Today, the Office for National Statistics issued a paper on wages and productivity. The findings were not good. Wages in Britain have declined sharply since 2010, while at the same time inflation has risen, causing the cost of consumption to rise. In short, people are earning less, and their costs are going up.

The Labour Party has leaped onto the report as evidence that the Government is presiding over a hollow recovery that is not being felt by the public. Chris Leslie MP, Labour’s Shadow Chief Secretary to the Treasury said this morning: “these figures show the biggest fall in real wages since records began 50 years ago.” He went on to say that: “wages after inflation have fallen by 2.2 per cent a year since 2010.”

In this, Leslie is correct—but this analysis ignores much. Wage growth has been falling since long before the present government came to power and before even the financial crisis struck in 2008. It is certainly fair to fault the Government’s marshaling of the economy in this recovery phase. But any argument of substance must take into account the problem of wage stagnation in the long-term.

Source: the Office for National Statistics

The above chart from today’s ONS paper shows wage growth going back to 1964 and the rise and fall of the red line tracks the wage price spirals of the 1970s, the great inflation of the late 1970s that was attacked so aggressively by Paul Volcker, the Chair of the Federal Reserve. And then, starting in the early 1980s there begins the period commonly known as “The Great Moderation,” a slab of some 30 years in which growth was steady, inflation was kept down and economies, including that of Britain, were free from volatile systemic episodes.

But it is also noticeable that real wage growth in Britain declined steadily throughout that period—the black trend line superimposed over this ONS graph shows that downward trajectory. Labour may complain about current low wage growth, but that decline stretches back through the governments of two Labour Prime Ministers and three Conservative.

So why has the growth in average weekly earnings declined for the last 30 years? The growth of China and the loss of jobs to low-pay emerging economies overseas has been one reason. But another can be given, one that has its roots in the economic battles of the 1970s, fought simultaneously on both sides of the Atlantic. The collapse of the Callaghan government and the extreme inflationary pressures both in Britain and the United States created circumstances so dire that it became clear inflation had to be tamed at all costs. The wage-price spiral was attacked and ended in Britain in a fight that nearly destroyed the country and in the States, interest rates were hiked and then hiked again. US inflation in 1981 got as high as 13.5 per cent, at which time Volcker raised the Fed’s policy rate to 20 per cent. He was detested for his actions, but also proved correct.

The consequence of this action was that it allowed Volcker’s successor, Alan Greenspan, to set in place a long-term policy of low interest rates. Low interest rates make for cheap money—as such, the “Great Moderation,” can be properly understood as a period in which borrowing was easy, not just in the States, but globally. A slow wave of easy credit swept outwards from the United States. Britain willingly absorbed its share. But in the same period, average wage growth steadily declined.

The broadening in the supply of credit, such as happened from the 1980s to 2008, has a very specific effect on economies. The control of that credit’s path through the system is managed by financial intermediaries, such as banks, and these institutions tend to be not only the chief overseers but also the chief beneficiaries of credit booms. They are able to lend more and invest more in financial assets. Circumstances such as these tend to direct capital up towards the top end of the pay scale where it is invested—in assets, pensions or other savings products. It is not spent.

As this large amount of capital is invested in assets—say, in property—the price of those assets rises, which causes demand for those assets to increase, which causes the prices of those asset classes to rise even further. This in turn leads to an increase in borrowing by people somewhat further down the pay-scale who look to take advantage of rising prices and in this way, easy credit brings about a broad increase in the prices of assets. In the period of the early 2000s, banks developed more sophisticated products that enabled them to extend credit ever further down the wage scale, which led to more borrowing for mortgages. In this way, money was borrowed and invested—it was effectively stored.

And it is this lies behind the 30-year decline in wages. The easy credit conditions of the long interest rate cycle effectively siphoned money out of circulation and into assets. This process diminished the money available for wages—and it is this that remains the core issue in the British debate over stagnating pay. Not that wages have declined in the last four years, but that the structure of the British economy since the 1970s necessarily inflated the price of assets at the expense of wage growth.

That structure is not the fault of the present Government—or even this present generation of politicians. But it is the problem that more than any other, the government must now confront.