it is expected to be observable in states with very high levels of consumer credit, with the effect being most concentrated within the low- and middle-income groups who were introduced to credit over the period from the 1970s onwards. It is also likely that the relationship will be stronger in political economies where there are fewer social institutions in place to support wages in different ways, such as unions and public services. As a result the investigation is focused on the US, UK and Canada, since all three states expanded consumer credit and underwent wage stagnation; however each state’s supporting institutions look and behave very differently. Credit access is a common factor between these cases that may be able to provide answers in regard to wage trends, making these economies a useful starting point for investigating any possible linkages between consumer credit growth and wages.

In this investigation we will use statistical methods to test the viability of these two theoretical accounts, alongside that of the wage-determining factors economists already know a great deal about. Here the method used is a linear regression where wages are the dependent variable and the

independent variable list is made up of known wage-influencing factors with the addition of consumer credit as an additional independent variable. By using individual regressions it is possible to see evidence for statistically significant relationships, which if seen to be present will warrant further investigation. This will allow us to evaluate the strength of several wage-determining factors in each national economy, with the possibility of showing whether consumer credit is an appropriate

consideration within wage trends. If either the wage-supporting or wage-diminishing accounts are supported in the results, then this would mean that further research is needed to understand how such a relationship could exist. In this analysis it is also hoped that it is possible to uncover interstate variations that reflect the nuance of national economies and the variations in how they are managed.

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In analysing the relationship between wages and consumer credit growth, there are three possible findings from this study:

1) Consumer credit expansion has a positive effect on wages; 2) Consumer credit expansion has a negative effect on wages; 3) Consumer credit expansion bears no relationship with wages.

Through this analysis, this investigation hopes to aid in the understanding of the wage stagnation problem. What is clear is that stagnation is occurring in several national cases, yet economists are far from certain on the root cause of that stagnation. As wages detached from productivity in OECD economies in the 1970s, new factors were seen to be influencing wages, with several factors acting together in what is referred to here as a ‘perfect storm’. However the list we have today is far from complete and much still needs to be tested in order to more clearly explain this phenomenon. Here the main factors accepted by scholars are used as a starting point, with the simultaneous growth of consumer credit being factored in as a possible wage-determining factor. This is because credit expansion is a drastic shift in economic statecraft which took place over the same period as wage stagnation did; this could have had spillover effects in areas such as wages.

This investigation is structured as follows. Chapter 2 reviews the existing literature on factors that drive wages, collating a selection that can be generally accepted as playing a role in wage trends. Chapter 3 will then explore the growth of consumer credit as a plausible contribution to this selection, explaining both the wage-supporting and wage-diminishing accounts of how consumer credit

expansion could impact wage growth. In chapter 4, the statistical methods deployed and the cases selected, as well as their benefits and weaknesses, will be presented. Chapters 5, 6 and 7 discuss the results of the statistical analysis for the US, Canada and the UK respectively, before chapter 8 summarises the findings and concludes.

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2. Literature Review – What Drives Wages?

In assessing whether the expansion of consumer credit has any kind of relationship with wages, it is essential to first incorporate the broad spectrum of factors whose relationship with wages has already been identified by scholars, since these factors will be used in the statistical analysis of wage growth so as to determine their importance in the perfect storm of factors influencing wages in the national cases studied here. This chapter is structured thematically, grouping the findings of previous studies of wage-determining factors into five broad categories, namely as wage effects due to (i) changes in productivity, (ii) the effects of globalisation, (iii) new types of labour market policy, (iv) changes in the trade union movement and bargaining structures and (v) the rate of CPI inflation. Each draws from different theoretical approaches and while there is disagreement between academics over the relative importance of these wage-determining factors, a consensus does for the most part exist on accepting each plays a role. Here they will each be examined in turn, explaining how previous research has presented the relationships at work.

Productivity

Productivity, the output a worker can produce in an hour, is a factor commonly associated with rising wages. The theory behind this is that workers’ earnings should reflect the amount of work they can accomplish, meaning their wage should rise as they become more productive and thus more useful to the company paying them (Mankiw, 2006). At the firm level, a more productive workforce makes a company more profitable, which either translates into increased profit margins as employers get more value for money, or an increased demand for labour, which drives up wages (Cashell, 2004: 6).

