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August 30, 2014

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Tackling low pay needs a local approach

May 30, 2014

Originally published in New Start, 28th May 2014

Ed Miliband’s proposal to link the national minimum wage to median earnings is at first sight a sure seller. With the Labour lead in the polls steadily narrowing, last week was a good time to reveal his offer to the UK’s squeezed wage-earners.

As expected, the CBI issued a warning about ‘political interference’ with wages: but their new deputy director-general, Katja Hall, acknowledged last Sunday that a failure to share the gains of recovery are leading not only to record levels of mistrust in British business, but also strong support for activist government policy amongst the electorate. There is strong political support for action on low pay, and pressing economic reasons, but the devil’s in the policy details.

Low wages are tied to low productivity business models, as the report behind the Labour leader’s announcement recognises. Even before the recession, the gap in productivity – measured as the output of the UK economy divided by the hours worked within it – exercised economists. Cambridge professor Martin Rowthornhas powerfully argued that after the recession ‘workers, while cheaper to employ, are not working to potential. More output could be produced, but not sold.’ This ‘hoarding of labour’ makes itself felt across the economy as companies depend on cheap labour rather than capital investment to maintain profitability.

The labour market is not like other markets. As Professor Alan Manning comments, workers don’t always make economically rational choices about employment. On this view, the UK employment rate remained remarkably robust during the recession because employees considered it too risky to switch employment. In effect, the Economist suggests, ‘wages fell as workers priced themselves into low-paying jobs’. The substitution of (cheap) labour for (vanished) capital that has become a habit for companies, however, may prove harder to overcome in a recovery.

The demand for labour and the wage rate may have become uncoupled. That’s why a conservative chancellor expressed confidence that ‘Britain can afford above-inflation increases in the minimum wage’ at the start of this year. It also reflects a shift in understanding captured by Robert Pollin, an American economist who has given intellectual coherence to America’s various living wage campaigns.

He reminds us in that in classical economics, reduction in demand for a good following a price rise is a ceteris paribuscondition. Nothing else must be changing in an economic system for this law to operate. This applies to labour, and is why the national minimum wage hasn’t cost jobs. Reviewing over 100 research projects it has commissioned over its 15-year history, the Low Pay Commission found that firms have adjusted their business models, not fired employees, in response to the introduction and subsequent uprating of the national minimum wage. But the decoupling of wages and employment is also why policy now needs to focus on progression for the 2.9 million workers who, as the Social Market Foundationhave shown, are stuck on low pay. Insecure employment is also a factor: the UK’s 4.5 million self-employed, who are steadily losing out on earnings, also exert downward pressure on wages.

A single, legally-binding wage standard may not be the solution. A report by Kitty Ussher for Centre for London argued earlier this year that the high average productivity – and price-related poverty traps – particular to the London economy would merit a separate minimum wage rate. The Labour leader ruled this out in his latest proposal, but local strategies are winning out elsewhere. The Swiss electorate voted down a referendum proposal to bring in a £14.66 minimum wage last week. But Seattle will soon give businesses a three-year timeframe to raise hourly wages to $15, the highest rate in the country. Likewise, a number of local authorities from Islington to York have carried out fairness commissions, with Living Wage agreements among their chief recommendations.

Specific sectors, like security services, and particular businesses, like a number of leading professional services firms, have already moved to improve productivity by investing in the workforce. They have experienced other benefits that go beyond the bottom line: lower staff turnover and crucially, better employee support for new business strategies. This is why businesses and unions in Seattle reached agreement on wage targets, and why over 600 businesses have pursued Living Wage accreditation in the UK. The Labour team is admirably forward-thinking here: they argue for partnership to solve productivity problems – and sectoral flexibility – all in the pursuit of wage targets.

The national minimum wage was once seen as economically irresponsible and politically reckless: it’s now acknowledged to be a resounding policy success. But solving the wider problems of a low pay economy will take locally-targeted, sector-specific and long-term negotiation and cooperation. Miliband’s announcement might help him gain ground in increasingly close election race: but it will not be one policy pledge, or the next Westminster government, than can deliver for the low paid.

