How can the Government make sure everyone benefits from economic growth?

The economy is growing, which means that the prosperity of the country is increasing. So how does the government ensure that all in the economy, and not just the few at the mix ale top, share this? Well let’s look at a couple of areas where they have direct control; those on minimum wage and people working in the public sector.

Believe it or not, there is an argument against the minimum wage. The minimum wage was brought in during Tony Blair’s first term to guarantee a certain level of earnings. But not everyone welcomed this. The argument against it is a free market one, if someone is happy to do work for less than £6.70 an hour, who are we to stop them? The answer to this is simple; we don’t currently have full employment. There are more people looking for jobs than have them, which means a race to the bottom for pay levels. Employers can charge less and less because there will always be someone willing to take the job.

And the consequence of this? Lots of people working as hard as possible, yet are unable to support themselves and their family. This is where the government has to step in. Obviously no reasonable person would want to see someone living in poverty, so the government would have to top up someone’s earnings to a reasonable level. And this is what the government currently does; it’s called tax credits. We’ll come to that later.

The minimum wage also represents a race to the bottom. Jobs like cleaning or retail, in general, tend to be accepted as minimum wage jobs. As mentioned above, there are far more people seeking work than there are available jobs. As such, there is no incentive to ever pay above minimum wage. Thus, people in these jobs will never really get a pay rise unless the government steps in.

Therefore there is a responsibility on the government to make sure it’s setting increases to reflect the growing prosperity of the nation. A growing economy means the people working in that economy are better off. Incomes are a direct reflection of these profits. It is also generally reflected in salaried employees who have more opportunities, which means businesses have to increase salaries to attract (or keep) a workforce. But with a market intervention like the minimum wage, the government needs to increase the level to ensure that the lowest earners also benefit from this prosperity. This should be the responsibility of the Low Pay Commission.

However, as living wage campaigners have shown, the current minimum wage isn’t enough to live on. There are two ways to deal with this. Either we increase the mandatory minimum wage, or we top up people’s earnings with tax credits. In the simplest form, the burden either lies with businesses, or with the taxpayer. The current government has chosen the former – George Osborne has announced that the minimum wage should be increased to a so-called ‘living wage’, and he is also pursuing the end of tax credits. In theory this is great – people are earning enough to support themselves through higher pay, and the government no longer has to top up. Except that he’s done it in the wrong order.

Ideally people wouldn’t need tax credits, but the fact is they do. It is an act of unmitigated cruelty to take money from the lowest earning on the assumption that their pay will go up in the future. The goal of making sure that the likes of Asda are paying for people to be able to live (instead of the taxpayer) is fantastic. But until they are, one can’t just take money off the lowest earners. Instead, we should be ensuring that their earning increases at the same rate as everyone else’s.

So we fully support striving for the living wage, although it needs to be accepted that this cannot be done immediately. So, until they’re not needed, we also need to make sure we retain the support systems for people who earn below this living wage.

However, we still haven’t answered the question of sharing economic growth. Before we get to that, what about people in the public sector? They need to be allowed to share in prosperity as much as anyone else.

With most jobs, the free market dictates pay levels. If a company is competing with lots of other companies for the same talent, then the average earnings of those employees will go up. But lots of roles occupied in the public sector do not have direct private sector competition to motivate the government to pay them more. For example, the NHS basically has a state sponsored monopoly on health care. Let’s use social work as an example and take this back to first principles. What incentive does the government have to pay these people more, or even as much as they currently get? How do we decide what is a fair rate of pay?

If you want to be a social worker, you can hardly look around in the private sector. The government is your only option. This means that we’re not at risk of losing you to other companies, so don’t need to compete on pay. Social workers don’t fall into the ‘low pay’ category, so there certainly isn’t the motivation to pay them more in regards to a fair living standard. As well as this, it is safe to assume that social workers don’t go into the profession purely motivated by money.

But we do need to make sure that the best and brightest are still incentivised to jobs like these. And a lot of these jobs are tough. Anyone who knows a social worker can attest to the fact that they frequently get asked “do you enjoy taking kids away from their parents?!” Consequently, we need to be paying people enough so that they still feel valued and see these jobs as ‘worth it’.

But on top of this, we need to ensure that roles that only really exists in the public sector (and therefore has its pay levels set by HMG), shares the economic prosperity. Social Work is hardly an industry that would have a ‘boom era’ as, say, oil might. So people working in it aren’t going to see pay rising in line with the economy organically.

So how do we make sure that people on the minimum wage, and people in the public sector benefit from economic growth?

Well, we think there is a possible solution to this. The minimum wage and public sector pay levels could be set to a percentage of a comparable profession in the private sector, one that requires the same level of training and responsibility. Or, even better, an average of multiple private sector jobs. Then any rises or falls in the private sector would be reflected in public sector pay. Suddenly, economic prosperity has a chance of being shared equally.

This doesn’t have to be implemented with major cost implications. The percentage and average can be set in a way that current pay levels stay basically the same. But how could a government argue against it? When the economy does well, the private sector gets a pay rise, which means the government gets a pay rise. How could you say those in the public sector who, you know, save people’s lives and stuff, don’t deserve one?

Plus this policy has a secondary effect – every worker in the country has a stake in how well the country is doing. This means there is an incentive to vote in a manner that benefits the whole country. Instead of voting for the person who has promised to increase your paycheck, you would be incentivised to vote for the person who stands the best chance of increasing everyone’s paycheck. In turn, politicians have a massive incentive to make sure that everyone’s prosperity is increasing. GDP figures would no longer just be something reported every three months on the news; it would be something that actually mattered to people.

At the very minimum, the government has a moral responsibility to make sure people are paid enough to live, and that people are still attracted to jobs where we need them. But it should be more ambitious than that. Where the government has a role in setting pay levels, it should be ensuring that economic prosperity is enjoyed equally. And it is vital that it starts to do just that.

 

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