Monday 26 January 2015

Why talk of The Living Wage both helps and hinders policy debate on low pay

The Living Wage is all the rage but mostly honoured in the breach. Around 1 in 5 UK employees (5 million people) at present earn less than the rate of pay its reckoned an individual needs to cover the basic cost of living – currently estimated at £7.85 per hour (£9.15 in London where living costs are higher) roughly a fifth more than the statutory hourly National Minimum Wage (NMW) of £6.50. As of yet, however, only around 1,000 organisations (that’s less than 1% of employers) have voluntarily signed up to be accredited as Living Wage Employers, benefitting less than 0.2% (35,000)  of employees.

Not surprisingly therefore campaigners want many more employers to voluntarily pay their lowest paid staff at least the Living Wage and are increasingly supported in their efforts by politicians across the political spectrum. Last week Prime Minister, David Cameron, encouraged employers who can afford it to pay the living rate and if we ever get the much pondered televised Leaders’ debates ahead of the UK General Election in May politicians of every stripe will doubtless join him in calling upon bosses to do the decent thing.

The Living Wage campaign is laudable - aside from any success in raising hourly wages it helps focus public attention on the related problems of low pay and in-work poverty. But Living Wage rhetoric also has a tendency to mislead or oversimplify policy debate on these problems, with the public hoodwinked into thinking that positive talk about the Living Wage necessarily implies we are about to see a big hike in the NMW, which would guarantee a pay rise for at least 1.2 million employees.  It’s thus helpful to consider the Living Wage in its proper economic and policy context.

Advocacy of the Living Wage, which has echoes of the concept of the Just Wage often discussed within the realm of Catholic Social Teaching, sits within a long tradition of what one might call ‘real world economics’ that parallels orthodox labour market theory.

Orthodoxy concludes that absolute and relative rates of pay are determined by the interaction of supply and demand for labour of given productivity, the observed outcome reflecting the market rate or value of that labour. There is no reason to assume that workers whose productivity places them toward the bottom of the resulting pay structure will earn more or less than what is deemed the Living Wage, nor any reason why a profit maximising employer should pay more than the market rate. Affordability is relevant only insofar as an employer must be able to meet at least the market rate since otherwise employees will go to work elsewhere. The corollary is that competition between employers ensures that the pay of workers of given productivity will always be tending toward being the same across all employers of all types, size and profitability, certainly within local labour markets and, if market conditions are sufficiently fluid, across regions and nations too.

The real world view, by contrast, is that pay rates for workers of seemingly similar productivity are often found to differ across employers, even within local labour markets. Although this can be interpreted within the orthodox framework – for example, individuals who to all intents and purposes look the same in terms of skill or experience as co-workers who are paid differently might differ in terms of personal drive or ability which affects their market value – it is normally taken to suggest that there is an element of indeterminacy in pay setting. In other words, when it comes to pay, who you work for can, at least to some degree, matter as well as how productive you are.

Such indeterminacy is sometimes explained by the relative product market power or success of some employers, which enables them to pay ‘over the odds’, sometimes by their bargaining power relative to their workers which enables them to pay ‘under the odds’, sometimes simply because they are either ‘good employers’ or ‘bad employers’. But whatever the explanation, the possibility of employer discretion in pay setting opens up the potential to make efforts to change employer behaviour.

For example, where some low paid workers are thought to lose out because less powerful than their bosses the state can step in by setting a minimum wage to even things up, as we do in the UK with the NMW. But the minimum wage confronts the problem that some workers really are of low market value, in which case requiring employers to pay too much more will mean fewer workers are hired. This explains why the independent Low Pay Commission normally exercises a degree of caution when advising government on raising the NMW, leaving the minimum well below the estimated Living Wage. In this situation the only way to further raise the pay of workers of low market value – other than increase their productivity by way of education or training – is to encourage those employers who can afford it to pay over the odds, thereby providing the impetus for Living Wage campaigns.
The trouble is that ‘affordability’ is a vague concept and is just as likely to be deployed by employers as justification for maintaining the status quo as for signing the Living Wage pledge.  This is precisely why even the best run campaign faces an uphill struggle to attract more than a minority of private sector employers to the cause (many of those in the initial crop of signed up employers being charitable, faith based, not-for-profit and public sector organisations). Indeed, what’s normally presented as the business case for the Living Wage – enhanced corporate reputation and a positive employer brand that aids recruitment and lowers costly staff turnover - implicitly assumes limited adherence. If all employers were Living Wage employers any relative competitive advantage would disappear.   

