Higher Wages for all!

Next week, Ed Miliband will make a speech on wages. This is a good idea for the obvious reason that higher wages would be most welcome, both for the economy as a whole, and for those on low wages in particular. It is also a good idea for the less obvious reason that, as Duncan Weldon has pointed out, the living standards crisis is really a wages crisis.

The difficulty is that the gap between desiring higher wages and securing is generally rather tough to bridge, at least if you care about mitigating any negative consequences, like unemployment, reduced hours, and more young people on the dole.

Now, I have no idea what Ed will say next week, but I reckon if I triangulate using Labour’s overall positioning, Polly Toynbee’s article today, the Resolution Foundation’s recent work on low pay and the living wage, I get a pretty decent picture.

I’d expect first an analysis that says that not enough of our national income has been going to the many. That if we’re to build a stronger economy we’re going to do more to change that.

Then I’d expect the Labour leader to seek to carve out a unique, reforming position. I’d argue that to do this, we need neither the old corporatist approach or a low regulation, low control free for all. That would position Labour as being for change, but also ruling out the sort of proposals that frighten Businesses from the outset.

So far, so broadly uncontroversial.

The big question is what should government do to lift wages overall. Currently, government has two tools. First, there is the minimum wage and other legislative mechanisms that would place a floor on wages. Then there are institutional shift in the power relationship between employer and employee (individually and collectively) which would tilt the balance in favour of those seeking higher wages.

Personally, I don’t expect a big shift in the latter area. Centre-left types are mostly calling for things like worker representation on pay boards, or published pay ratios, which seems neither here nor there to me. There’s not much appetite anywhere except Unite HQ for a return to secondary action and closed shops. So, yes, a worker on every board, whatever. Go right ahead.

More interesting is the legal setting of wages, I get the sense that Labour is edging away from universalist solutions to specific ones. There’s a good reason for this. If you want to legislate for higher wages, you know that if you set the level too high, you will gett unemployment or underemployment.

Introduce a mandatory Living Wage now, and the Resolution Foundation’s modelling by NIESR projects a reduction in Labour demand of some 160,000 full time equivalent jobs. I haven’t done the calculations, but I suspect that this would cancel out the £2.2bn savings from tax credits and housing benefit that accrued from the remaining workers. On top of that, the same research indicates that demand for younger, poorly qualified workers would fall by 300,000. (Assuming no ‘youth rate’).

So the idea of a major jump in the minimum wage to the living wage for everyone is likely off the table.

Instead, attention has turned to those sectors where low pay is most prevalent. The three most obvious are social care, hospitality and wholesale and retail.  One idea might be to re-introduced some form of Wages Boards in these areas, or legislate specifically for them – you could even do something like introduce a ‘low pay social tax’ on Profits of employers who make lots of money but pay poorly.

However, the more you get into gritty ideas like this, the more problems and issues crop up. Introduce some sort of ‘Sectoral Living wage’ and you’re stuck in endless battles about what sector a company is in. You don’t have to look far for an example of this sort of thing not working well.  The selective employment tax is a great example.

All such micro-interventions are bedevilled by such problems. You might want to enforce higher wages in retail. But what if it turns out the lowest retail wages are being paid in the small shop sector, not in the big supermarkets? You could end up putting corner shops out of business, and helping Tesco. So then you might introduce a small-firm opt out. But then you’ve not cut the wages of the lowest paid. See how these things can turn into a Mare’s nest?

I’m not immune from this: I’ve previously argued for offering to give companies tax breaks if they pay the Living wage (so they get a proportion of the money the state doesn’t have to pay in benefits) , but I’m glumly aware that such a scheme would be horrendously complex and might mean a small tax cut for very high paying companies. Ultra localised rises could have a similar effect: Imagine what would happen to employment patterns if Gateshead had a minimum wage of £8 an hour and Chester-le-Street was £6.

The other issue with such micro-intervention is enforcement. If, as I’m told, we’re not doing well enough to enforce the minimum wage and existing anti-exploitation laws – and there seems to be evidence of abuse, especially of immigrant workers – what chance do we have of enforcing sectoral or localised ‘zones’?

So the more I look into it, the more sceptical I am about the micro-interventions – they either tend to be so small they wouldn’t solve the problem of low pay, so complex they would be ungovernable and lead to contradictions, or have awkward unintended consequences.

So what could we do instead?

