Brexit impact on real wages

A new analysis published today by the LSE Centre for Economic Performance shows that real wages have taken a hit since Brexit and Scotland is amongst the hardest hit areas of the UK.

The EU referendum outcome increased prices by 1.7%, which means that real wages in June 2017 were 1.7% lower than they otherwise would have been. This decline is equivalent to a £448 cut in annual pay for the average worker.

Put another way, this means the increase in inflation due to the Brexit vote has cost the average worker almost one week’s wages (4.4 working days’ wages, to be precise). Unless Brexit increases real wages in future years, this pay cut will be permanent. 

Households’ overall import exposure is similar throughout the income distribution. Poorer households spend relatively more on food and drinks, which have high import shares, but also on rent, which has a very low import share. Likewise, richer households spend relatively more on some high import share products such as fuels, but also spend a higher proportion of their budget on domestically produced services such as hotels and restaurant meals. 

Although the inflation effect differs little across income deciles, there are stark differences across regions. In general, the north of England is harder hit than the south. Scotland, Wales, and Northern Ireland are the worst affected areas. Compared with the UK average, the increase in inflation due to the vote is 0.18 percentage points higher in Scotland, 0.21 percentage points higher in Wales and 0.47 percentage points higher in Northern Ireland. 

This reinforces the need for the Chancellor on Wednesday to ensure that Scotland, and the UK, gets a pay rise.

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. 

Household debt, pay and the magic money tree

Low wages and rising household debt is not a sound basis for any economy. Today's news that spending on credit and debit cards is rising five times faster than wages, should set off the economic alarm bells.

At every recent UK budget, I tweet and blog the one chart in the OBR report that I find particularly scary – household debt. This is what I said in March this year:

This chart is scary because every year it shows that household debt is projected to rise. With wages in real decline the UK government expects households to pick up the slack caused by their austerity economics.

These chickens are now coming home to roost.  Real incomes have fallen for three successive quarters, the first time this has occurred since the International Monetary Fund bailed the UK out in 1976. Despite saving less and borrowing more, consumer spending has fallen, resulting in economic growth of 0.2% – the lowest of any of the major G7 industrial nations.

Here is a Guardian graphic illustrating the point using ONS data.

As Frances O’Grady, the TUC general secretary, puts it: “People raiding their piggy banks is bad news for working people and the economy. But with wages falling as living costs rise, many families are having to run down their savings or rely on credit cards and loans to get through the month.”

Low pay isn’t doing productivity any favours either. This chart from the Independent shows that productivity has now fallen below 2007 levels. 

There is more evidence in a recent TUC report on insecure work, which found that those sectors which had seen higher increases in productivity over the last five years tended to be those which had experienced smaller increases in insecure employment.

What governments at UK and devolved levels need is a plan to get wages rising again. They must stop holding down the pay of public sector workers by scrapping the pay cap. The minimum wage needs to rise faster reaching £10 an hour as soon as possible and stronger employment rights to tackle bogus self-employment and other forms of insecure work.

For this to happen we apparently need a 'magic money tree'. Here are a couple of branches for that tree.

Let’s have a look at those who have been doing really well out of austerity – the richest 1%. As a report by the Resolution Foundation shows, they have recouped all their losses from the slump. Some action on tax dodging would be a start as well as halting the tax cuts that simply are not trickling down.

Another is the Robin Hood Tax.  Professor Avinash Persaud has recently fleshed out a few aspects of this long standing campaign. He argues that Britain already has a financial transaction tax – it’s called stamp duty, It raises just over £3bn a year, half of it from overseas citizens. Some trading activities are exempt from stamp duty and he believes these exemptions should be restricted. He also proposes that the tax should be broadened to cover transactions in corporate bonds and cash flows arising from equity and derivative transactions. He estimates that this would raise £4.7bn a year - a pretty hefty branch for any magic money tree.


A low wage, low productivity economy is just not the way to go. We need to get wages rising, not least in the public sector after seven years of pay restraint. A different type of economy is possible and we have the wealth to support it.

Public sector pay back on the agenda

Public sector pay is at least back on the political agenda. Now we need to turn the rhetoric into action.

The decision of Jeremy Corbyn to put ending the public sector pay cap as a key element of Labour’s UK general election manifesto was a crucial factor in getting this issue back on the agenda. The conventional political wisdom would say focus on services, but he boldly ignored that. Even more boldly, he decided to put the issue centre stage in the Queen’s Speech debate.

