Britain needs a pay rise

Today is the seventh month in a row that prices have gone up faster than wages. The Chancellor needs to wake up next week – Britain needs a pay rise.

As this chart from the Resolution Foundation shows, it's the public sector that is taking the big hit.

More than 300,000 people on low incomes have been given a pay boost by the UK government’s “national living wage”. Despite scaremongering from some employers that the move to raise minimum salary levels would result in massive job losses, unemployment is at a 40 year low. However, the number of people earning below the voluntary real living wage reached a record high, rising from 6 million to 6.2 million. This is the amount needed to achieve an acceptable standard of living. That’s why he needs to move the living wage for all workers (including the u/25s) towards £10 per hour.

The Chancellor should also take note of the IPPR Commission on Economic Justice which has highlighted that the modest economic recovery since 2010, does not reflect the lived experience of the majority of people in society. One single finding from new IPPR analysis demonstrates that rising GDP no longer guarantees better pay in the economy.

As this chart shows, between 2010 and 2016, official GDP per employee has risen by 3.5 per cent, yet real wages are 1.1 per cent lower when adjusted for consumer price inflation (CPI). If inflation is calculated to include housing costs (using the RPI measure), real wages are down 7.2 per cent.  

A key factor has been low productivity. A less than virtuous circle has been created by low wages, leading to less investment despite record low interest rates.

The position is probably much worse than the official figures describe. The economist Simon Wren-Lewis points to a mismatch between the ‘official’ and ‘lived’ economy.    That’s because the official measure of real GDP uses an index of output prices to deflate nominal GDP into a ‘real terms’ measure. Output prices are those received by domestic producers, and they exclude things like taxes, retail and wholesale imports and profit margins.

However, the official measure of real earnings is deflated using an index of consumer prices which have trended well above output prices, and to a degree not seen prior to 2010. The result is that rising living costs, as seen in consumer bills, have consistently exceeded the narrower definition of inflation that is used to measure official GDP growth. And they have done so to an extent that is historically unprecedented.

This has a long-term impact on inequality, which also damages the economy. The Oxfam research report, Double Trouble, investigates the relationship between economic inequality and poverty in the UK and examines the trends in relative income poverty rates and income inequality over the period 1961 to 2015/16. They found a positive correlation between income inequality and relative income poverty in the UK over recent decades.

This reinforces the growing body of evidence that high and rising economic inequality is harmful for growth and that tackling poverty alone is not enough to reduce economic disparities and poverty in the long run. The evidence also shows that redistribution is not damaging for economic growth, as even the IMF now concede. A point the UK and Scottish governments should consider in tax and wealth policies.

In next week’s budget the Chancellor needs to recognise that a low wage, low productivity Britain isn’t the way forward for the economy. A real term pay increase for public sector workers, coupled with a £10 minimum wage, is an important starting point in breaking this downward cycle of decline.