Labour needs to be more radical on high pay and low pay

Miliband should should promise to link the minimum wage to a new top pay index.

When FTSE directors awarded themselves an average pay rise of 49 per cent the die was cast. Even the Conservatives had to concede to action. But this weekend, as the political parties scrambled to out-tough each other on boardroom pay, the net was spread narrowly. It was FTSE boardrooms, not top-earners more generally, who were the political lightening-rod. Good politics perhaps, but not enough to herald a better, fairer capitalism. Next Saturday's Fabian New Year Conference, 'The Economic Alternative' will be asking what it will take to build a responsible economy. Action on pay is part of the answer.

The left needs to take this week's unusual meeting of minds as a chance to broaden the argument, and demand a more general response to rampant top earnings, linked with new radicalism on low pay. This week's limp-wristed crack-down on the pay of 1,000-odd directors should be just the beginning. What about the rest of the 'one percent': the armies of corporate executives, bankers, lawyers, consultants and public sector leaders; the million-odd households taking home over £100,000 a year? Collectively their pay rises may not be so headline grabbing, but their much greater number means that economically and culturally they are the group that matter.

For three decades the income of top earners (in statistical terms actually the top two percent) has left everyone else behind. Since 1979 inflation-adjusted household income at the 98th percentile has increased by an average of 3 per cent per year, compared to 1.6 per cent for middle income families. So gradually, cumulatively, the top has drifted away from the rest. (In the Thatcher/Major era this was part of a general pattern of widening income inequality, but after 1997 it really was just the top; under Labour, incomes at the 20th percentile grew just as fast as those at the 96th thanks to tax credits and the minimum wage).

It can't go on like this. If the left is serious about forging a different economic path it must say 'thus far and no further' on the pay differential between the top and the rest. Even that would mean accepting today's unprecedented rates of inequality. It is a stark indication of how far to the right our politics has drifted that just calling for a freeze at the status quo seems a radical proposition.

Of course tethering top pay is easier said than done. Top earners as a collective have not consciously colluded to rip-off everyone else and they could not act in concert to change their ways, even if they wanted to. But one way or another, if the left wants fairer capitalism, the stable door must be shut.

Here's how it could be done. If Ed Miliband becomes Prime Minister he can't stop pay rises at the top, but he can impose them at the bottom. So he should promise to link the minimum wage to a new top pay index. The result would be a labour market where low pay always increased by at least the same as top earnings (say, those at the 99th percentile).

This idea isn't as economically mad as it sounds. The index would be based on pay near, not at, the top - in other words people earning six figures, not the multi-million pound directors who get away with double digit rises. The index could also be based on a rolling average to smooth out volatility. But most importantly, it makes sense because tackling low pay is in its own right an essential ingredient for economic rebalancing. This would be an automatic mechanism to ensure annual action.

The backdrop is that policy makers have lost their nerve on the Minimum Wage. In the years after its introduction, the NMW was raised much faster than rising prices or earnings. But in 2006 that all came to an end. Since then the NMW has lost value against inflation and only matched the UK's anaemic average earnings growth. It seems there is some unwritten understanding that the work of the minimum wage is done and that further action to reduce low pay would do more harm than good.

There is precious little evidence to support this case, however, even in the pages of the cautious annual reports of the Low Pay Commission. Their perhaps surprising finding is that raising low wages does not kill jobs. Indeed pardoxically higher wages are normally linked to lower unemployment. Perhaps it's because low paid jobs tend to entail hands-on tasks that can't be exported and which we prefer not to do without. It seems that how much we choose to pay at the bottom of the labour market is a cultural as much as an economic choice, with Denmark paying low-end employees three times more than the US, without any obvious consequences.

The case for tethering top and bottom pay is even more compelling now, as we add public spending cuts into the mix. In recent years the incomes of poorer groups in the UK have kept up with GDP growth mainly due to fiscal transfers not the 'trickle down' of rising wages (and the story is similar in other OECD countries). With the option of more spending on tax credits clearly unavailable, pay has to take the strain; if low income groups are to benefit when the UK's economic motor begins to revive, it will have to be through the pay packet not transfers. In other words, with no new public money, we will need to become more like Denmark and less like the US if we are to avoid inequality rising between the low paid and the mainstream.

