All work and no pay

The next generation are taking over, after 25 years of being the sole bread winner in the family two of my three daughters are about to step into the world of work – well let’s hope so!  Being equipped with a degree is no longer a passport to wealth and prosperity it may not even be enough to secure a job.  One of these daughters has taken the option to take a year out from University to gain experience working for a number of business as an intern during a "year in industry", which is sandwiched between her 2nd and 3rd years.  She secured three internships, where she is working for no money to gain experience; some might say this has been a pretty poor introduction to the world of work.  The reality is that she has the opportunity to work for three outstanding companies and has already been offered a permanent position!  This “year in industry” seems an eminently sensible idea, she gets to see different businesses and roles close up and they get the chance to check her out.

Get on yer bike!

My daughter’s situation is a microcosm of the whole job market, which has been a buyer’s market since 2007.  Those of us who work in the private sector have had to survive wholesale downsizing, salary freezes, smaller or no bonuses and a broader squeeze on company benefits (pensions, etc).  This reduction in take home pay has reduced demand and slowed growth; but this flexibility has allowed the UK economy to maintain relatively high levels of employment.  Now the economy is growing again the somewhat vexed question is - how long will it take for this increased economic activity to feed through into higher take home pay and rising living standards?  I say vexed because living standards have fallen by as much at 5% over the last 5 years and in real terms by much more.



Politicians are particularly keen to find a low cost answer to the problem of falling living standards, as electorates are sensible enough to understand the need for restraint but they want their rewards in heaven!  The problem seems to be that privately owned businesses are either unwilling to share the rewards of improved profitability (the owners want a higher share) or growth is taking a long while to turn into positive cash flow and profit. Some economists now believe that the situation has got out of hand and that governments should step in to set higher minimum wages. There is no doubt that the share business owners and managers take from their businesses is too high in comparison to those who work for them;  but adding mandatory levels of pay may kill flexibility in the labour market, without adding much of a benefit in increased demand.
The trade-off is quite straight forward - If a low paid worker currently on $8 an hour were to receive $10 an hour the worker would have $2 an hour more to spend – this only works if businesses maintain the same or increased levels of employment.  If employers were to reduce employment (due to higher wages) by 20% or more they the effect is neutral or worse.
The case for a higher minimum wage is most eloquently put by Paul Krugman -

Despite the lingering effects of the financial crisis, America is a much richer country than it was 40 years ago. But the inflation-adjusted wages of nonsupervisory workers in retail trade — who weren’t particularly well paid to begin with — have fallen almost 30 percent since 1973. As almost 60 percent of U.S. minimum-wage workers are in either food service or sales. This means, by the way, that one argument often invoked against any attempt to raise wages — the threat of foreign competition — won’t wash here: Americans won’t drive to China to pick up their burgers and fries……. We have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings. 

Others think that higher wages for the most poorly paid will lead to less people in work, more people on “short / zero hours contracts” and more migrant labour.  This would have the effect of driving down employment levels, reducing the tax take and encouraging unnecessary migrations – a hot topic in Europe.  I have found it quite difficult to come to an opinion on the economics of all this, my guess is that a limited increase in minimum wages would be pretty neutral in the short run and of course it has the benefit of being morally virtuous.  The chart below shows that some countries with high minimum wages can support high levels of employment during a down turn (the UK and The Netherland).  Also it is surprising how many countries have no statutory minimum wage.  Conversely in other countries the cost of labour may have hindered employment – specifically the mix of high minimum wages, short working hours and a large public sector looks like a particularly bad cocktail (France and Spain)!

It seems to me that the important commodity for people on low wages is time, one either needs to work very long hours to make it worthwhile or one needs time to study and acquire new skills in order to get a better job.  If we are to consider changing the low paid safety net we should ensure that those on low wages are offered:
1. An adequate rate linked to a standard “low pay contract”
2. Adequate hours – at least 140 hours a month
3. Holiday pay after period of service
4. The flexibility to trade hours for training – maybe funded by the state
5. Limit access to these contractual benefits for migrants