Tackling the productivity orthodoxy to boost pay

Millions of working people find themselves working harder for less. We need to rebalance our economy.

David Arnold is a policy officer at UNISON

Last week’s budget told you all you need to know about how the government see the prospects for future wage growth.  It also provided a stark reminder of an ideological unwillingness to intervene in labour markets, even when they are going wrong and putting the economic recovery at risk.

The government’s analysis rests on the proposition that pay and living standards can rise – but only in line with productivity, which the OBR forecasts to increase in both 2014 and 2015.

At one level, this orthodoxy makes sense. The more a worker produces in any given workplace using whatever skills, attributes, time and skills at their disposal, the more there will be left for wages, profits and reinvestment etc.  But whilst this central proposition is right in important respects, it doesn’t give you the full picture about what’s going wrong with pay and why millions of working people always seem to find themselves working harder for less.

Three points help illustrate why we need new thinking.  

First, theories about pay and productivity don’t tell us anything about what’s happening for the one in five who work in public services, an estimated one million of whom are now officially low paid, earning below the Living Wage.

Of course, productivity in public services has always been a contested issue, but it’s now increasingly apparent that with record numbers of job cuts and ever higher demand for public services, many are working harder than ever – for less.  After years of pay freezes and cuts, the average is £2,000 a year worse off since 2010.  Recent announcements of derisory pay offers in local government and the NHS  add insult to injury and put the sustainability of our public services at risk.

This is as true for those employed directly by the health service and local authorities, as it is for those delivering public services who are  employed by private companies or the community and voluntary sector.  In social care, those providing home visits are expected to see more patients, and to spend less time with each, and yet when travel time is taken out of their wages, many scarcely make the national minimum wage.

Vince Cable warned MPs recently that low productivity by social care workers and other sectors meant the National Minimum Wage could not be pushed higher and faster. Yet those workers in social care have never been more productive. It is the chaotic and fragmented nature of their industry which might be unproductive in Cable’s terms, with many Councils contracting with hundreds of different providers and replicating administration, finance and other functions.

Secondly, distribution is too often missing from the debate about productivity and pay.  As has been shown by a number of authors, since the 1970s we have seen a decrease in the share of our national productivity that goes to wages – and an increase in the share that goes to profits.  In parallel the wage share has been distributed in an increasingly unfair way, with ever more going to the top and a smaller share for those on low to middle incomes.  In the last two decades a bigger share of growth went to the top one per cent than the bottom half combined

Sure, this is partly about the jobs that the economy generates and how they are designed – and thus the wider debate about the range of policies needed to create more productive jobs.  But its also about the political choices made about how our labour market works –  the rules of the game, who wrote them and who they are designed to benefit most – not some theoretical model that guarantees fairer pay.

As Resolution Foundation pointed out, most advanced economies have large service sectors that generate lots of relatively low paid jobs.  However, identical jobs in Britain pay less than they do in other countries.

‘International comparisons show that jobs in these (service) sectors in the UK are designed to be lower paid than they are in other countries. In addition, Britain’s personal service employees are paid less than in other countries even for carrying out identical tasks, for example in fast food restaurants.’

Thirdly, the current debate wilfully ignores important new thinking about wage led growth and the way in which fairer pay has to be the start point for inclusive, sustainable growth. It should not be something bolted onto the back of famously fickle productivity figures, especially as there are strong arguments to suggest that growth and productivity will be held back by higher levels of inequality.  As the ILO argued, polarisation of income distribution and the decline in the wage share have played an important role in the generation of unbalanced and unequal growth.   As such, they argue, it’s now time to reconsider the validity of pro-capital distributional policies, and to examine the possibility of an alternative path, based on pro-labour distributional policies – e.g. more collective bargaining.

So what’s got to happen? Driving up investment, skills and rebalancing the economy for the longer term is obviously important, especially for the longer term.  But the squeeze on pay, the unfair way in which the national product is distributed and the cost of living crisis are problems for now.  For most of us life at work is shaped by the choices made by politicians, their values and their sense, or lack of one, about the social contract.  May 2015 can’t be the living standards election unless there is a proper debate about making the labour market and pay fairer.

One Response to “Tackling the productivity orthodoxy to boost pay”

  1. Postkey

    Assuming that the economy has some involuntary unemployment then there is room for public {infrastructure} investment.

    “Infrastructure investment spending of the government will increase both the marginal product of labour and capital”
    [New Keynesianism and Aggregate Economic Activity by Assar Lindbeck – Economic Journal, 108, 1998 pp167-80]

    Increasing the mpl will enable higher wages to be paid?

    “Where will the money come from? The Bank of England printing works at Debden. Thus is not a joke. Under a paper money system the amount of money in existence is a conscious
    national decision. Don’t talk to me about the money printing excesses of countries like Zimbabwe. Just because you cannot draw a line, it does not mean a line cannot be drawn. Ideally monetary policy should be the first line of defence against both slump and inflation. But with official policy interest rates down to ½ pc, there is not much more that can be done by conventional monetary policy; and tax cuts and public works may be necessary to put the money into circulation. (It goes without saying that in opposite conditions of inflationary pressure public sector surpluses would be required.) So far from being socialistic this analysis was developed in the 1930’s and 40’s by those who wanted to save the capitalist system. But, as always we are in danger of forgetting everything we have ever learned.“
    http://www.samuelbrittan.co.uk/spee59_p.html

    Keynes had the right idea?

    “I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.”

    http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch12.htm

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