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".

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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".

Advertisement
Advertisement - Article continues below
Advertisement

Recommended

Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520591/are-uk-house-prices-really-on-the-rebound
Property

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020
Visit/520584/weak-inflation-data-may-gives-the-bank-of-england-an-excuse-to-cut-rates
Economy

Weak inflation data may gives the Bank of England an excuse to cut rates

UK inflation is edging lower, and is now well below the Bank of England’s 2% target rate. That could mean even lower interest rates. Here's why. 
15 Jan 2020

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020