Where now for low pay?

Written by: Jonny Medland on 28 March, 2013
Filed under Economy

The Labour leadership has made little secret of its intention to turn 2015 into a living standards election”. Speeches have been given and lessons from the United States on living standards are apparently being placed at the heart of the party’s policy review process. It could hardly be clearer how important this issue is going to be in 2015, and with good reason; as has been well documented, living standards in the UK were stagnating long before the financial crash, with tax credits playing an essential role in mitigating the consequences. Since 20% of the UK workforce currently earns less than a living wage, any discussion of raising living standards must include how to do this for those earning inadequate wages; anything else ignores five million people, and their families, who are simply earning too little money to have a decent standard of living.

It was against this backdrop that the Resolution Foundation yesterday held the first in a new series of events on low pay, first looking at what a Conservative agenda for tackling low pay would look like.  Three key things stood out, primarily from the keynote speaker, Skills Minister (and former Chief of Staff to George Osborne) Matthew Hancock.

The first is that the full-on race to the bottom desired by the backbench Conservative authors of tracts such as Britannia Unchained is going nowhere fast. While the Free Enterprise Group argue that Britons don’t currently work long enough hours and that the minimum wage shouldn’t apply to all businesses, Hancock was at pains to emphasise that he thought “we should not only support the minimum wage, but strengthen it” and that it wasn’t necessarily desirable simply to make people work longer hours at the expense of all else. Although City AM editor Allister Heath made a brave effort to deny the overwhelming evidence that the minimum wage in the UK has not negatively affected the labour market, he was in a clear minority of one among those on the panel.

The second is that although the minimum wage may be here to stay, the Conservatives still lack a coherent agenda for addressing the problem of low pay. Although Hancock supports “strengthening” the minimum wage, there was no indication of him supporting significant increases to it, nor of concrete measures beyond improved enforcement of the National Minimum Wage Act. While welcome – there have only been eight prosecutions for non-compliance with the Act in the fifteen years since it passed – it hardly amounts to a plan for addressing the issue. Urging improvements to the education system and to skills training is frequently where politicians default to when  they’re not sure how to address a problem. Hancock’s speech was no exception.

The third is that Labour needs a clear alternative to the coalition’s chosen route on addressing the problem of low pay. It’s apparent that Conservative & Liberal Democrats messages on this will centre around the increases to the personal tax allowance. This measure is exceptionally popular (supported by 89% of the public according to the most recent polling)  and also comes at significant cost to the Treasury estimated at £6.5 billion in 2014/15. It also, as the Resolution Foundation shows in the inset graph, significantly benefits the upper-middle deciles of the income spectrum, rather than being effectively targeted at the groups it ostensibly primarily helps.

None of this was significantly addressed by Hancock who asserted simply that he “completely disputes that the personal allowance is better for middle income earners”. Nevertheless, it’s clear that the policy itself is exceptionally popular and that pressure will continue to come to keep raising the personal tax allowance; something that will reduce the tax base while continuing to primarily benefit middle-income earners.

While the Conservatives still lack a plan for tackling the problem of low pay, and of living standards for those at the bottom of the income spectrum, our previous method of seeking to combat low pay via tax credits will likely be unavailable to us in 2015. The opportunity cost & distributional implications of further raising the personal allowance makes that a poor idea. Instead we need to look deeper – at why it is so many people in the UK are forced to live on inadequate wages, and what sort of jobs can be created which offer the realistic prospect of sustainable, decent pay.

This piece originally appeared on Jonny Medland’s personal blog.