Tackling low pay needs a local approach

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 Rowthorn has 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 paribus condition. 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 Foundation have 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.