Where next for national parties?

May 1, 2014

At the IPPR European Skills and Jobs Summit

April 2, 2014

Making work pay: the productivity puzzle

March 11, 2014

Originally posted on the Fabian Review online, 11th March 2014

The restraint shown by the Low Pay Commission recently in recommending a three per cent rise in the national minimum wage is justifiable. The LPC has responsibility over a very successful instrument for attacking serious deprivation in the UK: it has almost eradicated extreme low pay without affecting inflation or employment rates.

But the architects of the national minimum wage did not anticipate that it might become the going rate for many jobs, and they didn’t foresee  the longest sustained fall in real wages on record. Even the founding chairman of the commission, Sir George Bain, came out earlier this month to argue for a radical overhaul of the LPC.

Clearly, a three per cent rise is going to do little to help those stranded at the bottom of the labour market. Thanks to inflation, the cost of a minimum standard of living is rising by around 4.4 per cent, leading to a record number of people relying on food banks, high rates of child poverty, and the second highest rate of fuel poverty in the EU.

As I argued in my previous post, with other economic indicators back on track, many see the continued slump in real wages as necessary suffering. Many believe that as we crawl towards growth, the flexibility of UK workers has been an asset. In the last meeting of the Monetary Policy Committee at the Bank of England, members noted the strength of the employment rate before voting to keep interests rates where they are – in other words, to hold the course.

The productivity puzzle

What baffles economists is how wages interact with productivity, and many aregetting quite concerned. The Office of National Statistics now estimates that UK productivity tails the G7 average by 21 percentage points. It’s clear that many have managed to hold on to jobs through the recession, but divide the output of the economy by the number of hours worked and the result isn’t encouraging.

The dominant view is that we’re facing a problem of supply. The financial sector has been distinctly reluctant to lend since 2008, and there’s less available capital for firms to make investments in productive assets. In particular, firms have stopped investing in people: they’re not hiring fresh talent, or spending money to train existing workers.

If the employment rate holds up and growth is maintained, the supply siders argue, the spare capacity in our economy will kick in. This return to sustainable growth will have been achieved, as Allister Heath claims, through a steely commitment to deficit reduction, the weathering of the Eurozone crisis and a few injections of government backed credit.

Others have turned the productivity puzzle around. What if it’s an issue of demand? Respected labour economist John Philpott recently pointed out that demand in the economy has been supressed for a remarkably long time when the supply of workers has been greater than ever. Large-scale demographic changes – the UK’s growing population, and a workforce swelled by older people retiring later – mean that hose in a job are willing to accept lower wages over unemployment, and so firms can hoard labour and avoid the costs of hiring and firing. Britain’s army of underemployed part-time workers also hold the wage rate down, not least because part-timers earn around two-thirds of a full time wage.

It’s not the case that low paid jobs are a way back in to work for those who have lost out in recession, who might return to boost the economy further. The Joseph Rowntree Foundation has carried out admirable work showing that “large proportions of low-paid workers are not moving up from the bottom of the pay ladder, even over relatively long periods of time”. Instead, low pay is increasingly the norm for particular sectors. The majority of jobs created between 2010 and 2013, noted the TUC, were in low-paid industries: chief among them retail and personal care.

There are serious consequences for everyone when low pay becomes part of the business model. Without readily available credit or solid demand, it makes sense for companies to squeeze value out of their employees rather than invest in creating new products and finding new markets..

One explanation of the productivity puzzle is that the creative destruction usually occasioned by recessions didn’t take place this time. Not only did banks fail to adjust their own business models – relying instead on quantitative easing – they may have extended forbearance on loans to companies that are fundamentally unproductive, as the IFS suggested last year. This idea has led some to dramatic conclusions:

“The real wage can determine the capital- or labour- intensity, and the productivity, of an economy’s output. To be slightly more precise: maximum achievable productivity places an upper limit on wages, but how close to achievable productivity an economy operates depends on wages.”

It’s surprising to read an argument like this in the Economist. But it’s encouraging that we are starting to recognise the long-term risks of our economy’s race to the bottom.