Wages across the OECD in the post-war period previously had a tendency to rise with productivity, following the relationship described by theory reasonably closely. Despite this historical link, real wages ‘decoupled’ from productivity in the 1970s (Schwellnus et al, 2010: 4). Looking at the US example, one can observe a 96.7% increase in productivity and a 91.3% growth in median hourly compensation between the years 1948 and 1973; however as financialisation took hold between 1973 and 2014, US workers managed to improve their productivity by a further 72.2%, yet hourly

compensation rose by only 9.2% over the same period2. Similar albeit less drastic divergences have also been observed in economies such as Canada (Sharpe et. al, 2008: 19) and the UK (Pessoa and Van Reenan, 2013: 1). Nonetheless, some argue that productivity growth and wage growth do still bear a relationship; when wage growth accelerates or decelerates, productivity growth has been observed to follow a similar trend, although the gap between growth rates is diverging as a general pattern over time (Cashell, 2004: 14).

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What the decoupling of wages from productivity showed was that productivity alone was not enough to ensure rising wages; clearly wage levels are determined by additional factors. Whilst the gap between wage growth and productivity growth grew larger, new influences from a more

interconnected and globalised political economy would also be shown to have effects on wages.

Globalisation

The changes brought about between the 1970s and the present day by what many refer to as the ‘third wave’ of globalisation (Straw and Glennie, 2012: 2) have defined how the modern advanced

economies operate. Scholars have identified how developments within the third wave affected labour markets and wage rate through competition from overseas labour, changes in the ownership of global production chains and the influence of international bodies. Globalisation is generally seen to have encouraged a ‘race to the bottom’ in terms of labour standards, compounding the stagnation effect for many OECD workers (Mishel, 2015: 4).

Scholars’ explanations for this race to the bottom derive from the new institutionalist perspective, which Przeworski (2004) summarises in two core fundaments; firstly that institutions shape outcomes through influencing ‘norms, beliefs and actions’; and secondly that the circumstances of an

institution’s creation characterises both its ‘form and function’ (Przeworski, 2004: 527). Applied in the literature, Mishel (2015) asserts that the conduits of globalisation, namely modern trade agreements such as NAFTA and international institutions such as the WTO and G7, are irrevocably influenced by US interests and ideology because of the dominant position of the US in their design (Mishel, 2015: 4). The increased share of rising powers in global economic output did little to reduce the influence of the US and its allies over multilateral institutions, creating a ‘governance gap’ over the latter half of the 20th century which pressured emerging markets to follow Anglo-American development models even when it was not in their best interests (Henning and Walter, 2016: 6).

It is also important to note Schwartz’s observation that US political power was bolstered by the increasing ownership of global production chains that its corporations bought up over recent decades (Schwartz, 2009: 9). Accordingly he follows a Marxist view of ideology and proposes that the proliferation of typically American ideas of economic governance across the OECD reflects the commercial interests and ideological dominance of the US as well as the ‘absence of constraint’ they enjoyed (Ibid: 4). The importance of this centrality of US interests cannot be understated, as the attached preference for corporate and shareholder interests over those of individual workers created international institutions without a defence against what Mishel refers to as the “race to the bottom of labour standards” (Mishel, 2015: 4).

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Such a race to the bottom is seen as having a downward effect on wages for two main reasons, pertaining to international competition over (i) wage bills, and (ii) regulatory burdens. Firstly, in looking at wages, globalisation opened up national labour markets to competition from states that in some cases are able to produce more cheaply or in larger quantities that the advanced economies of the OECD. At the micro level, manufacturing workers of the OECD found themselves pitted against workers who would accept a far lower wage in other parts of the world, in turn forcing wage growth to slow in OECD countries as manufacturing declined (Chan, 2009: 2). Rodrik found that globalisation created a new ‘elasticity’ in labour markets, where workers now found themselves able to be easily substituted for those in other countries (Rodrik, 1997: 32). At the national level, governments worried about wealth leaving their countries as companies sought to increase profit margins by moving production offshore, thus disincentivising policies that are going to shift wealth shares from

shareholders, investors and executives towards workers (Palley, 2009: 15). These concerns did indeed become reality, as Western and Healy observed manufacturing wages across the OECD entering a period of decline or diminishing growth year-on-year as production chains became much more global (Western and Healy, 1999: 239). Put together, the opening up of national workers to much cheaper foreign competition clearly had a role in dampening OECD wage growth in many sectors, particularly in manufacturing. 3

Secondly there was the fear of employers exiting from the national economy as their organisations became internationalised and more mobile than their workers (Rodrik, 1997: 37). Nations facing competition for investment from emerging markets found themselves incentivised to reduce regulatory burdens in an attempt to maintain global competitiveness, reflected in the laissez-faire ideology of Anglo-American economists and the depoliticisation of debates on regulation, particularly in labour markets and finance, from the 1970s onwards (Burnham 2001: 128). However, as identified by writers such as Palley and Chan in their investigations, entry into the international trade system without effective employment rights and protections tends to keep wages level, especially for the least well-off, over prolonged periods of time despite improvements in productivity (Chan 2006, Palley 2009). The malfunctioning or absence of social institutions that embody such protections has been shown to disproportionately affect the worst-off in society (Solow, 1990: 3); their observed erosion in some OECD countries following the US-led globalisation strategy has been connected to declines in wages by authors such as Western and Healy, whose explanation of the OECD wage slowdown centred on the general rightward shift in policy which became political orthodoxy in the OECD, reflecting the ideological dominance of US models of capitalism (Western and Healy, 1999: 233). These writers argue globalisation was operationalised in a way so heavily influenced by US economists, favouring