We now have a number of Tory MPs and even cabinet ministers like Fallon, Gove and Boris Johnson calling for a rethink on the Tory pledge to maintain the cap until 2020. However, we need to contrast that with the cheers from many Tory MPs when the Queen’s Speech vote was declared. This was emblematic of politicians who have lost their grip on reality, particularly when a ‘magic money tree’ was discovered to bribe the DUP into the lobby.

The Scottish Government has also been having a rethink about its pay policy after SNP MPs supported the Labour amendment to scrap the UK version. Finance Secretary, Derek Mackay said: “The Scottish government will take into account inflation in the future pay policy."

Pay policy is largely devolved and the Scottish Government’s pay policy already has some important differences to its UK counterpart, most notably in its support for the Scottish Living Wage. However, for the vast majority of public sector workers in Scotland the 1% cap is the same as the Tory UK policy.

On average, public sector pay has been cut by around 14% in real terms since 2009. In recent years it is also falling behind the private sector. This matters at a time when the public sector is competing for staff in a tightening labour market. As our research on the ageing workforce shows, young people are not attracted to tough public sector jobs in care and elsewhere when they can get a less challenging job in the private sector on higher wages. Brexit will compound these problems. There are also jobs that have private sector counterparts those experienced and well trained staff can be poached, as our building control survey highlighted last week.

We shouldn’t also forget the economic case for better pay. Economic growth is declining not least because disposable incomes are falling and household debt is rising. The Resolution Foundation’s work on wages highlights this as a broader problem across all sectors, but the challenge is most acute in the public sector.

The recent parliamentary votes are in effect political skirmishing. The real test will be the UK autumn budget and the Scottish Government’s spending plans for 2018/19. If there is a change from the current revenue (not just capital) spending plans, then we will need to make the case for increasing pay as against other spending demands. There is little point in building roads if the workers are not there to maintain them, or hospital beds without the health care team to ensure they are used.

In Scotland, there has been some recognition of this. To address the large number of elderly patients in hospitals who don’t need to be there, ministers could have simply allocated resources to additional social care packages. However, they accepted the argument put by UNISON and the employers, that given the high level of vacancies and spiralling turnover rates, this wouldn’t work. We have to recruit and retain staff in the sector and therefore a proportion of new resources were allocated to paying the Scottish Living Wage. It is not a complete solution, buts it’s an important step in the right direction.

So, it is important to keep up the pressure on public sector pay, but also to prepare for the next budget round with the service delivery case for putting resources into pay and conditions. That will be the acid test for converting political rhetoric into action.

Time for action on fat cat pay

On the day most workers in Scotland returned to work, FTSE100 CEO’s had already been paid more than the average worker will earn this year.

Fat Cat Tuesday is a useful way of highlighting just how far corporate pay has spiralled out of control. The average FTSE100 CEO pay is now almost £5m, a ratio of 183 times the pay of the average worker. As the High Pay Centre director Stefan Stern said: “‘Fat Cat Tuesday’ again highlights the continuing problem of the unfair pay gap in the UK. We are not all in this together, it seems. Over-payment at the top is fuelling distrust of business, at a time when business needs to demonstrate that it is part of the solution to harsh times and squeezed incomes, and is promoting a recovery in which all employees can benefit.”

This isn’t just a matter of fairness – it has negative consequences for the workplace. The CIPD has recently published a poll on what employees think about high pay. It shows that workers don’t buy the inspiration argument and feel high CEO pay demotivates them and damages their organisation:

• 71% agree that CEO pay levels in the UK are generally too high (while only 5% disagree). 
• 64% disagree that CEO pay levels in the UK inspire employees to work hard (while only 8% agree). 
• 60% agree that CEO pay levels in the UK demotivate employees (while only 13% disagree). 
• 54% agree that CEO pay levels in the UK are bad for an organisation’s reputation (while only 11% disagree). 

Not for the first time the gut reaction of workers is spot on. There is little evidence that paying more results in better management.

One solution is to make it a requirement that organisations publish their pay ratios. This would automatically integrate pay at the top into an organisation’s formal pay scale. Peter Marsland explains how this can be done in the High Pay Centre’s recent publication ‘Pay Ratios – Just Do It’. He demolishes the standard arguments against this approach – it’s too difficult, to onerous. This is data employers should have, and calculating the ratio ought not to challenge anybody with a decent pass in National Grade maths. 

Peter doesn’t go as far as recommending a particular ratio, arguing that all organisations are different. The primary aim is transparency and even in the free market USA, the Securities and Exchange Commission supports this approach. Those organisations who have adopted a ratio have taken pretty high figures. For example, at John Lewis it is 75:1, at the TSB 65:1.

