John McDonnell had a simple but heretical message when he spoke to the TUC this week: Britain’s much-lauded flexible labour market is not all it is cracked up to be.

From the International Monetary Fund to the Treasury, from the Organisation for Economic Cooperation and Development to Britain’s employer organisations, belief in the benefits of a flexible labour market runs deep.

The Confederation of British Industry didn’t waste any time in criticising the shadow chancellor for pledging that Labour will extend employment rights to workers in the gig economy and change the law to make it easier for trade unions to organise. Josh Hardie, deputy director general of the body that represents Britain’s big employers, said: “The UK’s flexible labour market is good for the economy and increasingly wanted by workers as they look to juggle other commitments, such as caring or studying.”

This is an interesting take on the increase in the number of zero-hours contracts, five times higher now than in 2010. Until now, most of us had been unaware that it was demand from workers begging to work without rights, rather than cost-cutting by employers, that had prompted the big jump.

Hardie also has a somewhat strange view of success if he thinks the flexible labour market has been good for the economy. While it is true that unemployment is at its lowest since early 1975, by almost any other metric – growth, productivity, investment and living standards – the recent performance of the economy has been woeful. Britain’s labour market was much less flexible in 1975, but back then work paid. Today, two-thirds of those in poverty live in households where at least one person is working – and people who are low-paid tend to stay low-paid.

After being squeezed hard in 2017, earnings are now rising faster than prices but only marginally. It has been 15 years since real wages grew by more than 3%, and after adjusting for inflation, pay packets are £12 a week smaller than when Lehman Brothers went bust 10 years ago. People in their 30s have been especially hard hit.

There is an argument that says Britain found a kinder, gentler way of adjusting to the downturn of 2008-09 than it managed in the recessions of the early 1980s and 1990s, because an economy-wide pay cut was substituted for mass unemployment. In the past, a minority suffered greatly by losing their jobs; this time the pain was shared around.

But to have self-imposed wage restraint for a couple of years is one thing. It is quite another to be seeing nugatory increases in real wages a decade after the recession, and at any time when unemployment is historically low. Britain now appears permanently locked into a low-wage, low-skill, low-productivity economy, in which workers compensate for a lack of earnings power by taking on more debt.

The rapid increase in the bill for tax credits under Labour is evidence that Britain’s low-pay problem is not new, but the crisis of a decade ago propelled it into a new phase. There are more than 3 million in insecure work of one sort or another and a large pool of people who would work longer if they could. One in seven workers are self-employed, and while this is hailed as an example of flexible labour, it is all too often the result of bosses cutting costs by coercing employees to register as self-employed.

The explanation for the weakest decade of earnings growth since the Napoleonic wars is not hard to find. Workers are cowed and feel unable to ask for higher wages for fear that their employer will get shot of them. There has been a dramatic shift in the balance of power since the high point of union influence four decades ago. In the 1970s, 70% of workers were covered by collective bargaining agreements. The fall to 26% today is the largest of any OECD country.

McDonnell thinks it is time to redress that imbalance and, while his analysis is correct, it won’t just be achieved by reversing the employment laws brought in by the Conservatives since the winter of discontent. As David Arnold noted in a recent paper for the Unions 21 thinktank, there is a limit to what a government – even a union-friendly Jeremy Corbyn government – can do. That’s because union power is now highly concentrated in the public sector, the manufacturing companies that have survived the three deep recessions of the past 40 years, and workers in privatised industries.

“The growth areas, in terms of new jobs, are where unions have little or no organisation, such as retail, hospitality and administrative and technical services. This is also where some of the most unfair working conditions are to be found.” These three sectors account for 43% of private-sector jobs – but only one in 10 of their workers are union members.

Arnold accepts that unions have tried to organise in these growth sectors but says that too often they have relied on a membership model rooted in their traditional bases rather than something that may attract people working in non-unionised sectors. Generally, he says, the trade union movement has been resistant to change and over-reliant on political solutions – a harsh critique, but not an entirely unfair one.

Despite this, unions have seen their popularity rise of late. The financial crisis of 10 years ago is fresher in the memory than the winter of discontent that helped bring in Margaret Thatcher and her anti-union agenda three decades earlier. Talk of McDonnell seeking to return Britain to the 1970s misses the point. Where unions organise and workers are less exploited, the result is higher wages – which is precisely what the economy needs.

• Larry Elliott is the Guardian’s economics editor