The Challenge of low Pay

I am delighted to see the political conversation in the west finally starting to embrace the challenge of low pay in developed countries. Challenges of inequality, poverty and race are closely related and are also attracting the attention of commentators, and not before time. One risk is that people conflate these different issues together. They each need attention, and call for overlapping but distinct remedies.

The Economist included a good essay about low pay in its May 2-8 edition. Given the massive weight of factors driving the trend, perhaps what is most remarkable is that the problem is not even worse by now. For, in the absence of legislation, there is no powerful reason why wages should be enough for people to live on.

Many of the driving factors overlap and support each other. They started working in concert from the 1970’s or even before, and really accelerated with the Reagan and Thatcher revolutions of the 1980’s. Few of the factors are abating, and indeed many are accelerating. As with so many trends, globalization and technology may be the strongest factors behind low pay.

Several elements of globalization are in play. Stronger communications and simpler logistics enable companies to source from different places. Developing countries have greater skills and stability than before to go along with their abundant cheap labour. Companies have become more international in focus. Governments have also reduced inhibitors to greater trade, such as tariffs. Standards and specifications have become more international as well.

All of this has made it more attractive and more feasible to arbitrage labour, producing where it is cheapest. In turn, this puts pressure on wages everywhere, and authorities have to accept this in order to stay competitive and not to lose all their jobs.

Technology started with the self-service revolution, whereby consumers now complete purchase or service steps themselves that previously would have been performed by salaried producer staff. When was the last time you used a travel agent? Technology has also generally made capital goods cheaper, shifting the equilibrium with labour. Technology has also changed the nature of what is produced or marketed, into more automated and less labour intensive areas. Internet based companies such as Snapchat or Twitter now have a large share of consumer time and money, but often employ only a paltry number of staff.

As a result, more can be produced and consumed now with fewer people. Global demand for labour is hence reduced. The Economist argues that this may be temporary: during the industrial revolution, labour demand initially reduced before rebounding as new innovative applications came through. I am not so optimistic this time around – it would take an unlikely number of start-ups to employ as many as even just the car manufacturers used to fifty years ago.

Globalisation and technology would have significantly reduced the power of labour without any other factors. But government policy has accelerated the trend. Trade unions had their heyday through the middle of the last century, but they overplayed their hand. Moneyed interests tolerated this growth in union power, perhaps because they feared uprisings: after all communism was entrenched elsewhere in the world and had not yet displayed all its flaws. The fight back started in the 1980’s, led by Reagan with the air traffic controllers and Thatcher with the miners. Now unions are a shadow of their former selves, often representing only a tiny fraction of workers, and hamstrung by legislation.

Despite the downsides, it is not tempting to mourn the days of Arthur Scargill and his ilk. I wish unions had a greater role than today, but they can abuse power, and take a blinkered view putting existing members ahead of the wider constituency of potential future members and the workforce. Damaging legacies of this still exist in the public sector.

The fight back against unions was fair enough, but what came with it was not. Parasites, often in finance or consultancy, started telling bosses that they were worth crazy salaries. The same interest groups built interest in politics and pushed the agenda of greed, masquerading as necessary incentives for competitiveness (why do bosses need extra money to be motivated while workers need less?). Shareholder value took hold as an overriding aim, with investors demanding ever greater short-term returns. Not content with rolling back progressive taxation and unions, the same interest groups successfully lobbied for so-called flexible labour markets, ultimately leading to zero-hours contracts.

I benefited from this through my career. From about 1990, my pay rises and bonuses started expanding. It was trickle down, a subtler version than advertised based on shame. The CEO doubled his own salary, so thought he’d at least have to give 20% or so to those three or four levels below him (while giving nothing to those at the bottom). A few years of this and any semblance of fair reward had disappeared. I did not give the money back, but I do believe I was overpaid for what I did. Now we see the CEO even of conservative Shell taking out over $20m last year: how can that ever be reasonable?

The last trend is supply. People live longer, and are both allowed and expected to work longer (partly because the greed lobby has made a mess of pensions). Women have joined the workforce. More people have more education that they want to see a return from. Further, the Economist points out that a whole matching industry has built up. Starting from humble temp agencies, this industry uses technology to help firms and workers link up more efficiently. Of course, the main effect of this has been to drive down wages further.

So we have a tsunami of trends, all working in the same direction, and I don’t see any of them reversing anytime soon. The meagre increases in wages we start to see this year seem to be a reflection of an unacknowledged economic boom (and even then, compare these wage rises to stock market and property value increases), and sometimes as a sort of PR exercise by firms looking to build popularity with high-profile initiatives. That almost feels like philanthropy.

The effects of lower wages in the west are very clear to see in the statistics for median incomes. These used to be a correlation between GDP growth and wage growth, so that successive generations became better off. This has stopped abruptly. GDP still goes up, most of the time, but wages are flat or often declining in real terms.

This creates misery and poverty in many, coupled with the health and welfare effects of having to take multiple part-time jobs just to make ends meet, or even send kids back into work, like the nineteenth century. This challenges the established social and economic model at its very heart. And to repeat – this trend shows no sign of abating, indeed if anything it is becoming stronger.

There is also a macro-economic effect, one that our cynical friends in finance have started to notice, even while they choose not to notice the grinding poverty all around them. Growth is driven mainly by consumer spending, and if people don’t have income they cannot spend. So each ratchet of inequality and squeezed wages makes the next spurt of growth harder to attain. Even if society can somehow cope with the human consequences of low pay, the economic consequences gradually become untenable as well.

So what should be done? The Economist lists three areas, all somewhat overlapping. The labour market can be re-regulated, governments can give tax credits to top up wages, and minimum wages can be increased. It sees downsides to all three, but seems to prefer the last two over the first.

For me, these areas all have a role, but the problem is bigger so the solutions have to be wider as well. I intended this blog as cause, then effect, then solution, but the causes are so many that I’ll have to return with solutions later in the week.