I have already this morning quoted extensively from one article in the Observer yesterday and now I will from another. This one was the argument made by Frances O'Grady of the TUC, for whom I work, in favour of what she called 'a new deal on wages to kickstart a true UK recovery'. The argument was as follows, and I share it because like the earlier argument I think it of considerable importance:
Back in the 1950s Henry Ford took the US union leader Walter Reuther on a tour of a highly automated new factory. Ford gleefully asked Reuther how he would get robots to pay union dues. Reuther shot back: "And how are you going to get them to buy your cars?"
It is a classic dilemma. Employers want to keep their workers' wages and bargaining power to a minimum, but need their customers to have money to spend. And that can only happen if they can negotiate decent pay.
Decent wages are good not only for those who get them, but for economic growth, too. Yet the business-friendly policy of recent decades has favoured the selfish, short-termist employer keeping wage costs down.
The minimum wage set a welcome floor, but poverty wages just above the minimum were considered fine. Indeed the state has subsidised low pay through tax credits. In-work benefits should be defended, but it is right to query why the taxpayer should subsidise so many low-paying employers. Deliberate policies of labour market deregulation continued to send the signal that workers' wages should fall.
The result has been a steady decline in the share of the economy going to wages — a drop from 60% in 1980 to 54% in 2011. It is probable that the decline is continuing, as around four in five new private sector jobs are in low-paid sectors. This job creation may be better than unemployment but still leaves households struggling to make ends meet and is no recipe for economic recovery.
Not only has there been a decline in the wage share of the economy, but those in the middle and at the lower end have been getting a smaller share of this shrinking pie. The Resolution Foundation has forecast that a typical low-income household in 2020 will have an income 15% lower than they would have had in 2008.
But many orthodox economists have seen nothing to worry about. The slide in the wage share was inevitable. Technological change meant that the economy needed fewer skilled workers; and globalisation reduced real wages in advanced economies as developing countries industrialised.
Labour market deregulation was a core belief of the 1980s free-market consensus. It was meant to remedy the squeeze on profits and investment caused by union-bargained wages and the costs of "welfare capitalism". Everyone would win as profits drove new investments and innovation, which eventually would trickle down to all. Even today, the coalition claims that it is necessary to squeeze the working-age social security bill, even though the share of GDP going to these benefits has barely changed.
But the theory did not work. Profits grew as the wage share declined, but the increase in the profit share went entirely into the finance sector and personal fortunes, with no greater benefit for anyone else. Growth and productivity increases were a third down on the level achieved in the postwar decades. Unemployment was higher and recessions longer and deeper. Instead of the saving made on the wages bill being invested in new plant, skills and equipment, it funded a big increase in remuneration for those at the very top, plus financial engineering and mergers and acquisitions. Borrowing rocketed as consumption became increasingly dependent upon personal debt, and the seeds of the financial crisis were sown.
That is why I am making a call for a new deal to boost growth and rebalance the economy — as pressing a problem today as the price-wage spiral was in the 1970s. Improving the wages of those who have been left out of the finance sector bonanza makes sense all round. Higher wages would help rebalance our economy, increase the tax take and reduce the benefits bill. Even the OECD and the IMF now say that inequality has gone too far.
Such a new deal would have at its heart a national consensus that if companies making a good return on investment are to create decent, properly rewarded jobs, government, business and labour must work together. Increasing demand for productive skilled workers should be the key aim of industrial policy, and it should be linked to the capital investment that can help kickstart growth. Economic policy should have achieving full employment as an explicit priority, and this in turn is good for pay.
Wage restraint will have a place too, but applied to those at the top: this can release resources for better pay and more jobs lower down. And with even the IMF and OECD recognising the importance of reducing inequality, a new deal would promote the extension of responsible collective bargaining.
A modest increase in the minimum wage would have a minimal effect on employment. We should also expect companies that can afford it to pay a living wage. While there is a trade-off between jobs and the wage floor, many sectors and companies could pay more while continuing to increase employment. Modern wages councils could set new minimums in some sectors. The government has just abolished the Agricultural Wages Boardwhich did just that.
This adds up to an ambitious agenda for a new government, with some quick wins that can help build longer-term support. Britain needs a pay rise or we will be stuck in a damaging low-wage, low-productivity spiral where economic prospects remain bleak.
This, I believe is the economic policy that the UK needs.
And this, I think, is what the dispute with Labour is now all about.
But that's a theme I will have to return to later.
There is though more on this here and here.
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“While there is a trade-off between jobs and the wage floor”
What is the evidence for this neoclassical cliche? It is dispiriting when such a statement can be reproduced in an article which actually founds on the opposite, and thus renders the proposition incoherent, in context.
I presume that this is an acceptance of the phillips curve? If that is so then it needs to be made explicit. I do not think that the majority of people understand the underlying assumptions which lead to such conclusions, and they would be astonished by how utterly stupid and/or partial those assumptions are. The more you try to follow the logic the more you are left with the notion that it cannot be as daft as that: but it is.