Consequently, although emphasis on the Living Wage adds a useful dimension to debate on low pay one should not exaggerate its role in tackling the problem. By far the most important element is and will continue to be the level of the NMW, which the economic consensus suggests could be significantly higher than the current rate without cost to jobs albeit remaining below the estimated Living Wage. Whenever politicians talk about the Living Wage what they should really be quizzed on therefore is what they intend to do about the NMW.

If a higher NMW is still considered inadequate to provide a de-facto Living Wage or income the only efficient market based solution is to increase the productivity of those workers – thereby raising their market value – the only alternative policy option being to use the tax or benefit system to top-up earnings so that the incomes of the low paid reach a minimum accepted level. In this context the principal focus of political debate should be on the relative balance of the NMW and fiscal top-ups in the policy mix, in particular to ensure that top-ups do not act as an excessive subsidy to low wage employers. Living Wage campaigns, supported by government, including adherence in all public sector bodies, should continue in tandem with this policy but as a valuable adjunct rather than the key component.   

This policy mix undoubtedly may seem rather mundane to those excited by the current widespread Living Wage rhetoric. But far better to focus on this - especially the level of the statutory NMW - than pin hope on unrealistic goals or the goodwill of a tiny minority of employers.  

Wednesday 21 January 2015

Overall pace of UK labour market recovery slows but vacancies reach new record level, giving a further lift to real wages, while rise in number of people economically inactive helps lower jobless rate to 5.8% despite worrying increase in youth unemployment

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months September to November 2014.

These latest figures paint a mixed picture of the state of the UK labour market toward the end of last year. There was a clear slowing in the overall pace of job creation – the quarterly increase of 37,000 (to 30.80 million) being the smallest since spring 2013, leaving the UK employment rate unchanged at 73.0%. Similarly the quarterly fall of 58,000 in the number of people unemployed (to 1.91 million) is the smallest since late summer 2013. However, despite this slower pace of recovery a sharp quarterly increase of 66,000 in the number of people of working age who are economically inactive – i.e. outside the labour market – helped lower the unemployment rate to a six year low of 5.8%.

Full-time employees account for the entire quarterly net increase in employment, the number of people self-employed and/or working part-time having fallen slightly. There was also a fall in the number of temporary employees while the number of people working part-time because unable to find a full-time job remains on the recent downward trend to stand at 1.32 million. The level of long-term unemployment has fallen again (down 53,000 to 658,000) though youth unemployment (16-24 year olds unemployed and actively seeking work) is up 30,000 to 764,000, the number of 16-24 year olds in work dropping by 84,000.    

The most encouraging news in the latest quarterly figures is a rise of 19,000 in the number of job vacancies to a new record level of 700,000. This indicates a modest ongoing tightening of conditions in the labour market which underpins a continued increase in pay growth and a further improvement in real weekly earnings, with regular weekly pay growth of 1.8% far outstripping the CPI rate of price inflation.

As for what these figures suggest for the labour market in 2015, the message is broadly in line with expectations at the start of the year – continued improvement but at a slower pace than in the past two years and with no sign of a worrying rise in pay pressure even though low price inflation is helping to boost real wages. However, the apparent quarterly deterioration in the position of young people in the labour market is of concern and if it continues may well feature as an important issue in pre General Election campaigning.          

