Some Quick Thoughts 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.
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.