Limp pay may put Corbyn in No 10
Britain’s outlook for growth is poor. The Office for Budget Responsibility sharply downgraded its projections in last week’s budget and now expects growth to average 1.4 per cent over the next five years.
For most people, GDP is an abstract concept. What matters tangibly to households is their standard of living.
The news on that could hardly be worse. Real incomes are falling and are set to be squeezed further. There isn’t a more important economic goal than to turn this around.
Unfortunately, measures that might help are unlikely to have a short-term payoff. They require patience and an active role for government.
The latest figures show that in the three months to September, real average weekly earnings (total pay) fell by 0.4 per cent compared with the same period in 2016.
Taking OBR assumptions, the Resolution Foundation, a think tank, estimates that average pay will not recover to its pre-crisis peak until 2025. That would mean 17 years of a squeeze on pay.
There’s no postwar precedent for this. Even if Philip Hammond, the chancellor of the exchequer, abandons austerity in the sense of his ever-moving targets for eliminating the budget deficit, it won’t feel like an end to austerity if pay and disposable household incomes aren’t rising.
What can be done? In the short term, there’s a case for trying to raise household incomes by increasing cash benefits, such as tax credits, housing benefits and income support. But one problem is that the greatest amount of cash benefits doesn’t go (as you might think it would) to the poorest households. That’s because the state pension is classed as a cash benefit.
If the government wants to focus on remedying the pay squeeze, it needs by definition to target cash benefits on people in work.
Among other measures, raising the national living wage would help (the name now given to the statutory national minimum wage, set at £7.50 an hour for workers aged over 25 and £7.05 an hour for younger workers).
There will be no respite, however, unless Britain can tackle its problem of weak productivity growth. The causes are debated, but there’s no dispute that higher productivity is the only route to sustained increases in real wages.
Effective remedies are necessarily long term and they are the responsibility of government. These include investment in improving literacy and numeracy for young people entering the work force who have low skills, and providing lifelong learning and education.
And while it’s common to hear the complaint (one that’s especially loud among Brexiteers) that British companies are subject to too much regulation, it’s not true that they’re shrouded in red tape. On the contrary, more regulation in the field of training would help to remedy a stubborn problem, whereby companies that invest in training their work forces then risk losing these workers to competitors.
It’s a problem of free-riders, with the costs paid by society overall in the form of a less-skilled work force. The prolonged pressure on real incomes in Britain has had big political consequences.
The vote for Brexit, the surprisingly strong electoral showing of a very Left-wing Labour Party and the salience of the issue of immigration are among them – even though immigration has had almost nothing to do with the pay squeeze except for a very small effect at the low end of the distribution.
If the problem persists, bad solutions – like impeding the flow of goods, services, investment and labour – will become more popular.
These will worsen the problem of low productivity. And even if productivity does improve, that won’t help to remedy the pay squeeze if the benefits go mainly to shareholders. On the contrary, it would be a reliable route to putting Jeremy Corbyn in Downing St.
❚ The Times