Let’s power up productivity and give wages a boost

A FEW weeks ago, CBI CEO Rain NewtonSmith gave a speech at the Resolution Foundation, to celebrate 25 years of the minimum wage, first introduced in 1998. Together, the minimum and national living wage have directly and indirectly helped millions of people since then.

The economic picture back in 1998 was vastly different compared to the context firms are operating in today. Growth was 3.4% for 1998 – higher than the US last year. Inflation was at only 1.6%. Fast forward to 2024: in January, GDP fell by 0.3% on the year, with inflation still high at 3.4%. The last few years have left their mark on living standards – with half of families saying their cost of living is still rising. That’s not only affecting those on national minimum or living wage. It’s also hitting people in the middle of earnings distribution.

While it might be tempting to assume minimum wage policies can ease that, the truth is, those measures alone won’t do.

Businesses too have been struggling to cope with inflation and cost pressures. When the national living wage increased last April, almost half of firms affected told us that they had to pass it on in price rises. The overall squeeze means that firms have lost the headroom to invest – money that could be well-spent on tech and innovation to raise productivity. And productivity growth is the only effective and sustainable way to raise living standards.

We are calling for a Living Standards Strategy – fit for 2024, not 1998. We need a holistic approach that powers productivity, driving up wages. That comes in two parts.

First, firms are looking for Government action to boost the supply side of our economy and help reduce price pressures, including in areas like energy and housing. Here, unclogging our planning system could help build more low-carbon houses – bringing down rents and mortgages whilst improving energy efficiency.

Last week’s rise in the national living wage means that the Low Pay Commission (LPC) has hit its targets and ended relative low pay. But for many, the reality feels different. More people than ever are feeling low paid. In part, that’s because while we’ve been focused on minimum wages, we have been neglecting economic growth. To fix that, the LPC needs a new remit to make sure the lowest paid can benefit from growth going forward – by continuing to track two-thirds of median pay.

Business and Government should come together to focus on economic momentum to actually raise median pay – that is how to sustainably raise the minimum wage.

That is the second part of our strategy. Businesses require the right conditions to play their part – to invest in the skills, tech and innovation needed to drive productivity growth. That will take steps to incentive investment through a long-term industrial strategy, and measures to boost investor confidence through a 10-year trade and investment strategy. We will continue to campaign for a partnership for productivity – to boost real pay – with a national living wage so everyone gets their fair share.