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Nichell and Bell (1996) observed that the downward effect of labour market globalisation on wages does not end up evenly spread across workers of the OECD countries, with national institutional configurations playing a key role, as well as there being sector-by-sector variations (See Förster & Pearson, 2002: 4). This shall be developed further in the ‘New Labour Market Policies’ section of this literature review.

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corporations and consumer protections at the expense of union power and worker protections, that it had a downward pressure on wages by encouraging an unmediated ‘race to the bottom’ of labour standards which did indeed erode institutions that were credited with aiding stable wage growth (Bivens and Mishel, 2015: 3).

These two major developments as a result of globalisation engendered new responses in terms of labour market policy (LMP). In order to meet the challenges of international competition in a US-dominated system, in addition to their domestic responsibilities, several different strategies were formulated. However Western and Healy identified that there was a commonality of a general rightward trend in advanced economies’ LMP, aspects of which have been found to have a negative effect on wages from the 1970s onwards (Western and Healy, 1999: 235). It is these trends scholars have identified which shall be set out in the next section.

New Labour Market Policies

In the face of globalisation, alongside the inflationary pressures and powerful unions of the post-war period, OECD labour market policy (LMP) in some cases underwent a radical transformation. While national governments pursued new policy goals with varying measures and ferocity, scholars have still been able to isolate many ways in which LMP can influence wage growth for many workers in

advanced economies.

Full employment had been a mainstay of economic policy in the OECD for much of the post-war period (Mishel, 2015: 2). This had been based on the logic that the measures to ensure full employment create stable incentives for investment, increasing productivity and supporting wage growth (Palley, 2009: 2). By the mid-1960s governments in countries such as the UK and US feared their policies to meet this objective were inflationary, distorting the real value of labour (Mishel, 2015: 2). This along with pressure from the IMF to focus on price stability meant governments such as the UK reoriented policy towards monetary targeting and price stability, rather than employment

guarantees (Copley, 2017: 7). Mishel labels this as a ‘profoundly destructive’ move in terms of wage growth for many, as the removal of employment guarantees generates disproportionately concentrated joblessness amongst low earners, with increased competition over work exerting downward pressure on wages (Mishel, 2015: 2). The increased fear of lay-offs in the economy thanks to rising

unemployment also empowers employers in bargaining and restricts the willingness of unions to campaign aggressively, explaining the negative link between unemployment and wage growth (Western and Healy, 199: 235) . Accordingly these scholars propose that the abandonment of full employment as a policy goal led to reduced incomes, with increased unemployment and dampened wage growth reducing median earnings as a consequence.

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Another important aspect of LMP that must be considered in influencing wage rates is minimum wage legislation. As a baseline of earnings governments have several ways to administer and regulate minimum wages, such as by tying them to increases in CPI, average earnings or productivity to achieve different growth rates. In some cases it is frozen altogether, such as when the federal minimum wage in the US was held at the same unadjusted rate between 1981 and 1990 (Fitoussi, 1994: 61). Subsequently Lee (1999) found that the resultant decline in the inflation-adjusted value of the federal minimum wage in the 1980s played a huge role in increasing income inequality at the bottom of the US income distribution, with interstate variations in setting minimum wages

determining a great deal of interstate income growth inequality over the period (Lee, 1999: 1016). In terms of wage stagnation, the minimum wage level can therefore be used to ensure lower earners continue to see their financial position improve ‘in real and relative terms’, compressing the income distribution and ensuring incomes continue to rise (Fitoussi, 1994: 63). However in considering inequality, it is important to note an excessively high minimum wage floor can in some cases

disincentivise firms from taking on new staff and make labour inflexible, bringing down employment (Basiani and Duval, 2006: 9). Furthermore there are libertarian arguments that increases in the minimum wage do not boost prosperity or improve equality, since the freedom for employers and employees to negotiate without government interference produces more efficient distributions of wealth. They therefore assert minimum wages are distortionary and deprive employers of the flexibility required for competitive investment and adaptability in the markets, thus reducing profitability by inefficiently allocating finance and having a downward effect on wages for many in the long term (Friedman, 2013).

