Merryn's Blog

What should we do about Britain’s low wages?

How can we address the problem of low wages without pushing inflation to an unacceptably high level?

In search of growth without inflation'. That's the title of an old Statist article from 1967 I have sitting on my desk. Its author was worried: the UK had a little deflation going on; everyone wanted to reflate (via low interest rates, industrial grants and so on); and he thought this might lead to inflation and hence to another period of "contraction or stagnation".

How could this be prevented? With an "all out attack on the forces that undermine a competitive economy".

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By that, he meant the avoidance of wage-push inflation via the use of "moral suasion" to restrain the demands of the trade unions for higher wages. This didn't work out that well inflation was heading for double digits within three years.

Which brings us to today.

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The economy is apparently growing great guns (see my editor's letter this week for whether we consider this good growth or bad growth), and inflation is already knocking around 3%. Wages, however, are not. They've fallen 9% (shocking isn't it?) in real terms since 2008, and are still falling now. The TUC didn't like that much in the 1960s and 1970s and it doesn't much like it in the 2010s either.

Frances O'Grady, the head of the TUC, has just called on Ed Miliband to have the "courage" to commit the next Labour government to interventionist policies on low pay. She wants to see the return of the wage councils (which set wages for different industries) that the Statist was fretting about in 1967.

So should we fret now? Yes and no.

Wages in the UK very often are too low for the very simple reason that the state has effectively become its own wage council: the welfare state guarantees everyone a minimum income via the tax credit system (a negative income tax, in effect). It is just that this income is paid by via the taxpayer rather than directly by the employer. In that sense a raise in the minimum wage isn't a big deal, in that it should be mostly matched by a fall in the cost of the state.

The problem, of course, is that all things overshoot. Let wage councils back into the game and we could soon find ourselves back in the wage push inflationary cycles of the past. That doesn't seem likely, but it is worth noting that right now everyone wants to do something to help out the low paid.

You can't open a paper without reading something on minimum wages, living wages, or income inequalities (albeit for good reason). The same was true in 1967 when, as the Statist also said, everyone "irrevocably committed to doing something for the low paid".

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