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The longest pay freeze in history. And how to end it.

We may be in the middle of the longest wages freeze since records began, but the silver lining – according to the Chancellor, Philip Hammond – is that Britain has a record number of people in work.   Unemployment fell last month to 4.3 percent in the UK and in Scotland it’s even lower an 3.8% .  That’s good – isn’t it?  Everyone agrees work is the route out of poverty.

Perhaps, but the odd thing is that wages also fell last month  by 0.4 per cent.   That may not seem like a lot, but that fall in earnings is evidence of a most disturbing and puzzling trend.   Economists always used to say that, when there is near full employment, wages must rise as workers become harder to recruit.  Economists have a graph demonstrating this, which they call the Phillips Curve.   This is supposed to illustrate the law that unemployment can never be lower than 5 per cent without causing wage rises and consequently inflation.  Indeed, in the last century, “full employment” was generally taken to mean 5 per cent. This was called the NAIRU: the Non Accelerating Inflation Rate of Unemployment. Yet unemployment is now down to 3.8 per cent and wages are continuing to fall.

We now have what might be called the FERFI: Full Employment Rate of Falling Incomes. The Phillips Curve has been upended. Something odd happened after the financial crash of 2008-12, during which average earnings suffered the steepest collapse in 150 years. Wages picked up again in 2014 as the UK economy recovered – but now they’ve stalled again, even as the “recovery” gathers speed.  The Institute of Fiscal Studies said this week that they don’t expect pay not to recover to 2008 levels until the mid 2020s.  This is simply astonishing.  The  “laws” of economics are not functioning. We are discovering, not for the first time this century, that economic theory just doesn’t fit reality.

So, what is going on? Well, we keep hearing about the “gig economy” and the growth of zero-hours, part-time, and pseudo-self-employed jobs. Isn’t it the collapse of the old world of secure and steady jobs that is causing the wilting pay packets? Actually, it isn’t. According to the Office of National Statistics the big increase in employment over the last three months has been in full-time, permanent posts. The UK Government has been patting itself on the back for this, and saying that firms are confident enough  – despite Brexit fears – to take on proper salaried staff instead of the hire-and-fire casual labour of the recession years.

But this is not as positive as it sounds. On the contrary, we should be very worried because it suggests that even full-time jobs are now subject to falling pay. Indeed, in the new, post-crash economy there may not be such a thing as a “good job” any more, except in highly skilled occupations and in parts of the public sector, like medicine and dentistry.   In the private sector, employers can routinely cut wages without any resistance from the workforce.

The big increase in employment recently has been in hospitality and catering. Here, applicants are often now expected to sign forms exempting themselves from the 1998 Working Time Directive, which supposedly limits the working week to 48 hours. This means they are in “full-time jobs” but are often working 55-60 hours a week for the same pay. The TUC has estimated that, in 2016 alone, there were 2.1 trillion hours of unpaid overtime worked in the UK, to the value of £33.6bn. That’s money that should have gone into the pay-packets of full-time workers.

Moreover, full-time doesn’t mean permanent any more because many full-time workers are actually on contract. Even in the supposedly secure world of higher education, many lecturers are on contracts that expire after two years so the university avoids redundancy pay.  Further down the jobs market, a lot of the new posts are de-skilled and routine, like security guards, which means that anyone can do them. Manufacturing workers used to get paid according to their skills.

But this doesn’t fully explain why wages have been falling while unemployment reaches a record low. One more challenging explanation is that immigration from low-wage countries in Europe has been depressing pay in the UK. This argument is most often heard from populists like Nigel Farage and Ukip, and most economic commentators deny that there is any link between immigration and low pay. But one very high-profile left-wing commentator, the former BBC economics expert, Paul Mason, one of Jeremy Corbyn’s  advisers, seems to agree that immigration is partly responsible. The importation of cheap labour from the Czech Republic, Poland and Lithuania, he said in an interview in July with Aspen magazine, “allows businesspeople in Britain to take the easy route. This is why we don’t have a Silicon Valley in Britain: it’s so easy to make money exploiting people from Eastern Europe”.

There may be disagreement about the causes of the pay slump, but what everyone should agree is that something needs to be done. Last week the Government finally agreed to lift the 1 per cent pay cap on public sector workers. This was clearly well deserved and the right thing to do. No-one should expect nurses and firefighters to suffer pay cuts, and these essential services need to be properly remunerated. However, what tends to be forgotten is that the vast majority of British workers, 75 per cent, are in the private sector, where they have been experiencing the longest pay pause since the 19th century – with no sign of it ending.

One answer is to restore the power of trades unions, which can be very effective at keeping wages buoyant. More than half of public sector workers are in trades unions, against barely one in 10 private sector workers. This may explain why public sector pay and conditions are better than in the private sector.   Unions are power. Nationwide strikes are being planned right now by teachers, nurses and civil servants, but when did you last hear of a strike among security guards, kitchen staff or Uber drivers?

The power balance has shifted too far in favour of the bosses. Perhaps we don’t want to go back to the 1970s, when trades unions arguably had too much power and used it irresponsibly in certain areas. But trades unions should be part of the picture in the new age of casual employment. The right to trades union membership, indeed the presumption of membership, must somehow be restored to the private sector, which is easy to say; harder to do. Legally enforcing union recognition in the workplace might be a start.

But this is not just in the interests of workers. Higher wages make companies more efficient. Britain has one of the worst productivity records in Europe because labour is so cheap here, firms don’t need to introduce new technology or new methods. It takes three British workers to deliver the same output as two French ones.

Employers must be reminded that without proper wages, consumers will be unable to provide stable markets for the products and services of private companies. Henry Ford understood this a century ago when he doubled the wages of his workforce so that they could afford to buy his Model T cars. Our corrupt finance-dominated capitalism has lost sight of this fundamental law of real world economics: you can’t sell stuff unless people have the money to buy it.

Adapted from Sunday Herald.

About @iainmacwhirter

I'm a columnist for the Herald. Author of "Road to Referendum" and "Disunited Kingdom". Was a BBC TV and radio presenter for 25 years - "Westminster Live" and "Holyrood Live" mainly. Spent time as columnist for The Observer, Guardian, New Statesman. Former Rector of Edinburgh University. Live in Edinburgh and spend a lot of time in the French Pyrenees. Will that do?


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