Studies have also shown that LMP in the form of investment in human capital influences wage rates, with writers citing it as a far more important determinant of output growth than simple raw labour (Nehru and Dhareshwar, 1994: 26). It is well established that spending more years in education leads to higher wages at the individual level (Mincer, 1975: 76), as well as leading to increased economic growth per capita as a measure of productivity (Sweetman, 2002: 166). Research has come to support these assertions, as analyses have shown that OECD states that expanded their higher education programmes in the 1960s enjoyed faster growth in GDP and wages over succeeding decades than those who did not, while hiring educated employees has been shown to have the spillover effect of boosting the productivity of other employees (Blundell et al, 1999: 17). Given that increases in productivity are an essential means, if not “the only way”, of increasing living standards in the long run (Schwellnus et al, 2017: 4), while providing justification for increased wages to reflect such improvements, it is clear that educational investments play a key factor in determining long-term wage levels.

As can be seen, there is a multitude of labour market policies that governments pursue which determine wage levels and they must be taken into consideration in any analysis of wage stagnation.

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The targets on which policy operates, minimum wage floors and human capital investment all have been consistently found to influence wage growth. As well as political action originating in

government policy, there is also the structure of trade unions and bargaining institutions to consider as political bodies influencing wages. Unions and the way in which they are officiated can take on several different forms, and scholars have found reasons to believe that variation between cases explains why wage stagnation was able to develop in certain social groups. Therefore in addition to the effects of globalisation and labour market policy, it is essential to incorporate how changes in this aspect of the political economy have been found to determine wages.

Trade Unions and Bargaining Structures

Trade unions and the way in which they are regulated are central aspect of labour market operations. The definition subscribed to here sees trade unions as ‘political agencies representing the sellers of labour’ (Ross, 1947: 793). Whilst no comprehensive theory of the role of trade unions exists per se, several operations of trade unions, as well as changes in those operations, have been shown to positively or negatively influence wage growth. Most simply, unionised workers tend to enjoy higher wages, meaning trends in total wages are thus influenced by the density of union membership and by what means unions are able to carry out their functions. There are also spillover effects from higher union wages on the rest of the working population. Wage theorists value institutions such as trade unions in their explanations as they assert the connection between increased productivity and increased wages is only feasible against the appropriate institutional backdrop (Bivens and Mishel, 2015: 2), making it important to understand the main ways in which scholars have shown trade unions and bargaining structures to play a role.

Firstly, high rates of unionisation have been shown to reduce the dispersion of earnings, resulting in an upward trend for lower-paid workers over time (Freeman, 2007: 20). Pay rises secured by unions tend to translated into new industry standards of pay over time, compressing wages across firms and sectors (Gosling and Machin, 1995: 168). This is because the “logic of survival” held by unions encourages them to aggregate when necessary and to pursue uniform wage increases across their jurisdiction, even in situations where a smaller, more specialised body may be more efficient at negotiating on behalf of workers concerned (Ross: 1947: 797). This logic of survival derives from the opportunity for unions to enhance their legitimacy through increasing the number of workers whose interests they are seen to represent, as well as the principles of solidarity upon which the trade union movement was founded (ibid, 122). Nationwide rises in income also enhance the legitimacy of the unions behind it to a greater extent than at the firm-level; indeed unions have been found to continue industrial action and

negotiations, even when the costs of doing so exceed the actual pay rise finally awarded, in order to reduce pay differentials (Brown and Sisson, 1975: 29).

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However ‘deunionisation’, as it is referred to in Ebbinghaus’ 2002 paper, took place to varying degrees in almost all European states and to a greater extent in non-European OECD states, and is cited as a key part of the wage stagnation puzzle (Ebbinghaus, 2002: 467). The decline in union density in many OECD states from the 1970s onwards enabled a divergence in rates of pay as trade unions had less legitimacy upon which to negotiate with employers, resulting in the stagnation of wages for many at the lower end of the income distribution (Mishel, 2015: 2). Indeed, it was observed by Western and Healy, when comparing Sweden and the US, that a 50-point difference in union density can be connected to a 2% rise in wages during the post-war period (Western and Healy, 2000: 243). Additionally it has been shown that industries where union density was more rigid, wage growth slowed to a lower extent (Ebbinghaus, 2002: 468). ‘Deunionisation’ is also connected to some states’ strategy of focusing on financial sector growth, as sectors of the economy historically represented by unions became less dominant in the national economy (Kus, 2015: 485).

