Why workplace democracy must be part of Labour's economic agenda

Strengthening workers' bargaining power can deliver fairer wages and more productive enterprises.

All orthodox economic commentary today is focused on the need for fiscal responsibility. Cutting the deficit is said to be a pre-requisite for growth. On the left, the argument is about short-term stimulus followed by longer-term prudence to get the economy back on track. Unfortunately, a small dose of Keynesianism, while welcome, will leave many of the problems that pre-date the crisis largely untouched.

First, governments of all political hues have failed to halt and reverse the enormous rise in income inequality that took place in the 1980s. Far from being a source of dynamism, excessive inequality is now seen as a cause of economic instability. The IMF argues that the pre-crisis bubble was a result of rising personal indebtedness driven by a growing gap between rich and poor. Their prescription for recovery is equally clear: wages must rise in line with productivity and the bargaining power of those with modest to low incomes must be improved. 

Second, the Labour government was successful in restoring full employment as an objective of public policy. But the net effect of this achievement was to move half a million people from workless to working poverty. Families continued to struggle to make ends meet, despite the minimum wage and tax credits. Wages at the bottom end of the labour market were simply too low.

Third, since 2004, wages for all those below the middle of the earnings distribution have been either frozen or have fallen once inflation is taken into account. Robust growth depends upon a steady stream of consumer demand but consumers are hardly likely to feel upbeat if their living standards are being squeezed.

Obviously the state has a role to pay in solving these problems by making full employment a priority and redistributing through the tax credits system. But the government cannot determine wages for all people at work. Rebalancing bargaining power depends on institutions that can represent workers interests effectively – a relationship that is explored in the Smith Institute’s latest report Just deserts? Poverty and income inequality: can workplace democracy make a difference? (July 2013, Coats). To use the US scholar Jacob Hacker’s formulation, pre-distribution matters.

The centre-left, then, has an opportunity to revive an argument that has been treated with contempt for far too long – that workplace democracy can deliver fairer wages and more productive enterprises. The international evidence is compelling: those countries with a fairer distribution of incomes, like the Nordic states and the Netherlands, have an array of institutions which create an inclusive labour market with decent work for all.

Productivity levels and the extent of innovation in German manufacturing are also looked on with envy by British policymakers. This impressive record is partly a result of effective industrial policy, but it depends just as much on the engagement of workers and their involvement in the process of incremental improvement. Works councils and trade unions, despite their weakened condition, remain central to the integrity of the German system. Britain presents a stark contrast, with an exceptionally low level of employee participation (only Lithuania is worse in the EU).

It would be wrong not to recognise the weakness of trade unions, especially in the private sector, even though the workers covered by collective agreements receive wages around 6% higher than those in a similar non-union firm. There is still a union 'sword of justice' effect, but it has become weaker as membership has fallen. Labour must think radically about how the state can facilitate the growth of effective workplace institutions. There is an irresistible case for learning from the works council models that are to be found in most EU 15 member states.

Rebalancing bargaining power means that the state has to re-establish its role as an exemplary contractor and employer too. The living wage should be used as the pay floor in public procurement and where negotiated rates of pay exist they should be observed by all those in the government’s supply chain, including sub-contractors. Beyond using the government’s contractual powers, the Low Pay Commission (LPC) should be given extended terms of reference to investigate the causes, consequences and cures of low pay. The LPC should also be required to develop principles of affordability, identifying when a rate above the minimum wage could be applied to an industry. And government should sponsor a dialogue on skills and productivity between all stakeholders (including the trade unions) in low wage industries.

The central element of Labour’s story has to be a reconceptualisation of the purposes of economic growth and the role of major corporations. It demands a return to the notion of stakeholding that was rapidly adopted and equally rapidly jettisoned by Tony Blair in the mid-1990s. That the architecture of British capitalism is broken should be a matter of consensus, if 'One Nation' means anything it surely means a broad agreement about the terms under which markets operate. Thoughtful Conservatives like Ferdinand Mount, who served as policy head to Margaret Thatcher, have begun to see the wisdom of two-tier corporate boards on the continental European model.  It would be odd if Labour missed the opportunity to develop an agenda for the reform of British capitalism

While it would be wrong to argue that the electorate have moved decisively to the left, there is a widespread belief that a return to the pre-crisis status quo is unacceptable. The possibility of a progressive post-Thatcherite settlement is tantalisingly close but triangulation and well-intentioned tinkering will prove inadequate to the task. Labour’s alternative has to include a progressive agenda for the world of work. Reducing income inequality and the extent of low pay is essential in convincing a sceptical electorate that the party has a credible economic programme.

David Coats is a research fellow at The Smith Institute

The group's new report can be read here

 

Ed Miliband and Ed Balls at the Labour conference in Manchester last year. Photograph: Getty Images.
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The Brexit elite want to make trade great again – but there’s a catch

The most likely trade partners will want something in return. And it could be awkward. 

Make trade great again! That's an often overlooked priority of Britain's Brexit elite, who believe that by freeing the United Kingdom from the desiccated hand of the European bureaucracy they can strike trade deals with the rest of the world.

That's why Liam Fox, the Trade Secretary, is feeling particularly proud of himself this morning, and has written an article for the Telegraph about all the deals that he is doing the preparatory work for. "Britain embarks on trade crusade" is that paper's splash.

The informal talks involve Norway, New Zealand, and the Gulf Cooperation Council, a political and economic alliance of Middle Eastern countries, including Kuwait, the UAE and our friends the Saudis.

Elsewhere, much symbolic importance has been added to a quick deal with the United States, with Theresa May saying that we were "front of the queue" with President-Elect Donald Trump in her speech this week. 

As far as Trump is concerned, the incoming administration seems to see it differently: Wilbur Ross, his Commerce Secretary, yesterday told Congress that the first priority is to re-negotiate the Nafta deal with their nearest neighbours, Canada and Mexico.

In terms of judging whether or not Brexit is a success or not, let's be clear: if the metric for success is striking a trade deal with a Trump administration that believes that every trade deal the United States has struck has been too good on the other party to the deal, Brexit will be a failure.

There is much more potential for a genuine post-Brexit deal with the other nations of the English-speaking world. But there's something to watch here, too: there is plenty of scope for trade deals with the emerging powers in the Brics - Brazil, India, etc. etc.

But what there isn't is scope for a deal that won't involve the handing out of many more visas to those countries, particularly India, than we do currently.

Downing Street sees the success of Brexit on hinging on trade and immigration. But political success on the latter may hobble any hope of making a decent go of the former. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.