Can we simply raise wages and solve our economic problems?

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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.

Education

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.

Comment

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.

 

This entry was posted in Bank of England, Ethics, Executive pay, General Economics, Income, Inflation, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • forbin

    Hello Shaun,

    In a global market that has been created in the way that it has you will not be able to raise UK wages

    I exclude the top 1% as this “globalization ” was made for them , and them alone.

    but yeah raising wages would be the help needed

    or debt default , not gonna happen

    Forbin

  • Joe

    Wow, this piece is a real change of pace for you Shaun. It looks like you’re softening on your ‘rule’ to stay out of the politics – especially looking at this sentence:
    “”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.”

    Is this a conscious decision?

  • Anonymous

    Shaun,

    With the likes of Amazon, Starbucks etc plus other internet revenue sources (latest bingo/betting as payday loans?) perhaps its time to review company’s £ sales vs taxes paid (not including vat nor employee NI/tax ) with a target of say 20% as a guide to see who is not paying their share?
    Would publication of lowest vs highest pay also shame the worst offenders?

  • forbin

    sounds like a plan , a list of big companies and a list of top tax payers as well ( in this case top paid but paying little to no tax)

    change the laws as well , debt loading of a company should be banned with 110% fines imposed !

    If you hold a UK passport then you pay UK taxes first and then not have to pay your local domicile taxes .

    If you’re a non UK tax payer then you still pay the difference to the UK between your local country and our taxes . . All companies that operate branches here are required to have a CEO based in the UK if over 100 employees ( full or part time ) to whom we can chase for the lost company and personel tax.

    Forbin

  • Anonymous

    Hi Shaun,

    Reducing rental costs would raise the living standards of minimum wage workers.

  • Pavlaki

    Shaun, you are correct about companies being run for short term gain. When I worked as an MD and later regional VP in a large multinational we were under huge pressure from the very top to take short term actions to boost profit that we’re not in the long term interests of the companies I controlled. The reasons for this were either to satisfy the stock market (read for that directors stock options) or to qualify for bonuses. In many instances those at the top new that they were good for only 3 or 4 years on their huge salaries, options and bonuses and they wanted to maximise them. Senior management, on the other hand, hoped to be around for rather longer and wanted growth strategies adopted instead. Unfortunately shareholders are as short term as the guys at the top so there is little incentive to reign in short termism.
    I wonder just how many businesses would be affected by a higher min wage? Not too many I suspect as the UK is not a low cost manufacturing base. Ditto higher interest rates and a higher value pound. No business wants them but many we’re doing nicely when the pound was much stronger and rates higher. Once the economic recovery is broader based then this needs to happen but don’t expect business to suggest it as anything that may reduce the bottom line will be vigorously fought against.

  • Patrick, London

    Didn’t we come to the conclusion that we actually need to start referring to the top 0.1%?

    :)

  • Blue Brit

    I would disagree with the approach for a number of reasons

    Benefits are a subsidy for corporations that in reality pay very little tax. An employed person should not need government help to pay for a roof over their head or for food on the table.

    A large part of globalisation is the impoverishment of the local population by enriching others albeit at lower wages. All this does is make the fight for resources fiercer. In a finite world this is medium term suicide. As your citizens cant feed themselves this will eventually lead to resource wars. Which will decimate the natural world world exacerbating the problem.

    The real solution lies in population control. Reducing demand and lowering prices.

  • Noo 2 Economics

    I’m expecting wages to start rising quicker this year in line with inflation as I don’t believe in “the output gap”.

    I think structural unemployment has risen as a result of the debacle started by Brown and carried on by Cameron/Clegg. The upshot being that there is indeed less competition in the jobs market which will automatically force wage levels up, which, of course, will increase inflation unless the pound continues it’s march. So I think you’ll get your way Shaun, only not just at minimum wage level but at all levels which will unfortunately include the incompetent inhabitants of the upper pay scales, although their pay has always demonstrated the characteristics of Yazz’s hit song song no matter what the economic conditions.

  • Anonymous

    Hi Patrick and Forbin

    Or perhaps the top 0.01%?

  • Anonymous

    Hi Joe

    The answer to that is no on both counts. i was actually making the point that it is best to be as non-political as possible only this afternoon in a meeting.Timing huh?!

    To my mind I was simply continuing the theme which I have argued before that this “enmeshing of wages and benefits” has been a cause of the problems we have with the poverty trap. It has become reasonably accepted I think that it looks as though companies have used it to allow themselves to pay low wages knowing that the state would pick up the rest. I was not particularly blaming any party or individual for it as these days the opposition mostly apes the policies of the government with an occasional change. I am more than happy however to blame our political class as a group.

  • Anonymous

    Hi Chris

    Two good ideas as we need to get back to a system where taxation of companies is as compulsory as it is for individuals. As I am compiling my tax form for the end of the month that is a sore point! Although there needs to be some international agreement as otherwise there will be more Ireland’s…

    As to the second point it is worth a go but I fear that many involved lack a sense of shame…

  • Anonymous

    Hi ExpatInBG

    That is an intriguing idea. How would it work in practice? As a Londoner I am already wondering how it would work in the current bubblicious environment here.