Some argue that this logic of survival actually pushes many into joblessness as unions seeking higher wages for their constituents push lower paid, non-unionised workers from employment, thus having a negative effect on earnings (Friedman, 2014). However the hard data is more collusive with the hypothesis that unions’ upward influence of wages is more concentrated amongst lower earners based on the standardisation of pay; Gosling and Machin found in their UK study that assertions such as Friedman’s were not applicable to the relatively high skilled economies of the OECD, as they found that wage dispersion was greater over time in countries such as the US and UK where unionisation declined, as opposed to countries such as France and Canada that maintained high unionisation rates and the pay inequality level thus remained comparably stable (Gosling and Machin, 1995: 181). When unionisation rates began to fall in the mid-1990s in the Canadian case, Sharpe et al found that the decline in bargaining power resultant from decreasing trend in unionisation rates had a detrimental effect on Labour’s share of GDP, which fell from 56.5% in 1980 to 52.8% in 2005 (Sharpe et al, 2008: 23).

In addition to the size and composition of its membership, the means by which trade unions operated was changed by new restrictions placed upon them by some governments, who took measures such as banning flying pickets and ending the automatic registration of workers to affiliated unions. Several different strategies were pursued in relation to regulating trade unions. For example Mrs. Thatcher demoralised the union movement in Britain through several of what Kerr (2005) describes as ‘symbolic acts’ of confrontation that undermined the power of unions, such as by taking on the

strongest union in her notorious confrontation with the miners, by setting more stringent rules on strike actions and by banning unions altogether from GCHQ (Ibid: 171-173). By comparison, French unions enjoy a role as an elected representative on mandatory work councils and health and safety boards in all firms of a certain size, as well as being ‘joint managers’ of public services such as health and social security alongside business representatives (Economist, 2014). In the US many state legislatures ban

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striking altogether, while federal employees are restricted from collective bargaining on salary and benefits disputes, instead being confined to discussing working conditions and disciplinary procedures (Campo, 2014: 97). All these different strategies created fundamentally different political

environments, which in turn determine the strength unions enjoyed and thus their influence in setting levels of pay.

How unions have their observed upwards and convergent effects on wages is also dependent on the kind of bargaining structures lawfully in place to mediate between parties in determining employee remuneration. Wallerstein and Western identify two main ways in which wage setting can be centralised: through direct government intervention, or the setting up of negotiations between the largest unions and employers (Wallerstein and Western, 2000: 365). Centralisation of wages has been found to compress income distribution by protecting those at the bottom from falling wages (Ibid: 367). Contrastingly a move towards market-determined pay based on decentralised bargaining

structures has been found to widen the earnings distribution, by removing this protection and allowing for exponential increases in wage growth at the top of the income distribution (Freeman, 2007: 20). For examples, US bargaining structures tend to take place at the regional- or firm-level, whilst Europe has more sector-level bargaining structures featuring the most prominent associated interest groups (Compa, 2014: 96). Such trends have been observed in empirical analysis; Brown and Sisson’s 1975 investigation of wage bargaining units in the newspaper industry of Fleet Street and the engineering firms of Coventry showed that as bargaining activity escalated in the 1970s, workers had a greater number of contemporaries’ earnings to compare with their own, thus reinforcing what wages seemed palatable to them in respect to what others within their union and industry earned (Brown and Sisson, 1975: 46). Furthermore Western and Healy found that maintaining highly centralised bargaining structures shields manufacturing wages from market fluctuations more effectively than decentralised structures, thus maintaining more stable wage growth in line with productivity increases; states with centralised bargaining saw faster-rising wages than those without, while union-won wage increases in the public sector had spillover effects of the same effect in the private sector (Western and Healy, 1999: 242, 244).

In summation, trade unions influence wages based on their size and their ability to reduce pay dispersion. As such the decline of trade unions is clearly a core aspect of determining wages and will be incorporated into the investigation here. Bargaining structures have also been shown to matter as they dictate how workers’ interests are communicated to the state and employers; accordingly this determines the importance of these interests within the wider political economy based on their proximity to decision-makers and ability to legally act. By reducing pay dispersions, these structures serve to reduce income inequality and support rising earnings for lower-earners; their erosion over the period during which wage stagnation took hold is often cited as a sign that trade unions were a core aspect of maintaining steadily rising incomes.

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Inflation

The final possible wage-influencing factor we are concerned with here is the rate of inflation. The relationship between inflation and wages has been the focus of many scholars, especially as inflation targeting and price stability became a more central aspect of government policy making from the 1970s onwards (Copley, 2017: 6). The importance of inflation derives from how trends and

expectations in prices, and therefore business costs, determine the share of profits that can be allocated to wages. Accordingly different national economies with their own respective inflation norms saw different trends in wages over time that could be attributed to whether it was a high- or low-inflation economy. As inflation erodes real wages over time, this serves to smooth out shocks in the economy; however it also adds to wage variations within the economy, which can be inefficient and widen inequality due to firm-side variations (Groshen and Schweitzer, 1997: 27). The relationship between inflation and wages is therefore complicated and often different dependent upon which national labour market one examines.

