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To grow the economy, companies must pay higher wages


11:08 am - May 12th 2011

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contribution by Brendan Barber

I was at the O2 in Greenwich yesterday, speaking to the Insitute of Directors (IoD) annual convention. I always admire the way the IoD doesn’t pussy-foot around. They’re very clear that they don’t just back the spending cuts, but want more of them – and want them more quickly.

But in their desire to see the deficit tackled in this way, they should be very careful what they’re wishing for. The deep and rapid spending cuts are not just slicing away at the public sector, but doing big damage to the private sector too.

Public sector workers and their families are the IoD’s customers too. With incomes frozen and fears for their jobs they’re cutting back. It’s no wonder consumer confidence is collapsing – Just look at how the retail sector sees its prospects.

And we shouldn’t forget that one of the biggest customers for Britain’s private sector is the public sector itself. The state spends £236 billion on goods and services from British business – more than the entire public sector wage bill. As this is slashed, good companies in every part of the economy are suffering the consequences. In turn their staff feel the squeeze, and this does even more damage to consumer confidence.

For the government’s plans to work, the private sector needs to generate jobs faster than it has done in living memory to absorb the million or so jobs likely to be lost from the direct effects of spending cuts.

Yet one good thing about this recession was that fewer jobs were lost than might have been expected from the GDP figures. This is because many companies – often working closely with their unions – decided to try and hold on to skilled staff to make recovery quicker and easier. That was undoubtedly good news, but it means that many companies can grow without taking on much in the way of new staff.

If we look at the small print of the Office for Budget Responsibility’s report on the budget its figures for employment growth depend on households taking on more debt and borrowing more. Frankly I simply don’t see that happening. But it also says something rather profound about the direction of government policy.

I don’t see large scale debt as a good thing in itself. But simply transferring it from state to household is a conjuring trick, not an economic reform.

Instead we all need to talk about how we get our economy moving again. Sometimes we in the trade union movement don’t say it often enough or loud enough, but Britain needs a thriving, successful private sector.

What the IoD’s member companies do creates the wealth that pays for our public services – an economic fact of life we forget at our peril.

So what’s the alternative?

First, we need a more sensible timetable for deficit reduction, because Britain can currently finance its debt at affordable rates.

Second, we need a greater role for fair taxes, because those who caused this mess should make a proper contribution to clearing it up.

And third, we need a new financial transactions tax on the banks, because we need to curb excessive speculation in the City.

None of this will hinder our competitiveness. It’s not about putting burdens on ordinary businesses or raising costs for UK plc. It’s about fairness. Ensuring the banks and bankers who caused this crisis cannot escape its consequences.

And there’s one key change that the IoD probably won’t immediately identify with. It may sound counter-intuitive to company directors, but I believe it is in the long-term interests of their businesses. And that’s to pay their workers more.

Over the past three decades, the share of GDP going to workers’ wages has fallen from 65% to 53%, with those in the middle and at the bottom hit hardest. At the same time, the proportion going to profits has risen sharply. As wages have stagnated, debt has soared. And that’s bad for all of us.

In Britain, household debt more than trebled between 1980 and 2005. As incomes are squeezed further, household debt in this country is predicted to reach over £2 trillion by 2015 – an albatross around the neck of our economic future. Unless workers see their pay packets growing, we won’t be able to build sustainable consumer demand.

And it’s not just unions who are sounding the alarm. Ben Bernanke, the chairman of the Federal Reserve, has urged corporations “to meet demands for higher wages from workers”. And former IMF chief economist Raghuran Rajan has said the primary cause of the global financial crisis was the growing wealth gap between a tiny financial elite and everybody else – with ordinary workers forced to borrow dangerous amounts to maintain living standards.

So rather than wishing for sharp spending cuts, now is surely the time for a fundamental change of direction. To build a fairer, stronger economy, to nurture demand based on wages not debt and to get the incomes of ordinary workers rising again. Only that will let us make the decisive break we need from the catastrophic failures of the recent past.


Brendan Barber is secretary-general of the Trades Union Congress

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Reader comments


Sensible stuff, Brendan.

I admire the fact that the TUC is being more sensible than the reckless IoD.

2. Flowerpower

Total public spending is not being “slashed”. It’s reducing by 0.7% to 0.9% per year – almost within the normal margin of error.

No wonder household confidence is down if people are going about calling a reduction in spending of a fraction of one per cent per annum “slashing”.

