The downward pressure on pay is severe and – for now at least – irreversible.

There is a case for more action

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More jobs; lower pay. A crude, but accurate assessment of the state of the British economy. The two are, of course, related. One of the many conundrums thrown up during the Great Recession was how the worst financial crisis in a century did not bring in its wake the expected steep rise in joblessness; the grimmest predictions were of four million or more on the dole.

That this did not transpire was because, in sharp contrast to previous downturns, managements and unions worked together, accepting wage freezes and avoiding lay-offs. Since then, though sometimes fitful, the pace of job creation has picked up, as wage rises have remained moderate and the public sector has become subject to some of the same retrenchment. In the early stages of our slow and painful crawl back to normality, the new jobs being created were predominantly part-time and casual, but as yesterday’s figures show they are increasingly full-time, though usually not lavishly rewarded. The economy has in all probability returned to the level of output it peaked at way back in 2008. All the potential output since then has been lost forever; but we can at least be relieved that things are improving.

The other side of the coin, of course, is that real wages – that is, wages after inflation – have been falling for years. That has left us with, in the phrase of the moment, a “cost of living crisis”. Workers’ wages have been squeezed not only by the recession, but by the forces of globalisation, liberalised trade and automation – trends that long predate the recession. As China and India rejoined the world economy they brought with them a vast increase in the global supply of labour, with an obvious impact on Western workers. Employees in mature economies have also been hammered by the pace of technological change, particularly so with regards to the internet. As with all technological change these developments create jobs as well as destroy them. But they do not always create jobs at the same pace, nor at the same wage rates.

While wages, then, are generally under pressure, there are ways that the impact for those at the very bottom can and should be softened. One method is to adopt a more muscular version of the minimum wage. As we have found since New Labour introduced the measure 15 years ago, it need not shred jobs; but any commission tasked with setting such a rate of pay should only recommend an increase if there is a reasonable chance that it will not reduce employment. Determining the rate then becomes an analytical exercise, and one that stands less chance of becoming politicised, to the ultimate detriment of the poor.

A living wage, such as has been deployed by some companies and public bodies already, can raise pay without recourse to legislation. By taking poor people out of the lowest income bracket, it has redistributed wealth while reducing the national bill for welfare. 

Of course, we can also use the tax and benefits system to promote equality. Owners of capital and better-off workers can pay more to help those at the bottom. The Liberal Democrats have pushed the Coalition along this path by taking those earning less than £10,000 a year out of income tax. More could be done.

Long term we need a better educated, more productive workforce, just as we find in every successful economy. For now, and for most workers, the squeeze on wages is not going to go away.

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