So what would happen if a government increased the minimum wage in line with top earnings - say 3 per cent after inflation each year? Directly, it certainly wouldn't be an economic revolution. It would take three years to match Australia's minimum wage and six years to touch the UK Living Wage, at the levels at which they stand today. But gradually, over the tough decade ahead, it would make for a fairer economy. Women would benefit more than men, and the north more than the south - two important correctives to Government austerity. Low paying sectors would need to think about productivity improvements; incentives to move from benefits into work would improve; and the state would spend less subsidising low paid work (though a little more paying its own employees and contractors). If the economic literature is to be believed, the impact on unemployment would be marginal, except perhaps for young people, who sadly might need to be exempted from the scheme to start with, while reducing youth unemployment remains the priority.

Looking wider, perhaps pegging top and bottom wages would set in motion more far reaching change. The middle three-quarters of the labour market would not be directly affected, but would start asking questions if their earnings weren't keeping up. The 'Top Pay Index' would be a subtle prop in pay negotiations everywhere. Employees in the middle would try their utmost to keep ahead of the bottom and keep up with the top - while bosses would need just that little bit more chutzpah to award themselves more than the shopfloor or middle management. Feistier, better informed private sector employees might just be the key to unwinding the ever rising share of GDP ending in the hands of shareholders and top earners. A Government can't make median pay keep up with economic growth, but perhaps it can create the architecture for workers can do the job for themselves?

That thought leads back to the weekend's announcements on boardroom pay. For the new measures on enterprise-level transparency which Labour has endorsed could be transformative. Forcing listed companies to publish data on both workforce and boardroom pay, in clear, comparable terms has been pitched as an aide for institutional shareholders. In fact it is likely to be used far more doggedly by employees themselves. Armed with details of their own firm's policies, a league table comparing them to their corporate peers, and the figures from the national Top Pay Index, it would be over to the employees of UK PLC to take up the fight for fair pay for themselves.

Andrew Harrop is General Secretary of the Fabian Society. Twitter: @andrew_harrop

'The Economic Alternative', the Fabian Society's New Year Conference takes place on Saturday 14th January at the Institute of Education. Find out more by visiting the Fabian Society website.

Andrew Harrop is general secretary of the Fabian Society.

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Justin Trudeau points the way forward for European politics

Is the charismatic Canadian Prime Minister modelling the party of the future?

Six months after Canadian election day, Justin Trudeau’s Liberal party continues to bask in the glow of victory. With 44 per cent of support in the polls, the Liberals are the most popular party amongst every single demographic – men and women, young and old, and people of all educational backgrounds. 

While most European mainstream parties only dream of such approval, this is actually a small dip for the Liberals. They were enjoying almost 50 per cent support in the polls up until budget day on 21 March. Even after announcing $29.4 billion in deficit spending, Canadians overall viewed the budget favourably – only 34 per cent said they would vote to defeat it.

Progressives around the world are suddenly intrigued by Canadian politics. Why is Justin Trudeau so successful?

Of course it helps that the new Prime Minister is young, handsome and loves pandas (who doesn’t?) But it’s also true that he was leader of the Liberals for a year and half before the election. He brought with him an initial surge in support for the party. But he also oversaw its steady decline in the lead up to last year’s election – leadership is important, but clearly it isn’t the only factor behind the Liberals’ success today.

Context matters

As disappointing as it is for Europeans seeking to unpack Canadian secrets, the truth is that a large part of the Liberals’ success was also down to the former Prime Minister Stephen Harper’s extreme unpopularity by election time.

Throughout almost ten years in power, Harper shifted Canada markedly to the right. His Conservative government did not just alter policies; it started changing the rules of the democratic game. While centre-right governments in Europe may be implementing policies that progressives dislike, they are nonetheless operating within the constraints of democratic systems (for the most part; Hungary and Poland are exceptions).