Let’s not forget that even after the cuts, the state will be spending more in real terms than in every year bar one of Tony Blair’s premiership.

I don’t remember these levels of spending being described as “austerity Britain” in those heady days. They were described more as a golden age.

Let’s keep a sense of proportion.

Hear, hear.

If this is the voice of vested-interest loony-left militantism, I’d hate to hear the voice of big-picture mixed-economy sanity.

@ Flowerpower

“Let’s not forget that even after the cuts, the state will be spending more in real terms than in every year bar one of Tony Blair’s premiership… Let’s keep a sense of proportion.”

Yes, let’s. In particular, let’s not lose sight of the fact that by 2015, we’ll be spending a far higher ‘proportion’ of public money on pensions than we were spending in 1997 – not just because the population will have aged significantly over that 18-year period, but also because the pensioners of 2015 will be entitled to more money (on average, in real terms) than the pensioners of 1997.

Which is why the government’s teeny-tiny cuts to *overall* spending mean (yes) slashing spending *on public services* right back to 1999 levels.

“What the IoD’s member companies do creates the wealth that pays for our public services – an economic fact of life we forget at our peril.”

Well, the workers do, at any rate.

6. Flowerpower

@ 4 GO

The argument here, GO is not about spending on pensions in 2015 compared to 1997. The argument here is about how a fraction of 1% reduction NOW is supposedly having such a huge macroeconomic effect that it better explains sluggish growth than, say, the global economic situation, commodity price volatility, the hangover of the credit crunch, ….or the cold winter.

The narrative we are being fed here is that this reckless Coalition’s “cuts” are slashing the ranks of the employed so there are fewer people in a position to pay taxes or purchase consumer durables. The reality is there are 400,000 MORE people employed now than when Labour left office.

But you have not got the memo from the global elites.

We are ‘shrinking our way to growth.’ Just as we did after the Wall street crash of 1929.

Lets hope it works this time ,because it didn’t last time.

8. Margin4error

Brendan

Nice article and very well stated.

I have been fascinated to hear experiences of a lot of lower paid staff following the introduction of the minimum wage, and where it is applied, the london living wage.

It is surprising to hear the number of staff who found that as their pay increased, so did their training, responsibilities and prospects.

It seems that bosses, good ones at least, recognise that while paying staff more is a cost they have to make up from elsewhere, one way to do so is to increase the productivity of staff as well. This has worked in both the interests of employers anhd staff as it has raised productivity, bought through new ways of working, and of course, seen staff benefit from better wages and on-the-job learning.

This is commonly seen in middle income roles anyway and always has been. “mission creep” within one’s job – the taking on additional tasks and work that falls outside one’s job description, is welcomed by bosses and staff and often results in pay rises and better recognition.

Higher wages encourages staff to do likewise in roles where, traditionally, staff have been encouraged to just turn up, do what’s expected, and go home – without thinking.

sally,

We are ‘shrinking our way to growth.’ Just as we did after the Wall street crash of 1929.

Lets hope it works this time ,because it didn’t last time.

Perhaps you should do some research before posting. In the US and Germany, the crash was fairly horrible, the government intervened (yes – in both countries the government intervened – and the people in both then elected more interventionist leaders) and growth did not increase.

In most of the rest of the then western world, governments cut spending and growth picked up pretty rapidly, although trade barriers and the like did not help (indeed, this could arguably have been a big problem for the US because it meant there was no external competition for their big monopolies). Britain was in positive growth again in 1931 for example.

Another article by a Union leader living in fantasy land.

Why not just increase everyone’s salaries by a multiple of 10? We’d all be rich then surely?

Admittedly an extreme example, but you see the point….

Wages have been falling as a % of profits thanks to increased productivity and increased automation. It’s a normal phenomenon associated with progress. Workers *have* been getting progressively richer.

As for the points;

Firstly; the UK can finance at relatively good levels because we are taking action to cut our deficit. Nevertheless, our debt dynamics are becoming steadily more dangerous, and interest repayments are set to increase massively over the life of parliament – money which can’t be spent elsewhere. The Unions and Labour would be happy to delay this process and thus makes the problem worse. It’s unlikely the UK becomes like the PIGS countries, but not impossible.

Secondly; fair taxes? Why not have the it translated to “lets soak the rich”. The top earners already pay the bulk of taxes. The bottom 40% are not net contributors at all, whilst the top 25% of taxpayers pay over 75% of all tax.

