For over two centuries, most people have assumed that each generation would enjoy higher wages than the last. This expectation became part of everyday life. Productivity rose, businesses expanded, and governments could distribute some of the benefits through higher incomes, pensions and public services.

A shrinking economy changes this picture. Declining wages are not simply the result of greedy employers or poor government policies. They emerge because the economy itself can no longer produce enough surplus to maintain previous levels of income.

The key is to understand where wages come from.

Wages come from surplus

An employer does not pay wages because people need money. Wages are paid because workers produce goods and services that customers are willing and able to buy.

In an expanding economy there is sufficient surplus energy, investment and demand to support rising productivity. Businesses compete for labour and wages tend to rise.

In a shrinking economy the opposite occurs. The amount of economic surplus available to distribute becomes steadily smaller.

Businesses therefore face difficult choices.

• Reduce profits.
• Raise prices.
• Reduce wages.
• Employ fewer people.

Initially they try every other option before reducing wages. Eventually, however, lower labour costs become unavoidable.

The hidden decline

The first stage is rarely an obvious wage cut.

Instead workers find that annual pay increases no longer keep pace with inflation.

If prices rise by 5% but wages rise by only 2%, purchasing power has fallen by 3%. The payslip looks larger, but it buys less.

This process can continue for many years without people fully appreciating what is happening.

Fewer secure jobs

As conditions worsen, employers become cautious.

Permanent positions are replaced by temporary contracts, part-time work and self-employment.

Many jobs become “zero-hours” or freelance positions with little security.

Workers compete with one another for fewer opportunities, weakening their bargaining power.

Automation cannot solve everything

Some believe automation will maintain wages by increasing productivity.

Automation certainly replaces some labour, but it also requires investment, maintenance, skilled technicians and complex supply chains.

In a shrinking economy capital itself becomes scarce. Businesses cannot endlessly replace workers with machines if customers cannot afford the products or the finance is unavailable.

Automation therefore slows the decline in some industries while accelerating job losses in others.

Government employment

Governments employ millions of people.

When tax revenues decline while demands on public spending increase, governments encounter growing financial pressure.

Initially they borrow more.

Eventually borrowing reaches practical limits.

Public sector recruitment slows.

Vacant posts remain unfilled.

Services become stretched.

Real wages fall.

Some departments are reorganised or closed altogether.

Pension pressure

Older workers may postpone retirement because pensions no longer provide sufficient income.

This increases competition for employment.

Younger people entering the labour market find fewer vacancies available.

Generational tensions may increase, even though both groups are responding rationally to declining incomes.

The disappearance of discretionary work

Many occupations depend upon discretionary spending.

Advertising.

Luxury retail.

Tourism.

Entertainment.

Fashion.

Professional sport.

Consultancy.

As households devote more of their income to essentials such as food, housing and heating, demand for these sectors gradually weakens.

The jobs disappear long before essential occupations.

Local differences

Not every locality experiences wage decline in the same way.

Areas dependent upon finance, technology or government spending may initially appear protected.

Industrial regions may suffer earlier.

Eventually the underlying economic forces affect every part of the country.

The differences become matters of timing rather than direction.

Inflation changes everything

Persistent inflation creates an illusion.

People may receive larger salaries every year.

Yet they can afford less food, less travel, fewer holidays and fewer household improvements.

The important figure is not the number printed on the payslip.

It is what the wages will actually buy.

Real wages become the critical measure.

Localism offers another response

Localism cannot prevent national wage decline.

It can, however, reduce dependence upon wages.

A household producing vegetables, fruit, eggs and firewood requires less cash income than one buying everything.

Neighbours sharing skills reduce the need for expensive commercial services.

Repair replaces replacement.

Community enterprises keep more value circulating within the locality.

Barter and mutual assistance supplement money.

The objective is not to earn ever larger wages.

It is to require less money in order to live well.

Looking ahead

The great assumption of the industrial age was that wages would always rise.

If the economy enters a prolonged period of contraction, that assumption will no longer hold.

Real wages are likely to decline slowly, unevenly and often almost invisibly. People may continue receiving annual pay rises while becoming steadily poorer.

Understanding this process is essential because it changes the question society must ask.

Instead of asking how to restore continually rising wages, we may need to ask how people can maintain secure and meaningful lives when the economic surplus that once supported continual income growth is no longer available.

That question lies at the heart of the transition towards localism.