Just before Christmas, the Scottish media reported that there are at least 64 employees in the Scottish Government, its quangos and other public bodies being paid a minimum of £100,000, according to statistics obtained by the Scottish Greens. 

In fairness, most of these senior staff manage large organisations and their pay ratios are well below their private sector equivalents – a 10:1 ratio wouldn’t cause much pain at the top of the Scottish public sector. Even so, there have been efforts to copy the private sector in recent years with the introduction of bonus systems. The voluntary sector has come under similar scrutiny.

The evidence that staff are less productive in organisations that have big gaps between top and bottom pay and where decisions on pay are felt to be unfair also applies to the public sector. Interestingly, the CIPD survey asked respondents about ratios of 5:1 and 10:1 – far removed from the private sector norm.

The Hutton report for the Treasury on public sector pay found that: “A wide range of academic studies [...] suggest there is a strong correlation between narrower pay dispersion within an organisation and improved organisation performance [...] wide gaps between top and bottom pay within an organisation harm performance [...] there will be gains to morale and productivity in organisations where everyone is seen to be paid according to their contribution” 

The growing problem of high pay reflects the damage inequality does to our society. It also damages organisational performance and the reputation of organisations. Improved transparency through the publication of pay ratios is an important starting point. However, while one size shouldn’t fit all, maybe it is time for the Scottish public and voluntary sector to lead the way by establishing pay ratios. Perhaps something the Fair Work Convention should be considering?

Why this election matters for wages

This election matters because Scotland and the UK needs a government that understands the importance of wages to individuals and the economy.

Since Cameron became Prime Minister the average wage is worth £1600 less or nearly £2,000 if you are a public sector worker suffering under UK and Scottish Government pay policies. This is the worst fall in living standards since Queen Victoria was on the throne. This has happened because the economy has seen a big shift from wages to profits. If the wage bill had just kept up with inflation there would be £5bn more spending power in the Scottish economy.

52% of working age adults in poverty are living in households where at least one adult is in employment, as were 59% of children in poverty. The very 'strivers' the Tories claim to represent. Even among those suffering, the pain is not evenly spread. Women in low pay have a pay gap of 34.2% and young workers classed as low paid has more than tripled over the past four decades.

In contrast, the wealth of the richest 1,000 people in Britain doubled to £519 billion since 2009. FTSE 100 Directors had a 21% pay rise last year and now earn 123 times the average Scottish full time worker. In 2000 that ratio was 40 times. Oxfam calculated that the combined wealth of the richest 1 per cent will overtake that of the other 99 per cent of people next year. A staggering statistic on global inequality.

Much of this inequality has been driven by tax dodging. Contrast how the rich and big corporations are allowed to dodge tax, to how the same state treats the unemployed. There were 1,046,398 sanctions, or financial penalties, imposed on Jobseeker’s Allowance claimants in 2013. Five years after HMRC got the HSBC data there has been one prosecution. The penalties for tax evasion remain lenient while the sick and disabled are humiliated by work capability assessments and Jobcentre staff are put under pressure to meet sanction targets.

Falling petrol prices may deliver a cut in the headline inflation rate, but it only masks the real pressures on family finances. Since 2007 the average rent for a Council House has increased by 26% and in the same time period the wages of a Council Worker has increased by 8.3%.

Families have been plugging the gap by using savings or getting into debt. 30% of families say they have less than £500 put away, compared with just 14% in 2013. The scariest chart from the OBR report on the Chancellor's Autumn Statement shows just how much Osborne is relying on household debt to dig us out of the economic mess he has created. The last time this happened we ended up with the longest and deepest recession ever.

Labour is committed as its 'central task' to build an economy that, "creates the better paid and more secure jobs we need to raise living standards". They understand that economic growth is the best way to pay down the deficit. This doesn't mean a sudden big increase wages, but it does signal an important change in direction. Practical measures like an increase in the minimum wage to £8 an hour, a ban on exploitative zero-hours contracts, promoting the living wage and a new lower 10p starting rate of tax. A national goal to halve the number of people in low pay by 2025 would lift two million workers out of low pay. Labour's plan for work also recognises the role of trade unions in the workplace and in tackling excessive executive pay.

The Tories believe that growth is trickled down from the top and have promoted a system where you compete by cutting wages and conditions for everyone else. A race to the bottom that's a key factor in the UK's poor productivity, lower tax receipts and increases in welfare spending. Of course Labour's plans on wages should be more radical and we should press for more. Scottish Labour has established a Commission to report later this year on how we can 'abolish low pay' in Scotland.

