From the TUC

A High Productivity, High Wage Economy

05 Nov 2013, by Guest in Economics

NIESR modelling suggests that moving to a statutory Living Wage (i.e. uprating the National Minimum Wage to Living Wage level) would lead to the net loss of 160,000 jobs. New work from Howard Reed finds (subject to assumptions highlighted by Chris Dillow) that the demand boost from higher earnings would actually lead to a net increase in employment of around 58,000.  

There is of course no real answer to the question – “would a substantially higher minimum wage cost jobs?” that doesn’t begin with ‘Well, it depends upon your assumptions”.

But in the debate around whether or not a certain level of minimum wages would cost jobs, there is a bigger question that is often missed. In the long run do we want to preserve £6.31 an hour jobs?

I ask because I think there is a lot of truth in a something once said by T&G leader Jack Jones:

Low wages degrade the firms that pay them. Low wages cannot be justified on the argument that the firm would not survive – if it cannot pay decent wages it should not survive.

The long term vision of the economy that the TUC argues for is one that is of higher wages, higher skill levels and higher productivity.

In an interesting piece for Public Finance, Jonathan Portes recently concluded that:

Meanwhile, in the private sector, we have far too many businesses that are unwilling or unable to invest, whether in physical or human capital. A credible strategy would be to set out a coherent long-term vision for the UK: a high-skill, high-productivity economy, with structurally higher levels of investment, and a reasoned, patient strategy for getting us there that could survive changes of government. 

I think there is much truth in this. As Nick Pearce and Gavin Kelly have argued:

A fuller structural account of British capitalism would begin by highlighting its long tail of pedestrian, low-skill sectors, in which millions of workers are employed on low wages with no prospect of career advancement.

If we want Portes’ ‘high-skill, high-productivity’ economy then we need a credible plan to move more of the workforce into higher productivity sectors and firms that will be able to pay higher wages.

The TUC has argued that this requires, what is typically thought of as, ‘supply side reform’.  As I wrote earlier this year (following an IFS report into productivity growth):

  1. There is a strong case for a stimulus to demand.  Many of the suppose supply constraints the UK economy currently faces are actually related to problems on the demand side of the economy. Boosting demand now would boost productivity.

  2. The output gap is almost certainly larger than the government currently estimate. Fiscal policy is tighter than is far too tight. This raises questions about the choice of the structural deficit as the target for policy.

  3. The Government’s current supply-side polices will not address the real supply-side issues we face.

  4. The UK does however require supply-side reforms – but the reforms we need are reform of the banking system, corporate governance reform to encourage long-termism, a better skills policy and a modern industrial policy to support the sectors of the future.

  5. Most worrying of the Government continues with its current policies of extreme fiscal consolidation and the wrong supply-side reforms the UK risks going further down the path of a being a ‘demand-constrained, cheaper labour’ economy.

A few weeks ago I tried to set out what such a strategy might look like (this post even has a 10 point plan…):

…such a strategy would focus on growing higher productivity sectors through an active industrial policy with accompanying reforms to banking (a state investment bank, some form of local lending institutions), corporate governance to encourage long-termism and sector specific work to rebuild supply chains , help set direction and work on skills issues.

The aim though is not just to grow high productivity sectors but to also not only grow what Carlin calls labour-absorbing sectors (which have a lot of overlap with Williams’ ‘foundational’ areas) but to actively improve wages, terms and conditions in these sectors.

More ‘good jobs’, for example in high tech manufacturing (to quote an often used example), are not by themselves enough. What is needed is more’ good jobs’ coupled with actively making other jobs better. The benefits of high productivity in some sectors can be used to actively support better conditions elsewhere.

To use vogue-ish political terms, I think of this as ‘predistribution’ at an individual level – boosting skills and increasing productivity – and redistribution at the macro level between sectors.

So, if this is the broad vision of how we get to a higher productivity, higher skilled, higher waged economy with more long-termism, more investment and higher living standards, then the question becomes how do we get there?

The first thing to note is that you don’t build such an economy overnight or even over one Parliament. But one of the gradual steps you would take would be raising the level of the minimum wage (Hopi Sen has interesting post on similar topics today in which he argues for gradually increasing the value of the NMW).

But if we’re serious about building such an economy in the medium to longer term (and again, this is gradual project) then we need a much bigger debate about the eventual roles of statutory wage floors that goes beyond  “will it cost jobs?” and instead asks “what kind of firms do we want?”.

This isn’t an argument for doubling the minimum wage tomorrow but it is an argument for asking how we  get to a situation where there is less lower waged, lower productivity employment in the first place.

2 Responses to A High Productivity, High Wage Economy

  1. Tax Research UK » Paying the living wage could increase employment
    Nov 6th 2013, 8:11 am

    […] strongly recommend reading the report. It’s not without its critics: Duncan Weldon at the TUC links to some alternative view here, but I am much inclined to Howard’s view: I think his assumptions are realistic. His […]

  2. Benjamin Profane
    Nov 14th 2013, 3:35 pm

    The truth is that the UK is a high wage economy relative to the rest of the world. State sponsored capitalism, the system in the UK, will always produce wide disparities in pay as a product of its structure – indeed, the possibility that employees could earn more than a subsistence wage is a very recent development in economic history (read the Affluent Society). Skills-biased technological change is well recognised as creating an hour-glass labour market and this is unlikely to change. I’d be interested in the author’s thoughts on what these ‘high value’ industries and businesses might look like and how they might all coexist in one country with well-developed career paths.

    The fact is that not all of us can sit in an office in London and draw charts on excel and then post them into a blog post, write a tweet about it and then receive a handsome pay cheque. And the minimum wage is a red herring – only 4% receive it, most of who are young people who will earn more with experience/qualifications. The minimum wage has also increased more rapidly than CPI, RPI, average wages and GDP since its introduction in 1999.