Duncan’s Economic Blog

Some Quick Thoughts on the Living Wage

Posted in Uncategorized by duncanseconomicblog on May 10, 2011

An excellent joint blog post from the IPPR and Resolution Foundation today launches their new programme on the Living Wage.  

The Living Wage is often presented as being about justice, workers’ rights and dignity at work.

This is of course true, but actually it’s about a lot more than that as well.

As the Resolution Foundation noted recently, the OBR forecasts that consumption growth over the next few years will be underpinned by rising household indebtedness.

Despite all the frothy rhetoric about the ‘re-balancing of the economy’ the growth of household consumption will be absolutely pivotal in the resumption of steady growth. Indeed, the key factor determining the strength of  the UK recovery will be the uncertain reactions of millions of households, who are already close to the edge, to further falls in disposable income. The question of whether ever more personal debt can be used to fill the growing living standards gap deserves far more serious scrutiny than it has received to date

I think this is unlikely to happen, I just don’t see cautious and over stretched household’s going further into debt and as I’ve noted, consumption provides around 25% of the OBR’s growth forecast for 2011 rising to 50% by 2015. Much of it premised on a falling savings ratio.

The Living Wage is a crucial element in the politics of productivity (which I blogged about here) and a major step in a programme of wage-led growth. As I wrote two weeks ago:

One consequence of a declining wage share has been the stagnation of real wages and hence living standards in the Anglo-Saxon world (US median real wages have stagnated since the late 1970s, UK real wages this year will be at 2005 levels whilst productivy gains outstripped wage gains from the late 1980s onwards). Another consquence has been the growth in debt fueled consumption as workers are forced into borrowing to meet rising aspirations.

The coalition’s export-led growth model is premised on a further squeeze in living standards. The OBR’s November forecasts show the wage share ofGDP declining through out 2011 and remaining at a low level until 2016.

Given that a second large depreciation of sterling seems unlikely in an era of more managed exchange rates (‘currency wars’) and given that UK Trade & Investment is already rated as the best export-promotion agency in the developed world, it is hard to see any driver for net exports other than increased competitiveness – competitiveness that will bought at the cost of higher unemployment and lower real wages.

Reversing the trend of a falling wage share, according a recent IMF paper, would make future financial crises less likely and help the banking sector recover from the latest crisis:

“For long-run sustainability a permanent flow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful than a stock adjustment, unless the latter is extremely large… But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.”

It would also provide an important boost to domestic demand and allow a recovery based on growth in the home market rather than hoping for external demand.

 The Living Wage is about more than justice, it’s crucial to Britain’s growth prospects.


10 Responses

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  1. Stephen said, on May 10, 2011 at 11:55 am

    There’s a famous -though possibly apocryphal- story about Henry Ford. He was asked by a journalist why he payed his workers more than other assembly line workers. He replied that he wanted everyone to be able to buy his cars– including his workers.

    True or not the rise of the US workers wealth and consumerist explosion throughout the 20th century was the engine of US growth and hegemony. And I think the indebtedness and impoverishment of US workers has led to their crash and economic stagnation.

    An economy should be the exchange of goods and services for innovation and labour Now we have companies and rich individuals hoarding their capital or investing it in Gold– an eternal metaphor for unproductive wealth. We have governments who see all their own investments as debts. And we have the rest of us squeezed between the two.


  2. DaveyDave said, on May 10, 2011 at 2:14 pm

    Would be interested to have your take on the particular method of implementing a living wage advocated by Ed Miliband: that, rather than legislating for a higher minimum wage, we offer tax incentives to employers (the rationale being that better paid workers save the state money in tax credits and other in-work benefits, and the cost of administering the means test).

    • duncanseconomicblog said, on May 10, 2011 at 2:38 pm

      It’s not a bad idea at all. Need to see some more details of course!

      A good idea to start thinking about pre-tax inequality rather than post-tax. I’d rather Labour paid more attention to wage inequality in the first place – rather than using tax credits, etc to tinker around the edges.

  3. Luis Enrique said, on May 11, 2011 at 12:42 pm

    how big an effect should we expect?

    what I mean is, how many workers are there that would see their wages change after the introduction of a living wage, and low large would the change be?

    assuming the wage increase is paid for by lower profits* as opposed to reduced wages for workers above the threshold, how big a change in the labour share of income are we talking about here?

    (at least until whatever positive feedback effects you envisage kick in)

    • duncanseconomicblog said, on May 11, 2011 at 1:15 pm

      Fair question that requires a long response – will blog.

      Interesting to look at ONS household data and where debt/spending is to be found.

      On the labour share – back to 50s/60s levels (not 1970s) would suit me.

  4. […] need to outline why the Tory plan is bad. Duncan has begun to illustrate an alternative based on wage led growth and I would argue that these are the two constituencies which need to be targeted. Attacking the […]

  5. jomiku said, on May 11, 2011 at 3:18 pm

    As a correction to the first post, that’s not a true story. Ford had massive turnover, partly because there was so much competition in the early auto industry, partly because his own work rules (no talking, no breaks) made his plant less attractive. He paid more to reduce turnover. It worked. He also knew many competitors – Detroit had dozens of car companies then – couldn’t afford to match.

    To respond to the post, the question of living standards is huge. This is an issue avoided in the US. Much of the “theory” underlying this approach to government is increasing competitiveness through reducing the cost structure. In the US, the talk is about deficits and entitlements. The simplistic notion is that reducing the amount paid into the government increases the amount available. This is based on a truly strange notion that the US can compete on cost not with Europe but with China and India. Our economy is so much larger and our consumption so much higher that we can’t grow exports somewhat and generate sufficient prosperity to overcome the effects of massive cutting of government spending. I don’t know if Britain can but the US definitely can’t.

    In this country, the belief is rooted in religion: we have strayed from American principles – which God gave the Founders, which makes the US “exceptional” – and only by returning to those principles will God then make us prosper. The ideas is being sold literally as “the path to prosperity.” That path runs through impoverishment because it is through lowering living standards and taking away government benefits – like health care – that we are promised eventually God will reward us with prosperity. People believe nonsense all the time and that belief system is a perfect example. But it sells: people like being told they are going through something for a reason, that hope is on the horizon. Even when they’re being lied to or are just plain being led in the wrong direction.

  6. Craig said, on May 11, 2011 at 9:25 pm

    Duncan, have you come across any figures for the number of minimum wage workers in the UK that would be affected by a living wage?

    I’m speculating here but i would guess that companies with higher corporate surpluses would more likely be those employing professionals already above any living wage…any ideas on encouraging higher wages here? small tax cuts for above inflation rises ?

    Would any government action to incentivise wage rises ultimately lead to a lower labour share?

    • duncanseconomicblog said, on May 11, 2011 at 9:57 pm

      Craig, I’ve promised Luis a post on this (above) – will try and cover this issue to.

  7. […] has begun to illustrate an alternative based on wage led growth and I would argue that these are the two constituencies which need to be […]

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