The choice in this election is between more of the same trickle down economics from the Tories, or a new direction on wages from Labour. So, this election really does matter for wages - please remember that on May 7.

 

 

Fair Pay Fortnight - Scotland and the UK needs a pay rise

Scotland and the UK needs a pay rise. It's necessary for hard pressed workers and their families, but it's equally vital for the economy.

The next two week's will be Fair Pay Fortnight, a series of events across the country that will raise awareness about Britain’s cost of living crisis. Working people in the UK are seeing their living standards squeezed harder and harder every year. Workers in Scotland have lost nearly £2000 since 2010 and while jobs may be returning to the economy they’re increasingly low paid, low hours and low security.

This has happened because the economy has seen a big shift from wages to profits. You have to go back to the 1860’s for a pay squeeze as long as this one. If the wage bill had just kept up with inflation there would be £5bn more spending power in the Scottish economy. It is low wages that has delivered the slowest recovery recovery from recession since records began.

The UK government is also collecting £33.4bn less in income tax and national insurance than official forecasts suggested because of the lack of earnings growth in the UK, according to independent analysis in 'The living standards tax gap just got bigger', a report published today by the TUC. This analysis is based on the wages forecast made in June 2010 by the Office for Budget Responsibility (OBR). If earnings growth had been in line with the OBR forecast, income tax and national insurance receipts this year would total £308.4bn. But the Treasury is now expected to collect just £275bn. This could have delivered nearly £3bn of extra spending on public services in Scotland and is almost half the austerity cut on the Scottish Government budget.

Falling petrol prices may deliver a cut in the headline inflation rate, but it only masks the real pressures on family finances. Since 2007 the average rent for a Council House has increased by 26% and in the same time the wages of a Council Worker has increased by 8.3%. UNISON Scotland has published a series of reports in our 'Damage' series in which members describe in their own words the impact of low wages on them and their family.

Families have been plugging the gap by using savings or getting into debt. 30% of families say they have less than £500 put away, compared with just 14% in 2013. The scariest chart from the OBR report on the Chancellor's Autumn Statement shows just how much Osborne is relying on household debt to dig us out of the economic mess he has created.

Even among those suffering, the pain is not evenly spread. Women in low pay have a pay gap of 34.2% and young workers classed as low paid has more than tripled over the past four decades. As the Poverty Alliance has highlighted today, in work poverty in Scotland is growing, with almost two thirds of children in poverty living in working households. On pay rises, inequality is being compounded by what the CIPD calls a "tale of two workforces", with public sector workers most likely to see their pay held down.

In contrast, the wealth of the richest 1,000 people in Britain doubled to £519 billion since 2009, about two and a half times the annual deficit. FTSE 100 Directors had a 21% pay rise last year and now earn 123 times the average Scottish full time worker. In 2000 that ratio was 40 times. Put another way, they earned the average Scottish wage of £27,045 in just over two days of work last year.

David Cameron was making a somewhat belated pay rise pitch to the British Chambers of Commerce last week. In a TV reaction interview after the speech, one such fat cat couldn't stop laughing at the notion. That's why they are all queuing up to donate to the Tories already stuffed election fund. We are doing very nicely thanks - 5 more years please.

In Fair Pay Fortnight we will be developing these themes, making the case for greater fairness in our economic system. Scotland and the UK really does need a pay rise.

 

 

An economy that works for people

Today, I was speaking at the Scottish Green Conference In Edinburgh. Credit to the Green's for an outward looking conference agenda, looking beyond the tribalism that is all too dominant in Scottish politics.

My contribution to their economy debate focussed on wages, industrial relations and role of public services.

The big story of the economy has been the shift from wages to profits.

The share of wages as a percentage of national income has fallen from around 58% in the early 1980’s to 54% in 2011,while profit’s share has increased from 24% to 28% over the same period. I could churn out more numbers, but here’s a practical example. Since 2007 the average Rent for a Council House has increased by 26% - in the same time the wages of a Council Worker have increased by 8.3%. Or in the words of a hospital cleaner, "I just get by. Normally I am really struggling by week three. If my bills and rent go up any more I would not be able to live. Family holidays never happen".

This matters for the economy as well as individuals. If the wage bill kept up with inflation there would be £5bn more spending power in Scottish economy. The combination of rising employment and falling pay growth shows the austerity economy is very good at creating low-paid jobs, but struggling to create the better-paid work we need for a fair and sustainable recovery.