Monday 19 January 2015

Talk of ‘full employment’ rings hollow in Britain’s Dorian Gray economy

With the latest monthly official UK labour market statistics due out on Wednesday this will be one of four weeks between now and the General Election is which jobs are likely to be particularly prominent in political debate. The Prime Minister, David Cameron, is due to kick things off later today in a speech setting ‘full employment’ as a policy goal, with a pledge to propel the UK employment rate – the proportion of people of working age in a job – to the very top of the developed economy league table, ahead of the likes of Germany which currently enjoys an employment rate of 74%.  

Mr Cameron is understandably keen to make much of the remarkably strong employment growth enjoyed in the past two and a half years, though as I have noted before in this blog it’s difficult to attribute this outcome to any specific policy measures introduced by the Conservative- Liberal Democrat coalition government since 2010.

The scale of job losses across both the public and private sectors resulting from fiscal austerity has turned out to be roughly what I expected following Chancellor of the Exchequer George Osborne’s first budget. What I hadn’t expected was the speed of offsetting job gains – I knew new jobs would come but thought this would take longer on the assumption that the rate of growth in labour productivity would remain close to its long-run trend. But as we now know the labour market response to deficient aggregate demand was most unusual. Pay took far more of the strain of adjustment, resulting in a prolonged productivity slump, while there was also an exceptional surge in the number of people becoming self-employed and working on very low average incomes.

Insofar as the pay squeeze and rise in self-employment is the consequence of policy effects the cause has been flexible labour market measures implemented by successive governments over the past three decades. The only policy introduced by the Conservative-Liberal Democrat coalition I think might eventually be found to have been significant is the watering down of employee rights against unfair dismissal which took effect in 2012. This was overseen by the Lib Dem Business Secretary, Vince Cable, somewhat ironically given that Dr Cable is currently talking up his worker friendly credentials with an eye to what the post-Election parliamentary configuration might bring. By making it easier to fire employees, Cable’s reform may have encouraged increased hiring during the economic upswing that began in 2013, albeit sowing the seeds of a sharp firing spree were we to see another serious downturn.

Either way, good news on jobs has been enough for some to start speculating on when the economy might reach a state of full employment – hence the Prime Minister’s bullish speech today. At a superficial level one can see why. For example, at present I expect the working age UK employment rate to reach a new record high (on current measurement) of above 73.5% at some point this year, bringing Mr Cameron’s aim clearly into view. I also expect unemployment to fall back to or below the pre-recession rate of 5.2%. However, I would not consider this as anything more than a partial step toward full-employment.

Although a 5.2% unemployment rate is in line with many estimates of the long run sustainable rate, still very muted wage pressure as unemployment has fallen rapidly to the current rate (6%) suggests that the jobless total might now be able to fall well below 5% before threatening the government’s 2% CPI inflation target. I therefore conclude that the UK will remain far short of full employment for some time yet.

Moreover, even a new record high employment rate would at present occur in a labour market characterised by a relatively high rate of underemployment, a still high youth unemployment rate, an unemployment pool with over 1 in 3 people long-term unemployed, around 2 million economically inactive people expressing a desire for work, and a large segment of the workforce employed in low productivity jobs paid at or close to the National Minimum Wage. This does not constitute a state of ‘full employment’ in any genuine sense of the concept.

On the contrary, what we currently have is a labour intensive UK economy with endemically slow growth in both productivity and pay combined with deeply ingrained pay inequality. This is in other words a Dorian Gray economy, the admired façade of seemingly approaching full employment hiding a far from perfect reality. In an economy where poverty pay and use of zero hours contracts is rife, talk of ‘full employment’ rings hollow. For all the good news on jobs, the focus of policy debate in the coming weeks should be firmly on the reality rather than the façade.

Monday 12 January 2015

The economic consequences of cheap labour deserve more attention

This morning’s business news bulletins contained items on the adverse consequences of both falling oil and milk prices on UK producers in these respective sectors. What I find intriguing, however, is the relative lack of attention given to the long-term effect on business behaviour of the currently very low price of labour.

