Despite Brexit worries and business lobbying, the PM must hold her nerve on minimum wage raises
In order to continue to take a place in the centre ground, the Prime Minister must stick to the government’s National Living Wage target for 2020, as this is now under some threat.
When Greg Clark became business secretary, he immediately came under pressure to water down or delay the National Living Wage (NLW) target from a number of the smaller business federations.
This would be exactly the wrong thing to do at a time when the political signals ought to read “business as usual” in order to calm business nerves that were severely jangled by the outcome of the June referendum.
Since then there has been steady drip, drip, drip of pressure from business figures who have always resented the NLW, including a report today from an insolvency practitioner suggesting that more businesses are struggling.
The TUC now finds itself in the slightly unusual position having to help to defend government policy and calling on the PM and the Chancellor to hold their nerve and deliver what was promised by their immediate predecessors.
Luckily, this is not so hard to do. Not only does the UK have a record number of people in employment, as the government continually reminds us but, most tellingly, the number of people employed in low paid industries has risen faster in the past year than jobs growth in the rest of economy. This suggests that businesses have been able to cope with the introductory NLW rate of £7.20.
The arguments that UK businesses can’t afford a further increase don’t look very convincing either. We still have to see the latest figures, since pre-referendum corporate profitability was running at record levels. If large firms have to pay higher wages because of the NLW, there is also some recognition of the increase in the supply chain, whilst more spending money tends to filter down to smaller businesses in the shape of a modest but welcome boost to consumer demand.
It may be that some companies are taking higher profits rather than re-investing, but that would certainly not be a valid reason to hold pay down.
Negative lobbying from some element of the business community isn’t the only threat. As pay growth forecasts have been revised downwards following Brexit, the NLW target might deliver a much lower figure than initially thought, according to a new analysis published by the Resolution Foundation today.
When George Osborne announced the target it had two parts.
First: “I am today introducing a new National Living Wage. We’ve set it to reach £9 an hour by 2020.”
Second: “the Low Pay Commission will recommend future rises that achieve the Government’s objective of reaching 60% of median earnings by 2020”.
One problem is that earnings have so far not been growing as fast as predicted. Furthermore, wage growth forecasts have fallen significantly because of the uncertainty following the vote to leave the European Union, which has dragged down predictions for economic growth.
On the basis of current forecasts the Resolution Foundation predicts that 60% of median earnings is now likely to turn out to be around £8.60 by 2020, 40 pence lower than George Osborne’s initial announcement.
It is in everybody’s interest to have wages increasing as strongly as can be sustained.
Working people need money to live, businesses need customers with money in their pockets, whilst public services benefit from better funding when higher earnings swings the tax-benefit ratio in favour of the Exchequer. Even governments tend to wind up being be more popular.
Working people must certainly not be expected to pay the price for Brexit, otherwise the country will become even more divided. Yet HMTs monthly report shows the predicted growth in domestic demand for 2017 falling from 2.1% in the June pre-referendum round up of independent economic forecasts down to just 0.2% by September.
But the government does not have to just play with the cards that it is dealt. Rather, it can take steps to improve its hand… and should do so.
The government should take strong steps to keep the economy on an even course, including increased infrastructure spending and developing a modern industrial strategy. See the TUC report “Working people must not pay the price of the vote to leave” for more details on the way forward.
One of the great challenges for Theresa May’s government will be to commit to take action to ensure that the economy is buoyant and that real wages and incomes continue to rise during the coming period.
A key test of this commitment will be to stick to the National Living Wage target.