Why not issue forward guidance about the future value of the minimum wage, thus giving businesses time to understand their future costs of Labour – I think that such a gradual, small shift in overall wage levels would be tolerable for most firms, and if there were risks to specific sectors, government could act to offer specific support.

Further, by gradually increasing the wage, if we started to see risks to employment, especially among the young and poorly skilled, we would be able to act. For me, this would stand a greater chance of actually increasing low wages than lots of small, targeted steps.

5 Responses to “Higher Wages for all!”

  1. Dan Filson

    “The big question is what should government do to lift wages overall. ” Nothing – the market will take care of this. If an employer has difficulty recruiting and retaining staff of the skills and experience required to do the job to the required standard, the employer will take recourse to increasing the wages; otherwise the employer will do little or nothing, unless contractually bound to increase them in line with CPI, RPI, or whatever wind is blowing. Government can control wages of those it employs directly, but it is unwise to use public servants all the time as the whipping boys as word will spread that public service is paid rottenly and gets no pay rises and that could be an expensive word of mouth to rectify.

    A sensible employer will before raising wages consider what else makes for an attractive workplace – like a commitment to in-service training, accommodating leave arrangements, pleasant working environment. Put at its simplest, the shop-keeper who provides a stool for counter staff may earn a lot more gratitude than a 5p an hour pay rise will. Though the staff would not say no to the latter, ultimately turnover may be caused by the absence of the stool! Employers should also learn to be competent at handling staff advertising and recruitment, and not over-qualify jobs unnecessarily. Sometimes a non-graduate might be better in a job than a graduate.

    “Introduce a mandatory Living Wage now”, Blindingly obvious, but HM Treasury will wet their collective knickers at the thought. The multiplier effect is so obvious. The net cost to HMT is low much less than the gross amount (though not nil, mark you), and the further social benefits of ‘making work pay’ are intangible. There’s no doubt there is a correlation between large numbers of people being idle and low level crime, even though the bulk of the unemployed – and under-employed – are as law-abiding as the rest of us (as a pensioner I don’t know which ‘us’ I belong to)..

    Wages Boards – i’m not is sure. In an age where a job description could cover tens or hundreds of thousands of workers wages boards might have been relevant, but work has splintered into thousands of different jobs, and coralling jobs into suitable wages board categories might be very difficult.

    There may well be a case for lightening the load of employer NIC on the first tranche of wages of each employee. It would make employing staff cheaper, and be the exact converse of the Selective Employment Tax which had the purpose of shaking labour out of a near full employment work force. At the tie wages were not exactly wonderful (I started work, children, at 3 shillings and sixpence an hour) but there was certainly inefficient use of labour double-manning etc. Wages are now such that few employers lightly over-staff.

    Rises in wages might leave some cash-in-hand operatives – whose status as self-employed or employed is a bit nebulous – in a bit of a fix. That might focus their minds on regularising their positions.

  2. Quietzaple

    I worry that, whatever policy is adopted, we shall have a repeat of a 1974 Private Eye headline: Wilson: “Vote for me and I’ll give you what you want.”

  3. SpinningHugo (@SpinningHugo)

    Price fixing is dumb economics, whether it is for bread, rents, fuel, wages or anything.

    For wages overall there is nothing governments can do, but try to foster growth.

    Why then have a minimum wage?

    Because it concerns human dignity. We think there is a level of pay below which it is undignified to work.

    Don’t however kid yourself that raising it generally, or in specific areas, makes much economic sense. It does not.

    [The Toynbee piece was pretty disgraceful. Basically arguing for free lunches for all.]

  4. John

    Growth is not going to happen. The “growth” we are told the economy is undergoing, some 0.8%, is largely a result of population increase. Now, if we are talking about offshoring and low-paid immigrant labour……
    Legislated minimum pay: largely ignored by employers, especially small ones where any employee enquiry about minimum pay laws is met with “there’s the door”. The minimum wage is supposed to be enforced by HMRC, who at the moment are not bothering much, since they are being “staff-cut” to extinction.
    Tax cuts for employing staff…..more bribery; always works:Not.
    Nothing is more boring, or exasperating, than watching the reintroduction of policies that have failed in the past, many times, as though they will work this time because………………?
    If you cannot see that a merry-go-round of non-jobs, doing nothing, is a failure dressed as a success, then you seriously need to get out: of the country. A consumer-based country with minimal production is always going to be a failure.


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