In his book Why Most Things Fail, the economist Paul Ormerod tells the story of the struggle between the arctic hare and its predator, the lynx. Statisticians in Canada found that when the population of hares was big and growing, the lynx thrived because there was plentiful prey. The population of lynx went up and they killed more and more hares. Eventually, there were too few hares left and the lynx starved. The population of lynx went down and the number of hares started to rise again.

This story has a bearing on the way the UK economy works. For the past 30 years, one of the big aims of policy has been to make the labour market more flexible. Trade unions have been curbed, industries have been privatised, welfare reformed and employment protection reduced. The balance of power between labour and capital has been tilted decisively in favour of the latter.

The evidence of this is all around. There are 1.3m jobs on zero-hour contracts; wages can barely keep pace with price increases, even with unemployment coming down at a fair lick. Around half of the jobs created in the past year have been for the self-employed, with the suspicion that many of those "running their own business" are doing so involuntarily.

This is the flexible labour market in action. It is what has distinguished the UK economy from some of the more heavily regulated economies in the rest of Europe. Supporters of the reforms of the past three decades say the flexible labour market is the reason the jobless rate is around half the average for the eurozone. Critics say that the smashing of organised labour and the triumph of management is bad for workers, bad for growth and ultimately bad for employers.

Vince Cable can now be added to the list of those who wonder whether the labour market has become too flexible. The business secretary is right to pose the question because there are three big downsides to the way it works now.

The first is that the taxpayer ends up subsidising low pay through the tax credits and benefits system. There are now more people in poverty who are working than are jobless.

The second problem is that the loss of labour's bargaining power has meant the share of national income taken by wages has fallen. That has created a problem of weak demand, which in the buildup to the financial crisis was solved by households taking on more debt. It was a period of rising house prices and equity withdrawal.

When the crisis broke, individuals became more debt-averse. They started to pay off some of what they had borrowed and were reluctant to take out new loans. What needed to happen was for real wages to grow, since that would have allowed living standards to rise while indebtedness fell. Instead, real wages have fallen by 8%, and ultra-low interest rates have been required to get people borrowing again. Household debt is on the way back up again.

The final problem is that the surfeit of cheap, insecure labour discourages investment. There is little inducement for firms to buy expensive new kit when demand rises, because they can always hire inexpensive labour that can be summarily dismissed later.

What does all this mean? It means that in the long term there is a clear choice. Either the power of labour will be increased by full employment, stronger trade unions and collective bargaining or the flexible labour market will arrive at its ultimate destination: a form of capitalism that cannot function without excessive debt; is marked by low wages, low investment and low productivity; and which eventually ends up eating itself.

Britain is well advanced down that road. As with the lynx, there is a price to be paid for slaughtering too many hares.

Pay battle hots up



As the weather gets warmer, so does the temperature at the annual shareholder meetings that take place at this time of year. Last week, investors at Hiscox, BG and ITV joined their peers at Pearson, Standard Chartered and AstraZeneca in registering their concerns about big bonuses. But a serious blow had yet to be landed.

And then it finally happened. Vince Cable's binding vote on remuneration policies claimed its first victim: the FTSE 250 engineering company Kentz. Based in Jersey, Kentz was not only the first to have its remuneration policy opposed but also have its remuneration report voted down at the same time.

The significance? The vote on the remuneration report is one that has been in place for 10 years and covers pay that was handed out in the past. It is advisory. Companies can ignore it – but at their peril, as they risk a bad run with shareholders in the future. The vote on the remuneration policy is binding: it cannot be ignored and was introduced by the business secretary in October to cover the pay plans for the coming three years.

For Kentz, which had managed to avoid putting its pay deals to a vote until this year by exploiting a loophole created by its registration in Jersey, it was a moment of shame.

But it is one that has been narrowly avoided by others. The Lloyd's of London insurer Hiscox, for instance, had a 42% vote against its remuneration policy. Standard Chartered had suffered a rebellion on a similar scale the week before.

Little wonder, then, that HSBC took steps to head off a full-scale row over proposals to hand its chairman Douglas Flint up to £2.2m in shares at this week's shareholder gathering.

HSBC said Flint would be more likely get a smaller sum and only as a "one-off": a valiant attempt to show it is listening to concerns. But shareholders may still ask if any bank chairman should be handed a bonus – as is being proposed here – for working to improve relationships with regulators. The HSBC vote will be one to watch.

Engineering a manufacturing boom

Celebrations to mark 175 years of train building in Derby were held last week at Bombardier's factory, which is Britain's oldest surviving rail plant.

With his thoughts on the 2015 election, transport secretary and member for Derbyshire Dales Patrick McLoughlin pointed to the renewed optimism around Bombardier as a sign that the economy is now back on track.

Yet the important contracts that have kept Bombardier's historic Litchurch Lane works afloat did not come from the private sector, and were not the export orders that George Osborne craves. They were government-backed contracts. Had McLoughlin not signed off a £1bn deal to build trains for Crossrail back in February, it could have been 175 and out for Derby.

This economy wasn't sustained by Osborneomics but by the Keynesian stimulus of a public infrastructure scheme: digging the giant Crossrail tunnels under London. Good news for Derby, and the supply chain, but a long way from evidence of a sustainable manufacturing-led recovery.

• This article was amended on 19 May 2014. An earlier version said that around 80%, rather than half, of the jobs created in the past year have been for the self-employed.