Solutions to low Pay

A series of strong trends have combined to squeeze the wages of all but the highest earners since about 1980. Labour markets have become globalized, deregulated and made more efficient by technology, while labour supply has grown due to women and older people working. Unions overplayed their hand and have been punished by near impotence, greed has taken hold at the top of companies and their advisors and in finance, while technology has served to reduce the labour content of many tasks.

These are all major trends, and none show signs of abating. The effect has to fundamentally alter the balance between buyer and seller of labour in the west. The Economist tends to believe that over the long term innovators will grasp the opportunity and create new industries and new jobs, but I am skeptical, at least that this dream will arrive fast enough to avoid serious social damage.

The damage is severe, since the concept of jobs for almost all and living wages has been at the centre of the economic model for generations. Now we see food banks spreading towards the middle classes, people surviving on ever-reducing benefits in trailer parks, others working on three or four jobs even while infirm or raising a young family, and a whole generation heading towards pensionable age with no accrued pension. Even the rich notice that these people do not fuel further growth through consumption (at least once ruses of credit card debt have been maxed out). Linked issues of racial and generational imbalances and inequality are highlighted, and intolerance is growing. Serious social unrest and even breakdown may follow.

So this is a serious problem requiring serious solutions. The left, sadly, seem to propose solutions around reversing the trends. Many advocate inhibiting trade, re-regulating labour markets and even re-nationalisation, and forcing power back into the hands of unions. I was shocked recently to see Mark Brooks, a US commentator I respect, railing against impending trade deals – it made me wonder which union he was in the pocket of.

The problem with such solutions is twofold. First, like King Canute trying to hold back the waves, they cannot work. These trends are inexorable, we have to accommodate them not try to wish them away. Second, the solutions ignore the positive benefits that most of the trends have brought in their wake. Trade is a good example – from trade we all benefit from wider selections of useful goods and services at lower prices. Who would seriously argue that we would be better off with a new generation of Arthur Scargills wielding power? And do we really want to go back to branch banking and forsake other internet conveniences? The trends have made our lives better in countless ways, and have helped developing economies to support better lives too. So the left sound out-of-touch with their arguments, and all they do is reduce their credibility and support.

The Economist identifies three solutions, all overlapping and none providing more than sticking plaster. Labour markets can be partially re-regulated, governments can impose higher minimum wages, and lower paid people (and companies employing them) can be given tax breaks. The Economist points out downsides to all three, but each have a role to play.

Re-regulation does not mean going back to the days of jobs for life. But the new normal of zero hours can become close to exploitation. In Italy they have just rolled out a standard minimal employment contract, an idea which seems to make a lot of sense. We have it for renting houses – Bloomberg introduced a standard simple contract that is now used almost universally and which has cut out unscrupulous landlords. The same idea can apply to employment. Fair terms of notice, conditions, insurance, hours and so on could become statutory minima, and if widely publicized then anyone operating outside can be easily spotted and censured.

Minimum wages are hated by the money lobby, but have actually been quite successful. Like pensions, they should be indexed so that they don’t become gradually eroded, and cities with a high cost of living should introduce a higher minimum wage as well. Something is wrong when Walmart and McDonalds are able to claim kudos by raising their wages.

Tax is the third option. The Blair government in the UK introduced tax credits, and the liberals in the last coalition grew personal allowances. It must be in the interests of nation to get more people into work, so while these trends of supply and demand are so strong, this sort of incentive is a good one.

But I would extend tax reform further, to place greater emphasis on jobs. US states compete with each other to reduce corporation tax and give incentives to start-ups, but many of these firms employ precious few people. Why not keep corporation tax a bit higher, but tie incentives to the payroll budget? Shifting tax from employment towards other factors like land, property, carbon and money (debt, dividends and my old friend Tobin) would be affordable overall while making a real contribution to the low wage challenge. Non-polluting firms outside expensive cities using labour and equity would benefit, and jobs could flow as a result.

The other simple policy response is to target the expenses of those on low pay. This suggests reducing sales tax on basic items, as well as provision of plentiful affordable housing. Plentiful and inexpensive public transport would also be a natural target.

However, in the face of all these powerful trends, I am not sure that even all these measures together would be enough. Instead, governments might have to start rethinking the basic idea of a normal working life. Maternity and paternity leave is a good start – how shameful it is that the US still holds out on any paid maternity leave. An extension could be to greatly expand the concept of jobs as carers, so that nearly anyone can qualify and be adequately compensated.

Family values are stronger in developing nations, but have become eroded in the west. Most of us now endure periods with elderly parents who would really appreciate more time with their kids. Instead of packing them into nursing homes and shuffling them between stretched care workers, why don’t we devote some hours each week and some weeks each year to truly caring for our parents (or other elderly people)? A simple qualification could be quickly arranged to cover most care needs, and a system like maternity pay introduced so it could be monitored and compensated. Our families would become stronger, we would learn new values and skills, and the overall economy would be rebalanced.

The money lobbies would fight this change, and probably only enlightened places like Scandinavia would have the courage to introduce it first. We would have to be careful that the change did not act as a set back for women, with both genders taking their share of the caring opportunity.

So far, I don’t think policy makers have understood the scale of the assault on standard employment models. So many trends are at work that small measures will not be enough. Creating carer as a job for most of us for periods is one example of the sort of response that could be radical enough to make a real difference. Maybe other similar ideas are also available.