Kessel and Alchian (1962) posited that inflation comes in a) anticipated and b) unanticipated forms, the former being the steady price rise analysts expect and the latter being the expectation prices will remain at the same rate, when they are in fact rising (Kessel and Alchian, 1962: 521, 524). The relationship between inflation and wages was drawn from how the rise in prices from anticipated inflation affected demand for labour and thus reduced wages. In a nutshell, they proposed that anticipated inflation created rising business costs and incurred losses for money-holders, which accordingly reduced the share of wealth going to the workforce (Ibid, 534-5). This meant that as anticipated inflation took effect, labour-intensive industries such as manufacturing would experience slower wage growth year-on-year, whilst workers in more capital-intensive industries would be less susceptible to this effect of inflation. In the area of unanticipated inflation, Jon Card in his later analysis found that in the union sector “unanticipated changes in prices are found to generate changes in real wages that spill over from existing labor [sic] contracts to subsequent agreements” (Card, 1990: 685). Card found those inflationary shocks, as well as having a negative effect on short-term

employment, created a negative effect on real wages which lead to lower real wages in subsequent contracts, as labour markets and employers react to the inflationary shock and decline in value of cash holdings (Ibid: 681). Inflation and changes in the cost of living therefore influence wages through the labour supply, which if grown thanks to unexpected inflation can then drive down wages as labour becomes over-supplied in the economy (Western and Healy, 1999: 235).

As well as inflation potentially reducing downward wage rigidity in the short-term as described above, the overall trend in inflation has been shown to determine longer wage trends. Inflation rates are unique to each national economy, with some states being high- or hyper-inflation situations, whereas others are more used to low-inflation and, in extreme cases, bouts of disinflation. In his 2001 study,

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Bulíř found that lower inflation rates had the effect of reducing income inequality, no matter the levels of GDP per capita that were present in the national case (Bulíř, 2001: 153-156). What mattered was the relative price stability that this brought about, since the reduced volatility, which analysis showed was an effect that most clearly manifested itself when rates of inflation are low, such as between 5 and 40%, with rates outside this bracket found to lose this stabilising effect. This research also found that hyperinflation is damaging to income inequality, with the move away from hyperinflation being shown to have a serious positive effect on income inequality and countries with the low inflation range of 5-40% seeing the strongest income equality enhancing effects, since it reduces the disparities of pay created by varying inflation effects (Ibid.: 151).

What can be gleaned from these studies together is that inflation can have a negative effect on wages if too high, or in the case of inflationary shocks, whilst lower inflation can be seen to enhance income inequality by removing the disparity of inflation-related wage effects. Accordingly in economies with steady low inflation the effect on wages would most likely be very weak, if at all present. The effect of inflation on wages is therefore probably only worthy of note in economies where inflation is high and has great variation over time; in the cases under study in this investigation we may not see it to be an important factor at all, however it is definitely worthy of mention in the discussion of wage stagnation.

Summary - Wage Stagnation

The above discussion makes clear much of what is known about the factors that can cause changes in wages trends. Increased productivity possibly translates to wage increases at the basic level, however this relationship is contingent on a host of other factors with the political economy and is regarded to have diminished or disappeared since the 1970s. Globalisation impacted wages by internationalising labour markets and creating new structures of governance and mediation which slowed earnings growth for some in the OECD. Labour market policies concerning minimum wages and other measures took a general shift to the right from the 1970s onwards, which put wages under increasing market influence and thus reduced government pressure for rising wages. Furthermore union density is shown to play a key role by legitimating these organisations’ political action and enhancing their political strength as representatives of the labour force, with a decline in density being shown to dampen wage growth. These influences together contribute to a perfect storm of factors which has different characteristics between states and could explain a large part of the developments in wages in the OECD. Furthermore it is likely that this list is not exhaustive, which means the reasons for the observed wage stagnation may not lie amongst the factors listed here. Here it is proposed that the lens of analysis needs to be broadened so as to incorporate simultaneous shifts in the political economy which could have influenced wages; in this case that shift is the expansion of consumer credit. This investigation shall now present two opposing accounts of how a relationship between consumer credit

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and wages could be manifest and what this would mean for wage trends in economies where credit expansion took place.