Of course not everyone is suffering. The wealth of the richest 1,000 people in Britain doubled to £519 billion since 2009, about two and a half times the annual deficit. They also dodge taxes with £120bn lost to the exchequer. Just think what those resources could do for our battered public services. Again a real example buried away in Herald business pages. In an Edinburgh fund manager, 7 directors earned an average of £2.5m each and they settled a post retirement benefit liability to a former director for £31m! How the 1% rip us off.

If there are any positives it is that the damage this level of inequality does is beginning to be understood is less likely places. The Pope has highlighted the impact of inequality, even the CBI has said something about low wages. The Bank of England governor, Mark Carney said: "All ideologies are prone to extremes. Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis, such radicalism came to dominate economic ideas and became a pattern of social behaviour."

A few words about industrial relations, because strong trade unions and effective collective bargaining are the cornerstone of a more equal society. Last February the Scottish Government commissioned an independent review of progressive workplace policies and practices in the public and private sectors in Scotland. It was Chaired by Jim Mather and had a broad based membership.

This report dispels many of the myths about relations between unions and employers, highlighting the positive relationships that rarely get media coverage. Scotland does of course benefit from significantly higher union density than the rest of the UK and report identified a shared ambition to embed progressive workplace practices to boost innovation and productivity and deliver successful organisations, sustainable business and economic growth, high-quality jobs and a more equitable society. There are 30 recommendations in the report that seek to deliver practical actions in support of the key themes. Most employers and trade unions in Scotland will welcome this report and look to the Scottish Government to translate their response to the recommendations into action.

On public services much has been made income inequality in the UK, quoting the OECD report. But if you read that report the OECD also highlight key role public services play in creating a more equal society.

Public services evolved due to the failure of the voluntary and private sectors to meet the needs of the people. While the well off could buy many things for themselves, infrastructure like roads, water supply and sewerage needed coordinated action and investment. Even the wealthy recognised that it was in their own self-interest to ensure that everyone had clean water to drink and wash in and that waste was dealt with, because everyone suffers when others aren’t covered. The vermin attracted to a street where only half the bins are emptied would be a problem for everyone.

Public sector growth in the 20th century was about providing fair and equal access to services. This also highlights that the defining difference between public and private provision of services is democracy. Not just voting, but deliberative involvement including not just communities of place but also communities of interest.

Scotland has local government but not many genuinely local councils. We have fewer councils and councillors than any other in Europe. Stronger local government needs a wider range of people as councillors, power over finances and integration with other services that are being increasingly centralised.

Like equality, greater public ownership has widespread public support. Not Morrisonian nationalisation but new approaches. Polls show that two thirds believe public services should be provided in-house, not run like a business and with stronger user voice.

One approach to financing services that generate revenue streams is to use some of the £24bn in Scottish local authority pensions funds, provided by workers and the taxpayer. Half that money is currently invested abroad. However, governance is weak with decisions driven by advice from the very same fund managers who got us into the current financial crisis. They also cream off profits for themselves in transaction charges.

Finally some solutions.

• We need an active economic and industrial policy aimed at creating full employment, with quality jobs and a Just Transition to a low carbon economy.
  
• Work must pay enough to ensure a decent standard of life. There must be fair pay rises across the board, helping to restore living standards and eliminate in work poverty
  
• We must ensure equal pay is delivered and we should increase the National Minimum Wage in stages at least to the Living Wage level and extend the Living Wage to all workers on public service contracts, particularly in social care.
  
• Oppose welfare cuts and the political myth making that unfairly blames poverty on those struggling. Including the cut of £6 billion to welfare spending in Scotland.
  
• We need fair taxation and a crackdown on tax avoidance. Taxes are good value for money. Instead of tax cuts, we need to properly fund the public services that are currently so at risk. Tackling the UK tax gap of £32 billion, pursuing tax evasion to raise £90 billion and raising £23 billion annually with a Robin Hood Tax (Financial Transactions Tax).
  
• An end to the unfair council tax freeze which has cost more than £2.5 billion and benefits the better off most. Seeking a cross party consensus on funding local government.
  

Of course we can and should make the case for more powers. UNISON has a detailed shopping list in our Fairer Scotland-Devolution paper and like others we are reviewing these proposals before making a submission to the Smith Commission. But we can do a lot in Scotland now. By all means argue for different constitutional arrangements, but let's get on with what we can now.

There is a broad consensus that a fairer Scotland is possible, let's get on with it.

 

Posted with Blogsy