A long running theme of this blog has been that weak wages growth in the UK is one of the fundamental issues of the credit crunch era. There has certainly been a considerable change in the pattern which looks ever more like a paradigm shift. The Office for National Statistics undertakes an annual survey (ASHE) which summarises the position thus.
Up until 2008 the annual increase in weekly earnings was fairly steady, averaging at around 4% each year. However since the start of the economic downturn earnings growth has slowed, with the annual increase averaging at around 2% each year between 2009 and 2013.
Actually their ‘around 2%’ a year is slightly dubious as their own figures show that wages growth was more like 0.5% in 2011. Also if we step forwards from their annual survey we learn that wage growth has slowed since then.
Between August to October 2012 and August to October 2013:Total pay for employees in Great Britain rose by 0.9%.
Actually the latest single month figure showed a rate of growth of wages of 1.1% per annum. But the paradigm shift has been from wage growth of 4% (at the time thought to be 4.5%) to the official view of 2% but perhaps now more like 1%. Quite a change is it not? One of the most significant changes of the credit crunch era. Should the current UK economic mini-boom do little about it then it will shift to be the most significant change in my opinion. Certainly Karl Marx’s theories will have plenty to chew on as capital makes profit and the wages of labour get squeezed.
Of inflation and hence real wages
Back in the relative nirvana of the pre-credit crunch era wages rose at around 4% and inflation was targeted and often around 2% so real wages rose by 2% per annum. Oh for such times now! The consequence of the Bank of England telling us that an inflation overshoot was “temporary” when in fact it has lasted for just under four years has been terrible for real wages. These went negative and you may note that in terms of the annual survey 2011/12 was a particularly dreadful spell as annual inflation surged to above 5% in the autumn of 2011 as wage growth virtually ended. You may also note that if the Office for National Statistics is correct about the 2% per annum wage growth then real wages would not have fallen if the Bank of England had hit its inflation target. However you look at it this is the route by which the cost of living has become such an issue in the UK.
One issue here is whether it always was official policy to force real wages lower. Personally I think that they got it completely wrong and blindly following their economic models they did not expect wage growth to be so low for so long. Rather than the expensive official enquiry whitewash which took place it would have been much cheaper and more effective to simply scrap such models.
You may note that this policy was contractionary in terms of domestic consumption and is a reason why I have not been a supporter of Bank of England policy. It was being argued on Twitter yesterday on a chart prepared by Fraser Nelson of the Spectator using Bank of England figures that £100 billion of Quantitative Easing is equivalent to a 1% base rate cut. I do not think that it has anything like that impact although, mind you, base rate cuts have so little effect as we approach zero that you could argue that it has the same lack of effect! As soon as we move away from zero however such analysis will fail completely.
What can we do about this?
The bureau of central planning has a suggestion. This involves raising the minimum wage as a way of pushing wages up from the bottom. This does have factors to recommend it and the most obvious is that it would help to reverse some of the increasing economic inequality of these times. It would also help deal with another problem which is that so many workers on such pay levels both require and receive social benefits from the UK government. As the wage rises cut benefit payments you could argue that this is a back door type of austerity and one of the reasons why the coalition government seems to have shifted in favour of it! The enmeshing of wages and benefits at the lower end of the pay scale is one of the curses of these times and a policy mistake.
The other side of this coin is however that the government’s gain via lower benefit payments is being financed by the businesses that have to pay the higher minimum wage. So it is a type of implicit taxation on them. Also there is a danger that employment will drop in response to the higher price of labour although so far the minimum wage has had less of this sort of effect than many assumed before it was introduced. In addition there is the danger of prices being pushed higher and some inflationary pressure being generated. There is also the risk of other wages being pushed higher via “relative wage pressure” although at a time of sucweak current wage growth this seems less likely.
Here is a suggestion if this road should be taken. Any gains for the government from such a move should be given back to businesses by a cut in business rates. That would help with any inflationary implications as you would be cutting their costs.
How do we deal with those who are overpaid?
This is another fundamental problem right now but is much more rarely discussed. Our problem with rewarding individuals is as acute at the upper end of the pay scale as it is at the bottom. If we start with the private-sector then the joint-stock company system has been taken over by management and company directors who have overrun the interests of shareholders. Accordingly they award themselves pay and benefits which often have little or even no connection with their abilities. Even worse companies are run for their short-term gain rather than for long-term shareholder benefit so there is a clear argument that the whole system is counter-productive for our economy. Yet it is rare to see any argument saying that wages should be cut for the incompetent up at these rarified levels. In my opinion we need to find new criteria at the upper end of the pay scale.
Even worse this system was imported into the public-sector as the advice of people such as Fred Goodwin was taken. So the (supposed) talent gets ever more money and ever more disconnected with the rest of society whilst their actual responsibility declines. If we take the recent NHS scandal in Staffordshire where sadly there were apparently hundreds of unnecessary deaths and then look at who at the top was made responsible we see an empty list.
I have some contact with individuals who work in the NHS and education in the UK and have been going round them and asking them what their output is and what their objectives are. To the latter question I have received some extremely heartening replies as they genuinely want to improve health and education but the first question only elicited confusion. Once we got through that it was clear that management has its own objectives which often have nothing to do with patient needs such as appointments being made that are too short to provide proper treatment but of course making sure that the appointment target was met!
So my argument here is that we need to reform the top of the pay scale even more than the bottom of it. We can either get in better people at the same pay or cut the pay of the incompetent. Actually I suspect that many capable people would do these jobs better for less pay and we could win all round in both business and the public-sector.
The problem here is that we need to change not only our system of corporate governance but also reform our democracy as governments of whatever hue have and are contributing to the problem not the solution. The connection between rewards and responsibility is broken and is broken most of all in our political class.
I have made the case for a reform of education before and I wish to make it again. It been something of a political football in the UK for decades as political parties,pressure groups and the teaching unions all make ideological cases. Meanwhile we fail to take advantage of areas we are strong in such as advanced engineering -many of the Formula One teams are based in the UK- and instead have prioritised having around 50% of the population going to university without any real thought as to what they might study.
As graduates emerge blinking and staggering under a weight of student debt into the job’s market, they may well feel cheated and in many respects they are right to do so. The whole issue needs a complete refocus onto what we plan and hope will be priority areas unless we wish to compete in a ever lower wage world.
A more revolutionary idea
Keep inflation low and help real wages that way. I realise that this will involve a complete change in philosophy at the Bank of England.
In essence I am making the case for pretty much a complete economic reset for the upper echelons of UK society. They are doing nicely for themselves but letting the rest of us down. The truth of the credit crunch era is that one of Karl Marx’s themes is a background drumbeat as we see “capital” doing well but “labour” finding its wages being squeezed especially in real terms. If we look at a growing world population and finite resources this pressure seems set to continue as we look forwards. Thus raising wages on its own solves some problems but at the cost of creating others.
Therefore if we have any concern for the economic welfare of our children and younger people we should start the reform and reset of our economy now. It will not be easy as there is a lot of dead weight mostly at the top and they will resist this as much as they can. But we do have a history of invention and innovation which we have rarely needed as much as right now.