The low pay problem

KPMG says that one in five workers is paid less than a "living wage", of £7.20 an hour outside London and £8.30 in it. This is consistent with official figures which last year found that 20% of employees earn less than £7.31 per hour.

This reflects a fundamental problem with the global economy - that the rise of China and India has contributed (pdf) to a collapse in demand for low-skilled workers in the west.

What can be done about this?

Paul Sellars points to large firms hoarding cash and claims that transferring some of this to pay packets would "revive consumer spending and business confidence, thus helping to kick-start the recovery." I'm not convinced. I suspect many of the firms paying low wages are small firms struggling to get by, not the mega-corporations stock-piling cash.

Paul also claims that:

Many of these companies could actually gain from adopting the living wage. First, their reputation for corporate social responsibility would be enhanced – being “nice” can be a valuable selling point. Second, they would derive solid personnel benefits in terms of recruiting, retaining and motivating high-quality staff.

This, I fear, is the fallacy of composition. It's true that any individual firm paying good wages would get reputational gains, the pick of staff and lower turnover costs.But this wouldn't be true if all firms did so.

Nor am I convinced by the obvious statist policies.

There are two problems with raising the National Minimum Wage:

- It wouldn't hugely benefit the low-paid to the extent that a higher wage causes the withdrawal of tax credits and higher income tax payments. Such withdrawal rates mean that many low-paid might see only 30p of a £1 rise (pdf) in wage income.

- It would (perhaps?) reduce labour demand - in terms of jobs or hours. If we assume the average low-paid worker outside London gets £6.70ph, raising the NMW from £6.19 to £7.20 implies a 7.5% rise in the wage bill. Assuming a price elasticity of demand of 0.5, this implies a 3.75% reduction in demand for labour - equivalent to 160,000 job losses.

However, the alternative - more generous tax credits - also have problems, even assuming (generously) that there is popular demand for such redistribution:

- Employers might respond to higher tax credits by cutting wages. One reason why a minimum wage was introduced was precisely to stop this happening when tax credits were introduced.

- More generous support for the low-paid must be withdrawn as wages rise. But this means even higher marginal withdrawal rates and thus reduced incentives to work longer hours or get better jobs. This is an unavoidable trade-off with any system of in-work benefits.

So, what are the alternatives? I'd like to consider ways of increasing the bargaining power of the low-paid, perhaps through some combination of stronger unions, the state acting as employer of last resort and a basic income.

But let's be clear. There's a bigger problem here than all our political parties are willing to acknowledge: predistribution, in the form its currently envisaged, is not sufficient.

Comments

[Anonymous]

"So, what are the alternatives? I'd like to consider ways of increasing the bargaining power of the low-paid, perhaps through some combination of stronger unions, the state acting as employer of last resort and a basic income."

Yes, all those, plus breaking up the energy companies into thousands of pieces so they start competing aggressively on price. Lower prices will increase real wages.

Also, massive increases in public and social house building so that market rents are significantly lowered. Again, lower housing costs would increase real wages.
"So, what are the alternatives? I'd like to consider ways of increasing the bargaining power of the low-paid, perhaps through some combination of stronger unions, the state acting as employer of last resort and a basic income."

[Metatone]

I think there's a number of issues being confused here:

1) We're in a recession, a deep and long one. There is no local upwards pressure on wages because there's a big pool of local unemployed looking for low skill jobs.

2) Integration of Emerging Market workforce (starting in significant numbers roughly in the late 90s) has tripled the pool of labour. The adjustment process is slow - be nice if anyone had a good estimate of how slow, but I haven't seen one.

Anyway, adjustment is slow - how do we protect the dignity of our populace and the stability of our economy across the years that this transition will take?

3) Capitalists like to drive pay so low that at the bottom end they get extra negotiating power. When your next pay packet is the money for your essentials you have very little bargaining power.

These three structural features are interrelated of course and you can argue that a basic citizen's income (or a govt job guarantee) could address all three. But I think it's important to be aware that many other measures don't address all three.