Which is why the first weeks of the election campaign were dominated by an ‘Anybody But Harper’ sentiment, benefitting both the Liberals and the left-wing New Democratic Party (NDP). The NDP was even leading the polls for a while, inviting pundits to consider the possibility of a hung parliament.

But eight days before election day, the Liberals began to pull ahead.

The most important reason – and why they continue to be so popular today – is that they were able to own the mantle of ‘change’. They were the only party to promise running a (small) deficit and invest heavily in infrastructure. Notably absent was abstract discourse about tackling inequality. Trudeau’s plan was about fairness for the middle class, promoting social justice and economic growth.

Democratic reform was also a core feature of the Liberal campaign, which the party has maintained in government – Trudeau appointed a new Minister of Democratic Institutions and promised a change in the voting system before the next election.

The change has also been in style, however. Justin Trudeau is rebranding Canada as an open, progressive, plural society. Even though this was Canada’s reputation pre-Harper, it is not as simple as turning back the clock.

In a world increasingly taken by populist rhetoric on immigration – not just by politicians like Donald Trump, Nigel Farage, Marine Le Pen and other right-wingers, but also increasingly by mainstream politicians of right and left – Justin Trudeau has been unashamedly proclaiming the benefits of living in a diverse, plural society. He repeatedly calls himself a feminist, in the hope that one day “it is met with a shrug” rather than a social media explosion. Live-streamed Global Town Halls are one part of a renewed openness with the media. Progressive politicians in Europe would do well to take note.

Questioning the role of political parties today

Another interesting development is that the Liberal party is implicitly questioning the point of parties today. It recently abolished fee-paying, card-carrying party members. While this has been met with some criticism regarding the party’s structure and integrity, with commentators worried that “it’s the equivalent of turning your party into one giant Facebook page: Click ‘Like’ and you’re in the club,” it seems this is the point.

Colin Horgan, one of Trudeau’s former speechwriters, explains that Facebook is “literally a treasure trove for political parties”. All kinds of information becomes available – for free; supporters become easier to contact.

It was something the Liberals were already hinting at two years ago when they introduced a ‘supporters’ category to make the party appear more open. Liberal president Anna Gainey also used the word “movement” to describe what the Liberals hope to be.

And yes, they are trying to win over millennials. Which proved to be a good strategy, as a new study shows that Canadians aged 18-25 were a key reason why the Liberals won a majority. Young voter turnout was up by 12 per cent from the last election in 2011; among this age group, 45 per cent voted for the Liberals.

Some interesting questions for European progressives to consider. Of course, some of the newer political parties in Europe have already been experimenting with looser membership structures and less hierarchical ways of engaging, like Podemos’ ‘circles’ in Spain and the Five Star Movement’s ‘liquid democracy’ in Italy.

The British centre-left may be hesitant after its recent fiasco. Labour opened up its leadership primary to ‘supporters’ and ended up with a polarising leader who is extremely popular amongst members, but unpopular amongst the British public. But it would be wrong to assume that the process was to blame.

The better comparison is perhaps to Emmanuel Macron, France’s young economy minister who recently launched his own movement ‘En Marche !’ Moving beyond the traditional party structure, he is attempting to unite ‘right’ and ‘left’ by inspiring French people with an optimistic vision of the future. Time will tell whether this works to engage people in the longer term, or at least until next year’s presidential election.

In any case, European parties could start by asking themselves: What kind of political parties are they? What is the point of them?

Most importantly: What do they want people to think is the point of them?

Ultimately, the Canadian Liberals’ model of success rests on three main pillars:

  1. They unambiguously promote and defend a progressive, open, plural vision of society.
  2. They have a coherent economic plan focused on social justice and economic growth which, most importantly, they are trusted to deliver.
  3. They understand that society has changed – people are more interconnected than ever, relationships are less hierarchical and networks exist online – and they are adapting a once rigid party structure into a looser, open movement to reflect that.

*And as a bonus, a young, charismatic leader doesn’t hurt either.

Claudia Chwalisz is a Senior Policy Researcher at Policy Network, a Crook Public Service Fellow at the University of Sheffield and author of The Populist Signal: Why Politics and Democracy Need to Change