    On a completely different subject have things improved in Bulgaria?

  • Anonymous

    Hi Pavlaki

    You are right to point out that there is also a problem with shareholders who themselves are institutions mostly run by the same motivations and methodology as the companies themselves. It makes for quite a mess and I think that we need quite an enormous reset here.

    Do you have any thoughts as to how we could improve things?

  • Anonymous

    Hi Blue Brit

    I watched the film the Matrix last night and Agent Smith from it was certainly in agreement with you. However the Malthusian line has the issue that we need to deal with our debt issues with even more urgently. As the can kicking strategy does not go well with population control so our political class will be against it too. Of course though their opposition means that you have a very good chance of being proven to be correct!

  • Anonymous

    Hi Noo2

    We can agree very quickly on the “output gap”! As to wages there is backing for your view from the KPMG jobs survey released today.

    “Permanent salaries rise at fastest pace in over
    six years…

    Average starting salaries for people placed in permanent jobs increased further in December, with the rate of growth the strongest since October 2007. Temporary/contract staff hourly pay rates rose at a solid pace that was slightly slower than in the previous month.”

    We wait to see if such surveys are backed up by actual data as time goes by. So far they have not done so.

  • Anonymous

    Hi Forbin

    I have argued before that we need to change the way that debt interest is allowable against profits. It is a shame as there are genuine uses but it has also been gamed.

  • Anonymous

    Germany has tenant friendly laws and rent caps that work well in practice, but some slum lords do exploit vulnerable migrants in Berlin. Low paid German workers have a better standard of living due to this sensible law.

    London with it’s housing shortage is vulnerable to slum lord abuse. Britain’s aristocracy and churches do very well from rent seeking – so it’s a sacred cow that our politicians won’t touch.

    Bulgaria – I’m seeing lower prices for building supplies – those suppliers work in a tough cost conscious market. IT specialists have a much better standard of living than London due to lower living / eating out costs. For the unskilled, life is very tough.

    It’s hard to say if things have improved, the new govt is borrowing more money, but as far as I can see – it all seems go into kleptocrats pockets.

  • Rods

    Hi Shaun,

    A hard hitting blog today, where I think you are trying to apply a dose of medicine to suppress the symptoms of where the economy is right now.

    Adam Smith defined very simply the conditions for enterprise and markets to flourish. These are free trade, reasonable taxation, sound money and reliable protection of property rights. This sort of trading from the creation of the Silk Road to the spice trades and many other traders who have been meeting and creating markets and has worked and flourished for 1000′s of years, increasing all parties wealth and has in the UK exponentially since the industrial revolution since 1750 which changed a static to an ever growing population, personal wealth, happiness, health and increasing life spans. It has stood the test of time.

    Is it surprising that the developed world is struggling where these fundamentals have been eroded to the point of crisis.

    1. Free trade is under pressure from protectionist measures due to the current recession. The EU had a spat with China on this last year, where they tried to restrict selected Chinese goods at the behest of the French to protect their industries, after the Chinese retaliated with controls on European exports particularly of motor vehicles a compromise agreement was reached, Ukraine raised import duties across a wide rage of products right at the limits on what they were allowed to do under world trade agreements last year, there are also many other instances of this sort of protectionism, solar panel and steel in the US come to mind. Free trade to me also means reasonable regulation but this gets ever more onerous, where it is on a ratchet which tightens all of the time as there is never any deregulation these days, especially in the EU, which largely follows French legal system, where everything is illegal unless made legal, so everything is regulated and micromanaged (usually unsuccessfully as the two FSAs have shown) the opposite of the much more successful light regulation Anglo Saxon system. This increases unproductive costs and increases barriers of entry. The EU and European countries are very good at killing enterprise especially in the crucial SME sector.

    2. Reasonable taxation: VAT at 20%, 20%+ on profits, business rates, plus many other Government charges called anything but taxation. A single average person on an average wage paying about 50% of what they earn in taxes. These are IMO not reasonable taxes.

    3. Sound money, maybe for the lucky few in countries like Norway, but for the rest of us with ZIRP and QE and heavily massaged inflation figures. I don’t think so.

    4. Reasonable protection of property rights. Record levels of counterfeit goods at one end of the scale, with very little done by the authorities to stem the tide and companies all too often, especially in the US, using patents and litigation to try to stamp out competition. There are unscrupulous companies in the US that apply for patents, knowing that many won’t be challenged and they will be granted for non-innovative ideas with commonly used day-to-day processes and systems. They then invoice companies for breaking their ‘patents’, normally with fees in the $2000-$25,000 range knowing that it will cost a company $200,000 or more to fight the claim. Two very different ends to flawed systems.

    With the best part of 20 million unemployed within the EU and low wage Eastern European countries where it is not uncommon for wages to be that a day. So there is a ready pool of labour ready to work at minimum wages in the UK, so they will not be rising anytime soon along with mass migration from poorer countries outside of the EU.