[Drsimevans]

interesting blog as usual but it raised a couple of questions in my mind:

1) isn't the higher-minimum-wage-means-job-losses argument the same as was used against a minimum wage in the first place? Did we indeed see those predicted losses?

2) you say many paying low wages are small firms. Perhaps; but isn't part of this also related to outsourcing? Councils/hospitals/companies outsource cleaners/security/etc and any savings therefrom are largely paid for through lower pay/benefits of outsourced employees?

[chris]

@Drsimevans - depends what you mean by "predicted losses". If you mean "predicted by hysterical Tories", the answer's no. If you mean "predicted by orthodox modesl wih lowish elasticities, the answer seems to be yes:
http://ideas.repec.org/p/wrk/warwec/746.html
I fear you're right about outsourcing, tho.

[gastro george]

I'm surprised you didn't include the words "means testing" in your analysis.

[aragon]

First Off-shoring: Your behind the times:
http://www.nakedcapitalism.com/2011/11/when-offshoring-backfires.html

Also some jobs cannot be off-shored, and with a minimum wage increase opportunities for arbitrage are reduced.

Given the loss of wages earning power (relative to profits) over the last 50 years this would represent a minor correction.
http://www.economist.com/blogs/buttonwood/2011/05/profit_margins_and_wages
"The conventional economic assumption is that compensation should keep pace with productivity. But the productivity gains have accrued to employers not employees."

Re: 30pm wage increase per 100p gain, but the other 70p would accrue to the Government. How is that a problem ?

Job loss myth ?
(David Card and Alan Krueger 1994) http://www.angrybearblog.com/2007/01/minimum-wage-and-elasticity-of-labor.html
"there were no overall job losses when New Jersey raised its minimum wage."

A modest but substantial 20% increase in the minimum wage may result in few if any job losses and a reduction in dependance upon in work benefits.

There are further actions the Government could take to reduce the demand for in work benefits and allow a further increase in the minimum wage. Not least of which is to address housing costs and debt (bank) burdens.

[George Carty]

"Yes, all those, plus breaking up the energy companies into thousands of pieces so they start competing aggressively on price. Lower prices will increase real wages."

I don't think high energy prices are caused by supplier profiteering. Organizational inefficiency (which could be reduced by re-nationalization) and over-dependence on gas-fired power stations due to high interest rates at the time of privatization -- favouring high-OPEX (gas) rather than high-CAPEX (coal, nuclear) energy sources are more important.

[rogerh]

Well, 50% of us are 'average or below average', work opportunities tend to go to the 'above average'. A bit more training etc can shift the crossover a few points but not much. You can beat up on those at the bottom but the effect is small. Manufacture was a good way to leverage 'average or below average' ability and it is hard to see what replaces it.

So, eugenics, education, ability-quotas? None is likely to work enough. The only answer I can see is either pay a basic living allowance or declare regions of the country Encouraged Manufacture Areas. Scrap planning restrictions and employment law in those areas and hope manufacture will return. Otherwise we face a return to pre-industrial Britain. Chambermaids, ostlers and servants living off the new manorial lords.

[Paul Sellers]

Next Monday we will see Labour and the Conservatives (Boris) both promoting the living wage. This would have been unthinkable 20 years ago.

Of course, not every employer will sign up, but there is strong potential to help a lot more people.

[Dave]

There is no easy way out of this mess.
The industrial revolution put thousands of skilled weavers out of work when cloth could be produced more cheaply with unskilled labour. We know this. Manufacturers will always try to reduce the wage bill by moving to a low wage part of the country/continent/planet. We know this.
At the same time as computerisation has elimated whole sectors of jobs- for instance, typists, secretaries, accounts departments, telephonists, the improved health of the population has seen people still fit to work at 40, 50, 60 and beyond.
So- an ageing workforce and a declining number of jobs for the young to compete for. Dead man's shoes has never been more prevalent.
We over 60s can't afford to retire, but we are also aware that we are job blocking as well as bed blocking in the hospitals.
Is that what the Liverpool Pathway is all about?
On the good side- they will always need shelf fillers, burger flippers, trolley pushers and white van men.