It is a measure of how successful the neoliberal propaganda has been that this is slipped in without justification as if it was self evident. Well it is not self evident to me and I cannot derive it from the rest of the argument. Perhaps the author can be asked to explain how this can be so in light of the thrust of the rest?
Interesting point
very good point Fiona and lesson in how our subconscious soaks up propaganda as a ‘given’ – the main threat to the value of wages is the housing issue – some traditionally on the right in America are calling for an economy that does not see housing as an investment and a Land Value Tax that restores balance in this sector and allows Labour to be properly rewarded. When CEO’s cream of 300 times the average wage of their ‘workforce’ we know there is something more going on than the Phillips Curve – maybe the ‘Serfdom/debt slavery Curve! It is so obvious one is numb with shock that there is now no one to vote for out there.
Although like you, Simon, I advocate LVT to solve the permanent housing crisis, I’m afraid that that by itself will not stop surplus labour being expropriated by the money-makes-money brigade. Ensuring that labour retains (and can then spend) the highest proportion of that surplus is the key to a successful economy.
Simon ,
Out in America there may have been someone to vote for if he had been selected – Ron Paul .
He was the only person offering anything different and the only radical – too radical as it turns out , especially in terms of his non-interventionist foreign policy .
Obama seems to have been anointed by the same people who anointed Tony Blair .
I get the impression he authentically wants change but one can never be sure with modern day politicians , they might not even be sure themselves .
Nigel Farage’ UKIP is the only option offering anything different from LibLabCon but the big problem for me is that like the three big parties they don’t support Land Value Tax and offer nothing different on accommodation .
Going to be looking into the Young Peoples Party (YPP) next .
Ron Paul was not an option
He was a nightmare
And for the same reasons, unemployment and sickness benefits need to increase too. Don’t forget, what happens to such benefits when they’re paid out? They get very promptly spent back into the economy and find their way back to the Chancellor as taxes in short order. At least, those that don’t get diverted into tax havens via the likes of the big supermarkets do, which reminds us economics is not a vacuum. We need to roll local economies back to a stage where to a degree they can be self-sufficient. The big chains just funnel monies out of local areas and by comparison with locally-based equivalents put nothing back in. We need to make sure that increased velocities of money created by raises in wages and benefits aren’t simply sucked out of the economy by predatory chains.
Well, here’s handy… I’m not the only one thinks disabiity benefits should be more generous http://diaryofabenefitscrounger.blogspot.co.uk/2013/07/the-disability-stats-government-dont.html according to a recent survey, even the DWP have to admit the public do too! Perhaps here’s an idea everyone can get behind, eh?
On that same subject, here’s some slides showing how the cuts, which are the opposite of what people in this country want to see, remember, are adversely affecting disabled people http://www.slideshare.net/simonduffy/briefing-for-opposition-day-debate. I’ve seen them described as ‘harrowing’. I don’t disagree.
I’m with you in spirit, but in practice you have to say that a high minimum wage will have an adverse effect on small businesses. But the general point about inequality and the need for people to have more in their pockets is absolutely fundamental to a sustainable economy.
This has always been said
But its never been proved true
Martin – read my comment above about housing – peoples’ pockets are empty because of housing bubbles, yet NO politician will challenge the monstrous mortgage god for fear of un-devine retribution! House price rises and the mistaken obsession with somewhere to live as an investment is wrecking lives, throwing money to the corporate world and devaluing currency – sort this out and low wages are less of an issue! Give people back the wealth they deserve to have.
It’s through mortgages that most of today’s money is created into the economy. Changing that means fundamental root and branch financial and social reform. Let’s do it 🙂
Simon ,
I agree wih you about housing bubbles .
I’m self employed and do work for customers outside the UK because the UK companies which operated in the sector I serve have all been merged into overseas concerns .
The UK operates in a global economy and UK labour rates are typically 3* “emerging markets” rates and are generally higher than in most other developed countries – making the big assumption that currency rates-of-exchange aren’t totally rigged like everything else .
I can’t increase my rates to give myself a payrise , i’ve had to lower them below what I was charging 6 years ago just to get work .
In practice the self employed , people in small companies and people on low paid jobs just above the minimum wage will not enjoy pay rises , (the low paid in part due to the influx of cheap labour from abroad) .
All that will happen is that people working for big companies or the state will get pay increases which will due to several factors feed through to higher prices leading to the unintended consequence of those people who won’t get inflation busting payrises falling further behind .
Those people who won’t get pay-rises will do better from either reductions in the cost of living to make current wages more livable or from getting a different job .
Just thinking about the effect an increase in the minimum wage would have – the microeconomic effects on small businesses. Otherwise, I am with you all the way.
This has been argued so often – including before the minimum wage was introduced
And it did not cause the anticipated crisis