Leading economists call for new policies to raise pay

The next government should introduce bold new policies to support strong wage growth that is shared throughout the workforce, argues a new collection of essays published today (Thursday) by the independent think-tank the Resolution Foundation.

The Foundation has brought together forward-looking essays by leading economists from academia, policy and journalism in the UK and US. Each author – including Baroness Alison Wolf, Chris Giles, John Van Reenen, Alan Manning and Jared Bernstein – focuses on a specific area in which policy reform might boost wage growth, and underlying productivity, across the workforce.

In Securing a pay rise: the path back to shared wage growth, the authors highlight how wages have been hit since the financial crisis of 2007 and identify a range of challenges for the coming years. Key findings include:

• Younger workers have faced particularly sharp wage falls in recent years, with the downturn reversing the historic trend of each generation earning more than the previous one at the same age.
• Men have been disproportionately hit, resulting in a headline fall in the gender pay gap. As with younger workers, typical weekly earnings for men are lower now than they were in 1997. In part, these reductions reflect changes in working hours though falling hourly pay rates are a much more important factor. Hourly earnings for men are lower than in 2001; for the young they’re below their 1999 level.
• The recession intensified the trend towards women’s earnings surpassing men’s in lower income working couples. Half of working women are now the main breadwinner in couples with children in which their male partner is a low earner.
• The relationship between unemployment and wage growth has changed over time with the implication that wages won’t return to their historic pattern of growth until unemployment falls below its pre-crisis level.
• Even for those workers in stable employment, Abigail McKnight and Laura Gardiner show that only half received a pay rise last year (contrary to many claims). The likelihood of receiving a pay increase started falling even before the recession hit, as did the size of typical pay increases.

The authors reject the idea that all these issues will automatically resolve themselves as the economy recovers and eschew the notion that policy-makers are powerless in the face of global economic forces, arguing that positive intervention can make a real difference. There is, however, no simple or single measure that will stimulate productivity and pay: a range of approaches are advocated.

A number of authors make the case for raising productivity. John Van Reenen calls for a permanent infrastructure board, along with a planning commission to implement its plans. Andrew Smithers argues that the system of pay for top managers is a major barrier to securing higher business investment (and therefore higher productivity and pay). He sets out far-reaching reforms to executive remuneration that would directly link rewards to workforce productivity.

To improve the position of the young, Chris Giles argues for the public sector to lead the way by including a pay premium for younger employees and those with less secure pension rights in annual wage negotiations. Baroness Wolf illustrates how a new employer-levy (an ‘apprenticeship tax’) could provide secure funding for high-quality apprenticeships.

The macro-economic context is highlighted by Simon Wren Lewis, who assesses that austerity is likely to have played a bigger role in the wage squeeze than previously acknowledged (estimating that austerity from 2010 to 2012 could have reduced GDP by as much as 4 per cent). He proposes that in future recessions if interest rates are stuck near zero then ‘helicopter money’ should be used to stimulate demand.

Drawing on the US policy debate, Jared Bernstein argues against an over-reliance on the traditional supply-side levers of improving education and skills. He instead emphasises sustaining demand in the economy, noting that stronger wage recovery in both the US and UK rests on moving closer to full employment. In the UK context Steve Machin notes that the goal of full employment may be further away than is currently thought.

Increasing employment among particular groups is emphasised by several authors. Paul Gregg recommends a suite of measures to specifically support higher employment for those with ill-health or disabilities, including extending the right for an individual to return to their previous employer beyond six months, establishing a right to return part-time and to workplace adaptation. Susan Harkness focuses on raising female employment, making the case for increasing work allowances’ within Universal Credit to boost work incentives for single parents and second earners in couples.

As a means of tilting the balance of power in the workplace back towards labour, Alan Manning raises the idea of mobilising grassroots pay campaigns and rejuvenating unions, while John Philpott calls for stronger regulation of exploitation in the labour market, with more funding and powers for enforcement around employment practices like zero-hours contracts.

To help tackle poverty-wages, Sir George Bain and Conor D’Arcy consider how to strengthen the Low Pay Commission (LPC) and National Minimum Wage. They stress the importance of the LPC remaining entirely independent and call upon politicians to resist the temptation of dictating cash figures to it. But they also want to strengthen and broaden the LPC’s remit to make it more pro-active and ambitious in tackling the wider problem of low pay over the medium term.

Drawing on recent high-profile campaigns in the US, Arin Dube analyses the impact of higher minimum wages in cities – such as the move to $15 in places like Seattle – and considers lessons for the UK. He explores the case for the LPC to undertake a separate analysis of London’s labour market and report on whether the capital could afford a higher wage floor – and what it should be.

With the public sector pay premium falling sharply in recent years, John Hawksworth argues that a continuation of this trend may lead to serious recruitment and retention problems. He calls for a number of reforms, including more collaboration and sharing of services across government, to help deal with this challenge and highlights the fiscal choices that will determine the resources available to meet the public sector pay-bill.

Gavin Kelly, Chief Executive of the Resolution Foundation (and book editor) said:

“We have witnessed one of the longest and deepest pay squeezes in modern history – and even before the crisis, when the economy was steadily growing, typical wage growth was slowing down.

“With average pay now rising again, the recovery looking more sure-footed and an election imminent this is exactly the right time to debate what policy can do to secure stronger and shared wage growth. No-one should assume that rising GDP means that this is going to happen automatically.

“Whether it be productivity-enhancing investment, measures to take us closer to full employment, proper funding of quality apprenticeships, extra help for young workers or revamping the Low Pay Commission, there are plenty of ideas here on how to support wage growth.

“Boosting productivity and pay is the central economic question of our times: not only in determining living standards over the next Parliament but also in establishing the size of the fiscal challenge that the next government will face. So much rests on it yet the election debate has barely touched on it.”

Ends

An embargoed copy of Securing a pay rise: the path back to shared wage growth is available from the Resolution Foundation press office on request.

All of the essays and charts from the book will be available from 00.01hrs Thursday 26 March on a new microsite http://res-fdn.org/securingapayrise

The official launch will be held at the Resolution Foundation central London HQ on Thursday 26 March, 5.30-7pm (with a copy of the book and glass of wine available from 5pm). Please contact the press office if you’d like to attend.