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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The Brexit Beartraps, #2: Could dropping out of the open skies agreement cancel your holiday?

Flying to Europe is about to get a lot more difficult.

So what is it this time, eh? Brexit is going to wipe out every banana planet on the entire planet? Brexit will get the Last Night of the Proms cancelled? Brexit will bring about World War Three?

To be honest, I think we’re pretty well covered already on that last score, but no, this week it’s nothing so terrifying. It’s just that Brexit might get your holiday cancelled.

What are you blithering about now?

Well, only if you want to holiday in Europe, I suppose. If you’re going to Blackpool you’ll be fine. Or Pakistan, according to some people...

You’re making this up.

I’m honestly not, though we can’t entirely rule out the possibility somebody is. Last month Michael O’Leary, the Ryanair boss who attracts headlines the way certain other things attract flies, warned that, “There is a real prospect... that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019... We will be cancelling people’s holidays for summer of 2019.”

He’s just trying to block Brexit, the bloody saboteur.

Well, yes, he’s been quite explicit about that, and says we should just ignore the referendum result. Honestly, he’s so Remainiac he makes me look like Dan Hannan.

But he’s not wrong that there are issues: please fasten your seatbelt, and brace yourself for some turbulence.

Not so long ago, aviation was a very national sort of a business: many of the big airports were owned by nation states, and the airline industry was dominated by the state-backed national flag carriers (British Airways, Air France and so on). Since governments set airline regulations too, that meant those airlines were given all sorts of competitive advantages in their own country, and pretty much everyone faced barriers to entry in others. 

The EU changed all that. Since 1994, the European Single Aviation Market (ESAM) has allowed free movement of people and cargo; established common rules over safety, security, the environment and so on; and ensured fair competition between European airlines. It also means that an AOC – an Air Operator Certificate, the bit of paper an airline needs to fly – from any European country would be enough to operate in all of them. 

Do we really need all these acronyms?

No, alas, we need more of them. There’s also ECAA, the European Common Aviation Area – that’s the area ESAM covers; basically, ESAM is the aviation bit of the single market, and ECAA the aviation bit of the European Economic Area, or EEA. Then there’s ESAA, the European Aviation Safety Agency, which regulates, well, you can probably guess what it regulates to be honest.

All this may sound a bit dry-

It is.

-it is a bit dry, yes. But it’s also the thing that made it much easier to travel around Europe. It made the European aviation industry much more competitive, which is where the whole cheap flights thing came from.

In a speech last December, Andrew Haines, the boss of Britain’s Civil Aviation Authority said that, since 2000, the number of destinations served from UK airports has doubled; since 1993, fares have dropped by a third. Which is brilliant.

Brexit, though, means we’re probably going to have to pull out of these arrangements.

Stop talking Britain down.

Don’t tell me, tell Brexit secretary David Davis. To monitor and enforce all these international agreements, you need an international court system. That’s the European Court of Justice, which ministers have repeatedly made clear that we’re leaving.

So: last March, when Davis was asked by a select committee whether the open skies system would persist, he replied: “One would presume that would not apply to us” – although he promised he’d fight for a successor, which is very reassuring. 

We can always holiday elsewhere. 

Perhaps you can – O’Leary also claimed (I’m still not making this up) that a senior Brexit minister had told him that lost European airline traffic could be made up for through a bilateral agreement with Pakistan. Which seems a bit optimistic to me, but what do I know.

Intercontinental flights are still likely to be more difficult, though. Since 2007, flights between Europe and the US have operated under a separate open skies agreement, and leaving the EU means we’re we’re about to fall out of that, too.  

Surely we’ll just revert to whatever rules there were before.

Apparently not. Airlines for America – a trade body for... well, you can probably guess that, too – has pointed out that, if we do, there are no historic rules to fall back on: there’s no aviation equivalent of the WTO.

The claim that flights are going to just stop is definitely a worst case scenario: in practice, we can probably negotiate a bunch of new agreements. But we’re already negotiating a lot of other things, and we’re on a deadline, so we’re tight for time.

In fact, we’re really tight for time. Airlines for America has also argued that – because so many tickets are sold a year or more in advance – airlines really need a new deal in place by March 2018, if they’re to have faith they can keep flying. So it’s asking for aviation to be prioritised in negotiations.

The only problem is, we can’t negotiate anything else until the EU decides we’ve made enough progress on the divorce bill and the rights of EU nationals. And the clock’s ticking.

This is just remoaning. Brexit will set us free.

A little bit, maybe. CAA’s Haines has also said he believes “talk of significant retrenchment is very much over-stated, and Brexit offers potential opportunities in other areas”. Falling out of Europe means falling out of European ownership rules, so itcould bring foreign capital into the UK aviation industry (assuming anyone still wants to invest, of course). It would also mean more flexibility on “slot rules”, by which airports have to hand out landing times, and which are I gather a source of some contention at the moment.

But Haines also pointed out that the UK has been one of the most influential contributors to European aviation regulations: leaving the European system will mean we lose that influence. And let’s not forget that it was European law that gave passengers the right to redress when things go wrong: if you’ve ever had a refund after long delays, you’ve got the EU to thank.

So: the planes may not stop flying. But the UK will have less influence over the future of aviation; passengers might have fewer consumer rights; and while it’s not clear that Brexit will mean vastly fewer flights, it’s hard to see how it will mean more, so between that and the slide in sterling, prices are likely to rise, too.

It’s not that Brexit is inevitably going to mean disaster. It’s just that it’ll take a lot of effort for very little obvious reward. Which is becoming something of a theme.

Still, we’ll be free of those bureaucrats at the ECJ, won’t be?

This’ll be a great comfort when we’re all holidaying in Grimsby.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.