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  1. Politics
10 January 2012

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.

By Andrew Harrop

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.

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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.

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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.