Most immediately, low paid workers are also bad consumers. Recent growth corresponds worryingly to a rise in debt-fuelled spending. The gap between recent rates and a living wage – what we might call a “basic, but socially acceptable standard of living” – also means the Treasury loses out on £5.9 – £6.3bn in tax revenue. Put in perspective, the government will spend on £4.47bn on universities in England this year. This is not much of a public investment in innovation, and business investment is only now beginning to improve. The Bank of England plans to keep interest rates at 0.5 per cent for at least another year. Such a large and sustained stimulus becomes risky if bubbles emerge in housing and the stock market. Before we run out of economic options, it’s time to take on low pay: and to do so we may need to rethink some of our basic assumptions.

Making work pay: the story so far

February 11, 2014

Originally posted in the Fabian Review Online, 11th February 2014

The economy is growing, but where are the celebrations? The recentpreliminary GDP figures showed 0.7 per cent growth in the last quarter of 2013, but the response has been muted. Business secretary Vince Cable pre-empted the figures by declaring that “the shape of the recovery has not been all that we might have hoped for”. Why? First, there is little evidence that the economy is rebalancing: James Plunkett from the Resolution Foundation noted that 0.4 per cent of this growth was in business services and finance. Second, as the TUC’s Duncan Weldon commented, there is evidence that the recession has had the effect of boosting low wage, low productivity jobs. We are losing jobs in manufacturing, and gaining them in health; losing them in construction, and gaining them in real estate.

Signs of life in the economy therefore do not mean broad-based growth, much less relief from the longest consecutive fall in real wages since records began. The most common explanation for the decline in wages is the changing nature of the UK economy. The argument goes that traditional industries such as manufacturing have lost comparative advantage against emerging economies, in part because of the cost of wages. These competitive pressures mean we have been painfully shifting towards an economy in which a broad base of service jobs support a small number of truly innovative professions at the top.

This narrative is persuasive but not entirely so. It becomes a bit threadbare now that we have a much better understanding of the experience of low-paid workers. First, we know that low-paid workers in the UK are not competing directly against workers elsewhere. The sectors in which low pay has proliferated – chiefly personal services such as cleaning, catering, and security – are not directly exposed to international competition: a pub on a UK high street is not competing against a Chinese bar. So how about competition in the labour market? Immigration is not the problem here either, because increased migration tends to put downward pressure on wages in those sectors already staffed by migrants. London has the highest proportion of migrants, too, but the lowest proportion of low-paid jobs – so there’s no simple explanation to be found here.

A more convincing version of our standard narrative about pay suggests that technological change has made mid-level, managerial jobs redundant. Low-paid workers can’t progress to better-paid jobs because the career ladder has disappeared, alongside the 9-5 working day and the well-thumbed Rolodex. It’s true that there has been a decline in managerial jobs. In fact, the UK Commission on Employment and Skills argues that not only has the job market become increasingly polarised, the ‘UK appears to be one of the outlier nations that have encountered particularly strong polarising trends’. The significant change, however, appears to be growing inequalities in pay for workers in the same mid-level occupations.

For these reasons, it seems that the relative decline of Western economies and the disruptive effects of technology are not directly to blame. If we know the kinds of jobs that attract low pay, who are likely to take them?

Women are more heavily concentrated in sectors where part-time or flexible employment is common. The jobs market severely punishes women for trying to fit work around other priorities: not only are part-time pay rates generally lower, but there are also fewer opportunities available to those who have had a period of part time work. It is true that in the past decade, the share of low pay is increasing for men and declining for women: but the difference in earningsbetween high- and low-paid women has actually increased.

Young people are also bearing the brunt of a low-pay economy: a quarter of workers under 21 years old earned less than the living wage in 2012, and two-fifths of those between 21-25 years old.  Young people face a double challenge as older workers stay in the job for longer: many are seeking to make up for low wages by asking for more hours. However, employers have tended in the recession to extend the hours of older employees rather than risk hiring new ones.