Although the big squeeze on real wages in the past five years has often hit the headlines, the implications of this for business have generally been considered in relation either to aggregate consumer spending or to change in patterns of spending, such as that which has benefited emerging low price supermarket chains. But surely of far greater significance is how businesses have adjusted to what is evidently a new era of cheap labour.

Few would disagree that the fall in real wages – which has now come to an end on some if not all measures of earnings – is preferable to the even sharper rise in unemployment that several years of economic slump and stagnation would otherwise have caused. Yet while this highlights the obvious merit of a flexible labour market during periods of relatively weak demand, the continued weakness of real wage growth as the economy has mounted a strong recovery suggests that one can have too much of a good thing.

The kind of flexibility that dominates the British economic model – founded on a deregulated labour market, a tough welfare to work regime and reasonably open borders to migrants – is operationally conducive to maintaining a high rate of employment but has signally failed to deliver strong growth in labour productivity. Successive supply side reforms introduced since the 1980s have been far more successful at weakening the bargaining power of workers, thereby pricing record numbers of people into jobs, than at triggering businesses to invest in new technology and skills.

Indeed, the acute degree of deregulation that underpins the British model is inimical to investment since it provides businesses with a constant drip feed of highly addictive and easily absorbed cheap labour. Moreover, with real wages in recent years falling by an amount not seen since the mid-19th century, the level of addiction has soared.

As a result of this I think it naïve in the extreme to expect a sudden change in business behaviour to give an early strong boost to growth in productivity and pay. The best hope is that our economic recovery will be sustained long enough to enable unemployment to fall to such a low rate that labour becomes more expensive – i.e. a case of higher pay providing a spur to higher productivity. But the question then will be whether British businesses weaned and reliant on cheap labour, especially the least well managed, will be able to raise their game.     

Monday 5 January 2015

UK labour market outlook 2015 – best year since 2007 but ‘workforce divide’ set to grow wider

Happy New Year! I’m not sure how cheerily that declaration will be received on the first Monday of 2015. Those of you just back at work after the festive season will probably be feeling at least a little of the January blues, while those without a job might be fearful of what the year has in store. I can’t say my personal mood has been lifted by the prospect of having to endure four months of politicking ahead of the General Election, though the possibility of all three main political parties taking something of a hammering come May 7 should raise the pulse rate on polling day. But what can we expect for the day-to-day world of work? This is what my crystal ball is telling me.

The pace of job creation will remain strong in 2015 – with a net rise of 400,000 in the number of people in work taking the employment rate to a new record - but be a little weaker than in 2014 on the expectation that a combination of slower GDP growth and somewhat faster growth in labour productivity will curb hiring activity.

Unemployment will fall to 1.7 million, the unemployment rate dropping back to the pre-recession rate of 5.2%. As a result the rate of growth of average weekly earnings will rise to 2.5%, upward pressure from a pick-up in labour productivity and longer working hours being moderated by labour market flexibility effects and public sector pay constraint. Although this will still leave the annual rate of nominal wage growth around 2 percentage points lower than what was considered attainable and sustainable prior to the recession, with inflation on the CPI measure forecast to remain well below 2% 2015 will nonetheless be a year of solid growth in real wages.

The coexistence of both strong employment growth and real wage growth will make the coming year the best overall for the UK labour market since 2007.  However, not all workers will notice a marked improvement in their lot.

As the market tightens there will be greater pressure on employers to increase the relative pay of some workers in an effort to recruit and retain individuals in greatest demand across the occupational skill and personal talent spectrum. Workers with particular technical skills or personal talents in high demand will begin to fare noticeably better in relative terms as will those working for organisations voluntarily prepared and able to offer low skilled workers the Living Wage. But in a labour market still oversupplied with people desperate for whatever work is on offer, employers unable or unwilling to improve working conditions will continue to have no difficulty in hiring staff into minimum wage jobs or on zero-hours contracts without any fringe benefits. This will serve to further widen what has become a clear structural ‘workforce divide’ within the UK’s ultra-flexible and lightly regulated labour market.