Record numbers have priced themselves back into jobs – shifting political concern from loss of work to the cost of living, writes Alan Shipman.
The trouble is, if employment growth keeps pace with output, it means there’s little or no gain in labour productivity, or output per employee. Sure enough, UK labour productivity in mid-2013 was still lower than it was at the start of 2012. The country appears to be missing out on the strong rises in productivity achieved by other EU countries, and the US, since the downturn of 2008.
Why does a lack of productivity growth matter? Mainly because the amount people can be paid is limited by the amount they can produce. So if jobs are created faster than new output, real wages (rates of pay adjusted for inflation) are likely to fall. It’s not just the new recruits who’ll be paid less, but existing employees as well, because less-productive new arrivals drag the average productivity down. That’s also confirmed by recent data, which show that average weekly earnings rose just 0.8% year-on-year in the June-August period, while consumer prices rose 2.7%. Record numbers of working people (over 5 million) now receive less than they can realistically live on.
Low pay perils
The government says this isn’t a serious problem, or one that will last for very long. Once people are back in work, they can brush up their skills, while employers can invest in new equipment and training, raising everyone’s productivity. Output will soon start to grow much faster, allowing wages to rise in real terms. So the increase in employment will be followed by even stronger GDP growth, and should be read as a sign that much better times are on the way.
But there’s a more disturbing possibility: that people are being pushed into lower-paid work by the absence of alternatives, and the withdrawal of social benefits for those not working outside the home. And that employers, treating the low-pay culture as permanent, now view muscles as a chap substitute for machines. While other industrial countries raise the quality of their work, and tax the resultant high earnings to support those who can’t find it, the UK may be going down the route of squeezing everyone into jobs that don’t produce or pay enough.
This would upset government plans because lower pay doesn’t just anger people, but also pushes more of them into poverty whose costs fall back onto the state. Poverty used to be associated with unemployment. Now it’s largely the result of working for low pay. One reason the budget deficit hasn’t fallen as fast as the Chancellor hoped is that the Treasury is having to give more (through benefits and tax credits) to households whose income doesn’t match their essential expenses – even when all adult members are in work.
Shifting the subsidy
So the UK may be moving back towards a situation of full employment, but one where the ‘welfare state’ becomes a subsidy system for low-paying employers. That’s given the opposition party a significant new idea. It can promise higher pay, lower unemployment and lower government borrowing if it can cut some of those employer subsidies, by forcing firms to pay more. This might be possible, without provoking those firms to move abroad or stage an investment-strike, because Britain is still an attractive place to do business. Corporate profitability bounced back quickly from recession to rates that have always been high compared to the UK’s main competitors. And the UK has long been Europe’s biggest attractor of inward investment, even at times when capital and top salaries were taxed at much higher rates.
That’s why the opposition have come up with a plan to subsidise employers who pay the ‘living wage.’ This is the hourly rate required to meet basic living costs, without needing to claim benefits. Labour’s plan promises to be revenue-neutral – avoiding any rise in the budget deficit – because when firms pay more to people on the lowest wage, the government pays less to top-up their income (and collects more in tax).
There were similar offsetting benefits when the minimum wage was introduced in 1999, ensuring it didn’t cause the avalanche of job losses that critics predicted. Because it would affect millions of workers, the living wage (currently 21% above the adult minimum wage, and almost 40% above it in London) would also boost the amount of spending in the economy, helping firms finance extra pay through extra sales.
Hot properties
At present there is no assurance that the rise in UK employment will be followed by a rise in productivity, because employers are recruiting more without investing more. And while it could address this by switching its employer subsidies towards business investment, the Coalition’s strategy has gone in a different direction. Recovery plans are now focused on boosting property investment– with schemes to help households buy new houses when their low incomes don’t allow them to pay large initial deposits.
Property investment has often boosted economic recovery. But it usually works by promoting the building of houses, which also reduces accommodation cost so that households can spend more on other essentials. Promoting the buying of houses, with the Treasury taking on the credit risk, delivers its main boost by raising house prices, so that existing owners can join those helped-to-buy in borrowing and spending more.
Ironically, rising prices drove the rise in housing benefit claims which are one of the main reasons that welfare costs haven’t fallen as people go back to work. If it can’t quickly close the looming productivity gap, or get firms to sacrifice a little bit of profit in order to pay more, the government may find it has bankrolled the recovery as well as the recession – creating jobs for all without the rise in tax receipts and fall in social spending that’s needed to pay down all the extra public debt.
Alan Shipman 2 December 2013
Alan Shipman is a lecturer in Economics at the Open University. He is responsible for the modules You and your money:personal finance in context and Personal investment in an uncertain world, part of the foundation degree in Financial Services
The views expressed in this post, as in all posts on Society Matters, are the views of the author, not The Open University.
Cartoon by Gary Edwards