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3. A Possible Relationship Between Consumer

Credit and Wages

As seen in Chapter 2, there are several factors that play a role in determining wages, with variations in national economies producing different trends in wage patterns. These factors can have varying degrees of influence, depending on the nature of the national case in which they are embedded, creating what is referred to here as ‘perfect storm’ of variables that ultimately determine wages. This investigation seeks to add to our understanding of contemporary wage stagnation by broadening the base of factors being considered as influencing wages. By incorporating one of the most important socioeconomic changes for some OECD states, namely the expansion of consumer credit, the institutional forces affecting wages could become more clearly visible. The importance of consumer credit as a factor arises from the starting point that consumer credit has behavioural effects, since it opens new consumption opportunities and creates a social obligation to meet said debt. Accordingly previous analyses of wage determinants could have excluded a variable that does in fact shape the nature of actors’ behaviour within the political economy and therefore create spillover effects elsewhere, which here is proposed as a wage-influencing effect.

Given that this is the first instance where a possible link between credit and wages has been examined, there are no pre-existing predictions or models which describe how such a relationship would affect wage outcomes. However if one looks at writings on concepts of debt and the economy as a whole, it is possible to construct accounts which would support either a positive or negative influence on wages as a result of consumer credit expansion. As a result this chapter presents two accounts of how wages could be impacted by consumer credit expansion. In the first case, the implications of growing consumer credit could be seen to have a downward effect on wages, which here is described as the wage-diminishing account of credit and wages. Contrastingly the expansion of credit could have an upward pressure on wages; this scenario is referred to as the wage-supporting account of credit and wages. These two accounts are constructed by using the insights of different theoretical approaches, demarcated by their opposing attitudes to consumer behaviour and the social nature of debt in the modern economy.

Both positions also interact with life-cycle hypotheses of consumer behaviour; the idea that people borrow earlier in life, when earnings are low but spending necessities greater and more urgent, against their (expectedly higher) future earnings. Accordingly life-cycle theories, in the context of consumer credit, propose credit helps smooth consumption across individuals’ lifetimes and boosts their means of utility maximisation, since they have their future earnings to draw on as a tool for improving their quality of life. The wage-supporting perspective accepts life-cycle hypotheses on the grounds that even semi-rational consumers can weigh costs and benefits with reasonable skill, with the majority of

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loans being repaid and positive relationships between credit growth and consumption growth showing an effective system at work. However the wage-diminishing account refutes explanations of borrower behaviour as proposed by life-cycle theories, viewing consumers as unable to reasonably anticipate future earnings and the best means of improving their quality of life at the borrowing stage of the life cycle, instead citing earnings stagnation and deliberate marketing tactics as the reason for borrowing proliferation; individuals are using whatever means possible to maintain their quality of life in the face of stagnant earnings growth. The wage-diminishing account describes rising borrowing coupled with slowing wage growth and depleting savings rates as treading water behaviour, rather than actual maximisation of wellbeing. The wage-diminishing account takes the position that individuals cannot possibly have certain knowledge of future earnings, meaning they cannot rationally make the decision to borrow; accordingly the use of consumer credit is a socially learned means of consumption that is enforced by social norms and perpetuated by governments and financial institutions. It therefore argues that consumer credit is a less effective means of individual welfare-maximisation than

effective social institutions such as trade unions. Here both accounts are explained in detail, before the following chapter introduces the methods this investigation will utilise to test the viability of these possible relationships between consumer credit and wages.

The Wage-Diminishing Account of Consumer Credit and Wages

The wage-diminishing account of credit and wages proposes that a growth in consumer credit levels will have a downward effect on wages. The position rests on two central assertions; firstly, the argument draws on the debtfare argument put forward by Susanne Soederberg, which argues that the social institution of debt enforces market discipline on workers (Soederberg, 2012: 499). The discipline brought about through the need to meet regular repayment obligations is posited to make workers more risk-averse and thus reduce their bargaining power at the aggregate level. This in turn could produce a downward effect on wages as a result, since workers will be less willing to take risks with their income stream, given their new market obligation to pay back their debts, and so will accept stagnant wages or declining wages so long as it protects their ability to meet the debt obligation. The second core aspect of this argument again draws on the debtfare argument, by proposing that additional indebtedness changed the relationship workers previously had with institutions such as unions, whereby the introduction of credit as a new means of utility maximisation reduced the

perceived importance of institutions such as trade unions that had historically acted to increase wages. Soederberg proposes that a new form of state was coming about where credit was acting as a

replacement for the historic institutions and increases in pay that had encouraged improvements in the quality of life for workers in the post-war era (Soederberg, 2012: 500). Resultantly consumer credit reduced the effectiveness of these institutions, exchanging the support of unions for the support of financial institutions as people incorporated credit financing into their own financial planning, thus

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removing a supporting factor for wage growth and allowing the observed stagnation of wages to set in over the period.