Now the economy has returned to growth, it’s time for a conversation about pay. The gaps in the usual story of international competition and technological change mean that we need to understand why certain sectors are dependent on low pay. The experience of the low-paid themselves means that we can’t just point the finger at individuals: women are losing out because of the nature of the jobs available to them, young people because of the kind of working life they are forced to accept. Low pay need not be a fact of life, and in my next article I will show how it is holding back recovery.

Local finance is about money working for us

January 17, 2014

Today, Ed Milliband announced a “reckoning with Britain’s broken financial system”. An extraordinary political reversal has taken place, with a conservative chancellor announcing yesterday an above-inflation rise in the statutory minimum wage rate, and, as thinktanker Phillip Blond pointed out, a Labour leader attacking monopolies in the banking sector.

Milliband argued that “part of the reason we rely too much on low-paid, insecure work is that the small- and medium-sized firms – that could create the good, high-paying jobs of the future – can’t get the finance they need.” There are reasons for skepticism here. The Institute for Fiscal Studies found in their last Green Budget that small businesses were contributing to the UK’s productivity gap by hoarding labour – reducing their costs, but cutting hours, training and investment. In other words, keeping people out of the unemployment statistics by running down the quality of work. It was clear in their analysis that the erosion of job quality in response to recession was greater in firms who spent less on wages. The connection between job quality and a productivity Miliband makes is bold and borne out by the evidence: the IFS concludes that much of the UK’s productivity gap results from “an impaired financial sector that is extending forbearance to low productivity firms while being more risk averse in funding new projects”.

The Labour leader’s key policy here is to control the market share of the big five banks and support the entry of at least two new ones. Understandably, he did not feel the need to acknowledge that the government has finally begun to make good on its promises to increase diversity into the banking sector, which despite constant pressure to prove its social and economic contribution, is still not investing in small business at anywhere near the level it should. In March, the former Financial Services Authority announced regulatory changes to make it easier to start new banks. The British Business Bank, spearheaded by the Department for Business, Innovation and Skills, is due to begin guaranteeing loans to small businesses next autumn, with initial capital of £1.25 billion.

But the lack of confidence banks have shown in small business is matched by a similar ambivalence of small businesses towards traditional finance. Cambridge and Counties Bank is one of only four new banks to open in the UK the past three years, the result of a partnership between Cambridgeshire Council, its pensions authority, and a university college, amongst others. They admit that the process has been difficult, but emphasise the importance of working closely with their clients, where relationships with traditional banks have deteriorated. They have also aligned themselves closely to the development priorities of local authorities. As the New Economics Foundation’s Tony Greenham has emphasised, while it is easy for traditional banks to standardise payment functions and achieve economies of scale when dealing with small businesses, their business model is ill-equipped to provide credit where it’s needed. Successful decisions for about lending to companies with limited access to financial information depend on an intimate understanding of localised economies and specialist businesses.

Allowing local councils to set up banking functions was mooted in the 2011 Localism Bill, as part of giving councils a ‘power of general competence’ which included powers to do “anything which it considers is likely to be of benefit” for their localities and citizens. In early 2013, Newark and Sherwood Council established the Think Business Investment and Growth Fund, to provide seed funding to small businesses with growth potential. Working with the fund is not simply a transactional relation: business consultants help develop each loan proposal, which are then considered by an independent panel made up of three people with finance and business experience. The panel then makes an informed, individual decision on whether a loan can be offered and the terms of the loan. This initiative is especially striking considering the eye-watering scale of cuts councils have been required to make in recent years, but the Council insisted that being ‘open for business’ was an essential part of adapting to changed circumstances.

What’s immediately inspiring about local finance is that by bringing finance back down to human scale, it represents some of the most decisive steps taken to address a lack of confidence in our financial institutions, and to face up to the powerlessness many feel with respect to the world of money. Meanwhile, the response from councils – to act proactively and flexibly within the financial and legal constraints they face – shows local government beginning to live up to its promise as the essential partner of innovation. It is encouraging to see an acknowledgement today by a party leader of the dismal failure of politicians to face up to the financial system. Shaky, unproductive firms continue to provide unsustainable jobs, all the while supported by supine banks. Money needs to start working for us fast: local finance is one way of making this happen.