Thirdly; the idiocy of the robin hood tax, again. All banks would do is pass the costs on. Pension funds returns would be decimated, and market liquidity would be much worse, making markets MORE volatile, not less. Blaming speculators for things is the normal last recourse for people who have no-one left to blame for bad economic governance and fiscal incontinence.

11. Watchman

m4e,

A sensible argument there, that probably would not get any disagreement. But I would point out that Brendan does not link higher wages with increased responsibility or workload, but seems to believe it should be automatic.

As an aside;

I heard a joke the other day;

A politician seaking to a crowd…

“Elect me and I promise you free healthcare, free housing and free clothing. I offer you free food, and jobs for EVERYBODY!”

He then asks for questions from the crowd, and one man steps up to ask one.

“What do we NEED jobs for?@

Speaking of pensions, I support the thrust of this post and the need to get a fairer deal for workers. What I don’t know, and would be interested to hear, is what proportion of the statement “over the past three decades, the share of GDP going to workers’ wages has fallen from 65% to 53%” is accounted for by squeezed wages, what proportion by rising unemployment, and what proportion by the increasing pensioner population.

@ Flowerpower

“The narrative we are being fed here is that this reckless Coalition’s “cuts” are slashing the ranks of the employed so there are fewer people in a position to pay taxes or purchase consumer durables”

What article are you reading? I’m reading one by Brendan Barber called “To grow the economy, companies must pay higher wages,” in which he argues that economic growth, if it is to be sustainable, needs to be driven by consumer demand that’s based on higher wages rather than higher household debt.

There’s a bit of stuff in there about job insecurity, and a bit of scepticism expressed that the private sector will be able to create enough jobs to absorb all the job losses that are in the pipeline, so I suppose one could infer that the author should be worried about us ending up in a position where employment falls and so “there are fewer people in a position to pay taxes or purchase consumer durables”. But he doesn’t make that inference himself; he’s talking about the wages and borrowing of employed people, not about the effects of unemploment.

By how much does Brendan Barber reckon wages need to rise?

5%? 10%? or c. 25%, as in the mid 1970s?

How is the calculation to be made?

16. DeathtoDave

A politician seaking to a crowd…

“Elect me and I promise you free healthcare, free housing and free clothing. I offer you free food, and jobs for EVERYBODY!”

He then asks for questions from the crowd, and one man steps up to ask one.

“What do we NEED jobs for?@

To pay for the bankers bonuses of course! came the reply. Boom Boom.

17. Mike Thomas

Tell you what Brendan, you lead the way, show us what the public sector can do?

When it becomes as productive, reduces its waste, adds more value, is as results-focused and as efficient as the private sector – then we might not begrudge paying you and your ilk for your fantastic pay and pensions.

Us mugs in the private sector suffered the 10% pay cuts, the 1.25m out of work.

Did the public sector do anything to ease our suffering, remember if the public sector cost less we could repay our debt quicker and perhaps even enjoy some relief in a tax cut.

Tell me, how much to YOU get paid to make all this happen? Why don’t you do your bit and take a lower salary so your members have a little bit more in their pocket.

YOU weren’t bitching and whining about the bankers when all that lovely lolly to bankroll the Labour Party was rolling in were you? YOU weren’t bitching at the unsustainability of New Labour’s industry and economic politics. We didn’t get into trillions of pounds of debt overnight. Did you tell Gordon & Alastair then?

I didn’t see Tony Woodley or you bitching and whining when Labour wound up MG Rover and not a peep from you when 1,500,000 manufacturing jobs were lost in the last 13 years.

No, you took your fat salary and kept your mouth shut.

If I get a pay increase, it because I earned it, not because some chippy class conscious economic illiterate said I should have it.

That is the real road to economic ruin, price everyone out of a job.

18. Watchman

G.O.

What article are you reading? I’m reading one by Brendan Barber called “To grow the economy, companies must pay higher wages,” in which he argues that economic growth, if it is to be sustainable, needs to be driven by consumer demand that’s based on higher wages rather than higher household debt.

Hmm. There’s nothing in Brendan’s article, or in the figures I am aware of, to suggest that in the period of ‘the past three decades’, when ‘the share of GDP going to workers’ wages has fallen from 65% to 53%’ that workers have got poorer. Both in outright terms and purchasing power workers are richer. But debt has still grown – so getting richer clearly does not preclude debt (you might argue it increases it, but in the same period there has also been considerable liberalisation of the lending market, so in fact debt levels in 1981 might have been artificially low…). In fact, all that the figures show is that our national production has increased more than wages – which since we have vastly increased the economy in 30 years suggests that this is a normal part of workers getting richer.