    The best route from poverty is first a job and then running a successful SME, so they can aspire to join the 1% or 0.1%. The best way to raise wages is successful enterprise and labour shortages, South Korea is the current poster boy for this, many East Europeans have emigrated there, where they have severe labour shortages and rising wages. The EU and too many other developed countries are killing this with artificially high energy costs, expensive regulation which pushes up industries cost base, high taxes, unsound money, broken banks and financial systems. The 20th century communist and socialist experiments showed that only capitalism produces large wealth for few and even more wealth, which becomes smaller for each person when shared with the many. Einstein said that insanity is doing the same again and again and expecting a different result, but most western governments, seem to be taking this increasing confiscation of wealth with rising taxation to mimic the socialist failings of the past, so we expect the same result, poverty for the many.

    I don’t understand, this finite resources argument as to date we have not run out globally of any natural resources. Capturing more of the sun’s energy, nuclear fusion, can provide all the power we need for 1000 years plus with available technology, nuclear fission should be available by then which offers unlimited power. Crops can be grown every year and with resource management ad infinitum. What we need to get much better at is recycling as the molecules that things are made of that we use, don’t just disappear. With close to 100% recycling plus interplanetary mining, where does the finite come from? Growth will always be there from human endeavours, innovation and enterprise adding ever increasing perceived value with prices to match.

  • Anonymous

    Yes! This is killing UK competitiveness.

  • therrawbuzzin

    We could end rent benefits for the U-25s, thus reducing at a stroke demand for rental property, and since rental, rather than property value will feed through to inflation rates and thus benefits to the elderly, the evil genius of the Tories becomes ever more apparent.

  • therrawbuzzin

    Politics is no longer about parties; they all have the same policies, and elections might as well be beauty pageants.
    Joe seems to mean that you’re picking sides in the class war, which is the only political battle left in the UK.

  • Anonymous

    Thanks for a laugh.

    Rent benefits mostly enrich the BTL brigade. Rent benefits only disguise an affordability problem at great cost to the taxpayer.

  • therrawbuzzin

    Perhaps, but no btl, no re-inflated bubble.
    May I point out that rent benefit does actually put a roof over the head of the needy.
    Perhaps you see that as fortuitous side-effect?

  • Patrick, London

    Is class the right word to use? It seems like an anachronistic misnomer now. It’s those with enough assets and the dubious moral compass needed to game the system, and those without assets and in most cases, less scope to exploit the system.

    There are clearly going to be those with ridiculous levels of assets, who turn a bit philanthropic, because they can, feel obliged to, want a different type of power, or are genuinely taking advantage of their incredible opportunity to ‘do good’.

    Likewise, there are tens of thousands of people who didn’t have an asset base, who fibbed about their salaries to jump on the BTL market, who have built up an asset base to get ahead, with no sense of the ramifications to FTB, to communities and to the overall state of the nation’s finances.

    This is not a ‘class’ war. It’s a battle about morality. It’s also not implicitly a battle between Capitalism and Socialism. The failings of both systems are remarkably similar, and the type of people who rise to the top when corruption is rife in either are mirror images of each other.

    How small does the 0.1, 0.01, 0.001 have to be before the fight seems winnable?

  • Paul C

    Patrick,
    I great insight from you breaking down Shaun’s distinction between assets and labour. I completely agree that you cannot distinguish when conversing around the dinner table between old money and new money. It is about morality and selfish motivation, some folk use the pension excuse that property is the only way to save for the future.
    Whether you are landed gentry or a leveraged-up “buy to leter” then both parties can be considered asset owning and exploitative, in some distorted modern English humour this could be called a class distinction but really does becoming a land-lord move you across traditional class boundaries?
    The credit crunch has served to exacerbate this elitism, some BTL folk have lost their “empire” through their own incompetence but this has only served to re-inforce the perception amongst those still successful in property that they are indeed: successful, productive, supplying a need and have earned it all in a very deserved manner.
    The reset of which Shaun alludes would necessarily be far-reaching and de-capitate many sacred cows.
    We shall see

  • DaveS

    Hi Forbin

    You can’t raise wages – but you can inflate them.

    They can’t maintain this debt trajectory without introducing a good dose of inflation – bit of a conundrum for monetarists but I think the reality is slowly dawning on them.

    So they will start cautiously but minimum wage rise is aimed at those higher up – the squeezed middle, Those on minimum get subsidised by working tax credits which will reduce, so not much cost for government.

    Lets see if we see some wage bargaining and a tick up in inflation.

  • therrawbuzzin

    I understand what you mean, but disagree; I definitely see it as class war; only not the Marxian class war of Labour-Capital, and social immobility.
    Imv it’s a neo-feudal class war between property and the rest, hence property’s content (in fact connivance) with the destruction of the value of money.
    It’s a matter of time until property has its, “Let them eat grass.” moment.

  • Anonymous

    The needy want a roof which doesn’t leak, a warm dry and clean property. What they typically receive via housing benefit is a damp cold drafty dump.

    Ergo we have 2 problems.

    1 ) Received benefit is substandard
    2 ) cost is excessive.

    I suggest we have a market failure here, and regulating rents won’t improve the housing quality.