The wage-diminishing account also rejects life-cycle hypotheses, which assert rational consumers use credit as a means of utilising future earnings when they are more urgently needed in the present, thus smoothing consumption over their life. Instead it proposes that consumer credit since the 1970s has been taken as a means of remedying stagnant wage growth, with individuals accepting credit as a socially learned means of lifestyle improvement that has been allowed to supersede the less simple task of negotiating a meaningful pay rise or change in career. This account argues that this is made possible by the absence or erosion of institutions more appropriately suited to boost the wellbeing of individuals. Here these points are expanded in full, before the contrasting wage-supporting account is presented.

The Market Discipline of Indebtedness

The starting point for how consumer credit could have a downward effect on wages is through the new obligation which demands regular repayments over a prolonged period of time. Soederberg notes that indebted individuals become subject to the market discipline that indebtedness entails (Soederberg, 2012: 499). The requirement to meet monthly payments is an obligation which, if ignored, threatens to exclude the individual from continued access to credit and thus jeopardises their wellbeing. Such an obligation could make individuals less willing to risk a period of unemployment that could lead to delinquency on their payments. Accordingly a slowdown in wage growth or even a pay cut is more likely to be grudgingly accepted over unemployment in the face of unavoidable debt obligations and the risk of losing creditworthiness.

This argument draws on the fact that being in debt does indeed add to individual stress levels, meaning fear of not meeting said debts is a major problem for borrowers. The impact of being in debt has attracted interest from sociologists and psychologists in recent years, with examples such as the design of a ‘debt stress index’ from Dunn and Mirzaie at the University of Ohio (Dunn and Mirzaie, 2010: 2). Surveying a sample of US borrowers 4 separate times between 2006 and 2010, they investigated whether individuals’ debt was causing problems with their family life, job performance and physical health. Accordingly they found approximately 40% of their respondents between the years 2006 and 2010 claimed that debt was causing family problems, with an average of 3.4% of those surveyed saying it had created an ‘extreme’ problem across the 4 analysis periods. They also found nearly 1 in 5 of those surveyed cited some problems with job performance as a result of debt stress and by January 2010 over 40% of those surveyed said it was causing them some degree of health problems. The number of those reporting concerns in these areas as a result of debt increased during times when consumer credit levels were increasing. Evidently taking on credit, despite the clear positives of doing so, increases stress on borrowers. Accordingly the need to maintain steady employment in order to

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meet these repayments is a must, with individuals clearly deeply concerned about the ramifications of failing to do so.

What this discipline and stress translates into is an erosion of the power of workers’ options for exit. In the dynamics of negotiations, clearly a threat of exit is far less credible if the worker making it has a great deal of outstanding debts to pay off; accordingly a heavily indebted workforce strengthens the bargaining position of employers against labour by increasing employer leverage. The addition of debt obligations causes stress to the borrower, who in turn will prioritise their ability to meet their payments over anything else, thus meaning they will accept slower wage growth or even a wage reduction so as to maintain their creditworthiness and protect their income stream.

Changing Institutional Relationships

The wage-diminishing account of credit and wages argues that in addition to the discipline of indebtedness reducing individual workers’ bargaining power, expanding credit markets could also change the relationships between labour and institutions within the political economy. This is because the introduction of credit turns financial institutions into a new source of welfare for the labour force, reducing the apparent importance of other welfare-boosting institutions, such as trade unions. Through credit liberalisation new, less demanding means of increasing consumption and thus quality of life became present in the form of accessible borrowing. Once able to borrow enough for their planned consumption, borrowers need only meet their payments and remain ‘creditworthy’ to enjoy their desired level of consumption. Expansion of credit across society could therefore encourage a shift in social relations which unions’ historic role as political representatives improving the position of labour-sellers (Ross: 1947: 793) is taken over by financial institutions providing labour-sellers with credit options. Accordingly less importance is attached to unionisation as a means of boosting the welfare of workers and the effectiveness of unions suffers as a result. Following from Soederberg’s theory, the wage-diminishing account proposes that the extension of credit through risk-based pricing was to account for the erosion of social institutions that elites looked to pursue from the 1970s onwards (Soederberg, 2012: 499), shifting workers towards “highly exploitative, corporate forms of social welfare and wage replacement/augmentation” (Ibid., 509).

Indeed it is possible that the rapidity with which credit expanded and was made accessible served to obscure the decline in wage growth. Although wage growth was slowing, individuals’ ability to consume was growing thanks to the introduction of consumer credit. At the individual level this meant that workers were not noticing a decline in living standards because of the slowing wage growth, since they were still able to improve their quality of life by using credit to finance purchases that had previously only been possible through earnings. At the governmental level, leaders were not pressured to intervene as wages stagnated since consumption was able to maintain steady growth

Credit expansion and the perfect storm of wage stagnation : evidence from the US, Canada and the UK