Which makes sense. Back in the middle ages, GDP (obviously not measured) was effectively little more than the labour people put in – in effective terms, probably about 95% of GDP was labour, waged or not. In the agricultural and industrial revolutions, new processes developed (at a faster rate than before) and allowed the production of more from the same amount of labour, but even so even the industrial mills of nineteenth-century Britain were still very dependent on labour – it was still the major cost, since people ran machines (and machines were a long-term investment). I suspect that even in 1900 wages were equivalent to more than 70% of GDP – if anyone can find figures to check, that would be interesting. So in effect, alongside a situation where people have undeniably been getting richer, GDP has been increasing at a greater rate.

And this in turn is easily explained – as people get richer, they need less of their income for subsistence, and can spend more on other things – so there is more money circulating per capita, and money circulating in the economy tends to have a multiplier effect (one of my objections to tax and spend is that it takes the money out of the economy before putting it back in – reducing the multiplier effect). The more disposable income we have, the more it can circulate, driving the economy further.

So in effect, Mr Barber seeks to take us backwards, to reduce the ability of the economy to produce more wealth, and most peculiarly, he seeks to justify this by arbitrarily comparing wages and GDP, seemingly not noting that an increase in wages should actually cause an increase in GDP, but an increase in wages as share of GDP might not have the same effect.

Mike Thomas

When it becomes as productive, reduces its waste, adds more value, is as results-focused and as efficient as the private sector

Yeah. Just like the banks!

Oh, er, wait…

Mike Thomas

Did the public sector do anything to ease our suffering, remember if the public sector cost less we could repay our debt quicker and perhaps even enjoy some relief in a tax cut.

So, pay back the debt so that we can, er, go back into debt again because the government can’t raise enough revenue.

Genius!

Did you have the temerity to call someone economically illiterate just then?

Admittedly an extreme example, but you see the point….

Err no Tyler, its not a very clever way of trying to make a point by creating a strawman and then puffing your chest out while you knock it down.

Watchman

Some interesting stuff there. A couple of points in response:

“Both in outright terms and purchasing power workers are richer. But debt has still grown – so getting richer clearly does not preclude debt”

No – but I suspect this is why it matters that “those in the middle and at the bottom [have been] hit hardest”. The authors of The Spirit Level argue that income inequality increases the pressure to consume, and with it the propensity to borrow. So driving up the incomes of low and middle income workers (while allowing the incomes of higher earners to stagnate or fall) would plausibly lead to a reduction in the amount of debt people took on. (On the other hand, presumably it would also mean people were less prone to consume – meaning you’d see lower growth. But then very plausibly a lower level of sustainable, wages-driven growth is preferrable to a higher level of unsustainable, debt-driven growth.)

“an increase in wages should actually cause an increase in GDP, but an increase in wages as share of GDP might not have the same effect.”

It *might* not – but as you say, increasing people’s disposable incomes is an excellent way to drive growth by getting money circulating in the economy. Very plausibly, then, an extra £1 in a worker’s pocket is typically going to do more to drive growth than an extra £1 paid out to a shareholder. (Poorer people tend to keep money circulating by spending it; richer people tend to accumulate assets that just sit around, effectively taking money out of the economy.)

23. Mr S. Pill

Thanks to the right-wingers for providing plenty of lols when stating that poor people should stay poor 😀

You are joking, right..?

You have to laugh when the neo liberal capitalists like Tyler and Mike Thomas show up spouting their free market clap trap.

Just remember folks when Tyler and Thomas and his mates are lecturing us about “free housing and free food “ if their so called free market was in place all the major investment banks in the US would be bankrupt now. But hey , Paulson gave them $700 billion with no strings and in many cases 100 cents on the dollar loans to pay off their sub prime folly. No problem guys you just fucked up the entire global economy but we will bail you out because you are so clever that you just can’t be allowed to fail.

Capitalism for poor ,and socialism for the rich is their tune.

In the US , by 1932 the unemployment rate was 25%, Watchman’s wet dream . Now I know moronic tories like you think that is not a problem. The ends justify the means and all that. “A price well worth paying”

But As historian, professor Broadus Mitchell summarized, “Most indexes worsened until the summer of 1932, which may be called the low point of the depression economically “

Franklin Roosevelt was elected President in 1932 . The New Deal saved capitalism.

