Little evidence that benefits of high productivity are shared with workers as well-off reap most of the fruits

John Le Carré's Smiley's People was published in 1979, straight after the Winter of Discontent, and there's a scene where spymaster George Smiley travels to Hamburg to make contact with Claus Kretzschmar, the owner of a sleazy nightclub, the Blue Diamond.

Smiley has to pay 200 marks for entry and obligatory drink – a considerable sum in the late 1970s – but it is later refunded after he and Kretzschmar do business together. "You English are poor these days. Too many trade unions," Kretzschmar says.

This was the accepted wisdom at the time. Britain was the sick man of Europe and over-mighty labour was to blame. Germany had rebuilt its economy in the 1950s and 1960s; Britain had slipped further and further behind. The solution, or at least one part of it, was to make labour markets more "flexible".

There were two possible ways of achieving this. There was the consensual German way, with trade unions seen by management as partners rather than adversaries, or there was the American model, which saw labour as an enemy.

Britain went down the American route. New laws made it harder for unions to recruit, organise and operate. De-industrialisation destroyed the old strongholds of union power. The full force of the state was used to win two big industrial struggles – the miners' strike and the Wapping dispute. Welfare changes were introduced to make it more attractive for the unemployed to take low-paid jobs. Globalisation has further strengthened the bargaining power of employers.

Britain now has a flexible labour market and as far as workers are concerned is virtually indistinguishable from the US. Increasingly, though, the transition to the 51st state looks like a hollow victory. As the International Monetary Fund noted in its annual health check on the US economy last week, the American labour market is characterised by falling participation rates, high levels of long-term unemployment, stagnant wages and 50 million people living below the poverty line.

US-style flexibility has also been marked by a relentless squeeze on wages and the capture of the proceeds of growth by those at the top. A recent article by David Blanchflower and Stephen Machin says that in 2013, median real weekly wages (pay adjusted for inflation for someone smack in the middle of the income distribution) were about the same in 2013 as they were in 1979.

"This is probably of concern for the UK's prospects since the United States went through a number of labour market changes some time before similar shifts in the UK. These include greater "flexibility" and a massive reduction in the extent of union bargaining over wages," they wrote.

Up until around a decade ago it would have been hard to draw this conclusion. While US median earnings were flatlining, the average UK worker was getting better off. Median full-time weekly earnings were 40% higher in 2003 than they had been 15 years earlier.

But from then on, three or four years before the onset of the "great recession", real wage growth tailed off markedly. It then plummeted during the crunch and has still not recovered. Confounding the predictions of the Office for Budget Responsibility (OBR) and the Bank of England, the real wages of the median worker have dropped by 8-10% – or about 2% a year – since 2008. This is entirely unprecedented in Britain's recent history.

The OBR and the Bank assume that the tide will eventually turn. Falling unemployment will make labour scarcer, forcing firms to pay more to obtain new workers. Businesses will also respond to stronger demand by investing more and this will make their employees more productive. A tighter labour market and higher productivity will result in more generous pay settlements. Real wage growth will resume.

There are two parts to this assumption. The first is that productivity will return to its previous growth trend of 2% or so a year. The second is that if productivity does indeed rebound, the benefits will be shared more or less equitably between those on high, middle and high incomes.

Both are questionable. Far from becoming a high-skill, high-productivity, high-wage economy, Britain seems to be going in the other direction. Labour is plentiful and cheap; capital, by contrast, is relatively expensive. Employers can dip into a reserve army of labour for some short-term contract workers any time they see demand rise.

But even assuming that the OBR and the Bank are right in their first assumption, what evidence is there that the benefits of higher productivity will be shared? Certainly, there is none from the US – and not much from Britain either. In both countries, those at the top have been extremely successful at capturing the fruits of growth, leaving little left for anybody else.

"Even if productivity were to rise rapidly, the tendency for longer-run inequality trends to cause an unequal division of wages from productivity gains to the top (like bankers' bonuses) would need to be addressed," say Blanchflower and Machin. "Until that happens or until policy starts to address these issues seriously, it seems that the prospects of significant, rather than modest, real wage increases for typical workers are bleak."

This seems a fair assessment. Power resides with employers and there seems no reason why they would willingly hand over productivity gains to their workers. Unless forced to do so, they will keep the gains for themselves.

It is here that the absence of trade unions is felt. In 1980, 64% of workplaces in which there were 25 or more employees had a recognised trade union. By 2011, the percentage had fallen to 37%. In the private sector, unions are even weaker. Only 17% of firms with more than 25 staff recognise a union; for those with five or more the figure is still lower: 11%.

More than that, though, organised labour represented an alternative political force to business. Andrew Gamble, in his new book Crisis Without End? (Palgrave Macmillan) notes that one reason there has been so little reform of the underlying economic model since the "great recession" is that there is no countervailing force to stand up to the business and financial interest. "Although there are divisions within business, it no longer faces significant opposition outside itself," he writes.

All of which makes the role of labour and unions in the current political debate rather curious. The left of centre thinktank the IPPR has just published its strategy for national renewal which has no mention of unions in its 280 pages. Thomas Piketty, best-selling author, calls for a 75% wealth tax but neglects to say how it might be achieved.

The answer comes back to George Smiley. If the spy met Herr Kretzschmar in 2014 the message would be slightly different. "You English are poor these days. Not enough trade unions."