And all your right wing clap trap, and re writing of history which the free market, free loaders have been doing lately does not amount to a row of beans.

In other libertarian news, it turns out the NHS is a form of slavery.
http://thinkprogress.org/2011/05/11/rand-paul-health-care-slavery/
According to Rand Paul, a right to health care is EXACTLY THE SAME as being chained into forced labour.

27. Sevillista

It is astounding that the labour share of income has decreased so much (and will surely decrease rapidly over the next 5 years as real wages decline). And with so little public debate.

If the labour share was at pre-1979 levels, earnings would be an additional £180 billion – between a labour force of approximately 30 million that is a cool £6,000 per worker or 23% higher average wages.

How does the labour share of income compare with other economies?

And how do right wingers justify this massive redistribution towards capital? Or explain it?

Just interested.

While an interesting suggestion it does run into a bit of an economic reality brick wall. If you increase the costs for employing people then business’ will do less of it, substituting and mechanising where ever those costs now make that a rational decision.

Of course there is a way round this; get rid of national insurance, both employee’s, (a direct income tax) and employer’s, (an only slightly less direct income tax on the employee). If you wanted to make big difference then you could reduce income tax while you’re at it and to cut what is probably the most severe dead weight on wage levels, abolish corporation tax. If you took this route then not only would you increase wages but employers would hire more people as the relative cost of employing someone fell, (assuming not 100% of the tax reduction effect went to the employee).

So raising employee wages and increasing employment is possible but if you believe you can do it by adding to employer’s costs then you’re just pissing to windward.

29. Mike Thomas

@20

Ben,

By paying back the debt, the government pays less in interest.

By paying less in interest, the government requires less tax revenue, it passes this onto the taxpayer. It can cut taxes without affecting spending on anything else.

The taxpayer decides what to do with their money depending on even basic Keynesian co-efficients like the propensity to spend & propensity to save.

I use Keynesian economics because Labour seem to have rediscoved it after it ran a counter cyclical deficit since 2002….

Wouldn’t you agree?

No, because Labour is totally beholden to the public sector and turkeys do not vote for Christmas.

26
Or serfdom as Hayek suggests.
I’ve come to the conclusion that libertarians are big on hyperbole.

31. BobbaFett

You’re an idiot. Go learn some economics.

@ Flowerpower: If there are no cuts, you’d better tell the Government – Climate Change Minister Greg Barker in particular. He says they’re making cuts Thatcher could only dream of.

@ Tyler: “the top 25% of taxpayers pay over 75% of all tax” – yes, and they have 72% of the wealth. In other words, the top 25% on average are paying pretty close to their share. The top 1%, meanwhile, have 21% of the wealth, and I can’t find figures on the percentage of ALL tax that they pay. Plenty of screaming about how unfair it is that they pay 25% of all INCOME tax, nothing about any other taxes (income tax accounts for only 29% of the UK tax take).

@ Mike Thomas: “When it becomes as productive, reduces its waste, adds more value, is as results-focused and as efficient as the private sector” – you know perfectly well why this is impossible, and it’s got nothing to do with the public sector being inherently inefficient. It’s very simple: Any private sector business which is in competition with part of the public sector HAS to be MORE efficient to stay in business. The public sector could be hyperefficient, but any private competitors that survived would by definition be better. Private sector businesses which do not compete directly with the public sector are not forced to be more efficient, and, as a result, aren’t.

33. Ross Crispin

Deficit?

The deficit caused by the massive bailout of banks 3 years back.

No cuts EVER are necessary, we could just claim back what’s ours. Or, rightfully nationalise our banking system to ensure it’s under worker control.

@ Ross Crispin: Are you trolling or barking? I really can’t tell.

@ Makhno: Your explanation that the public sector is not inherently inefficent does sound very like an explanation as to why the public sector is inefficient compared to the private sector. That is after all the comparative we’re interested in, there being no Platonic ideal of efficiency we can use as a base line.

35. Arthur Seaton

Tyler – that joke is an absolute classic. You must be as joyous a person to be around as you are to read.

@32 Makhno

So you are saying we should tax total assets every year?

The top 25% pay 75% of ALL taxes when you run the numbers.

As for productivity – you argument, when possible to follow (which wasn’t easy) essentially seems to be saying that the public sector doesn’t have to be efficient just because it’s the public sector, and it doesn’t have to compete.

That, of course, is total bullshit.


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