Research published last week by Citizens UK found that companies in the UK are paying their workers so little that the taxpayer has to top up wages to the tune of £11bn a year. The four big supermarkets (Tesco, Asda, Sainsburys and Morrisons) alone are costing just under £1bn a year in tax credits and extra benefits payments.
This is a direct transfer from the rest of society to some of the largest businesses in the country. To put the figure in perspective, the total cost of benefit fraud last year was just £1bn. Corporate scrounging costs 11 times that.
Worse, this is a direct subsidy for poverty pay. If supermarkets and other low-paying employers know they can secure work even at derisory wages, since pay will be topped up by the state, they have no incentive to offer higher wages.
None of this makes sense. We are all, in effect, paying a huge sum of money so that we can continue to underpay the 22% of workers who are earning below the Living Wage – the level at which it is possible to live without government subsidies. The only possible beneficiaries are business owners.
Britain is an increasingly unequal society. Inequality here has risen more rapidly than in any other major economy over the last three decades. Piecemeal adaptations in the benefits system have attempted to cope with this. One of the larger measures was the introduction of tax credits by Labour after its election in 1997, intended to lift the low-paid out of poverty.
However, the labour market has become increasingly polarised as manufacturing employment has shrunk. Manufacturing has traditionally been better able to provide moderately well-paid, reasonably secure work. Its replacement by services employment (now over 80% of the workforce) has meant a “hollowing out” of the labour market. A few at the top do very well, but growing numbers are pushed into low-paid, insecure work. This tendency has accelerated since the crash, with record numbers on zero hours contracts, for example.
The tax credit system and other in-work benefits make sense if there are only a few low-paid jobs, in fairly exceptional circumstances, requiring top-ups. When low pay becomes prevalent, the system breaks down. Employers begin to expect the top-up from government and set their pay accordingly. Meanwhile, with the weakening of trade unions – sitting at 14% membership in the private sector in 2013 – the hand of employers has been strengthened dramatically in negotiations.
One manifestation of this problem is the productivity puzzle. Exceptionally, the amount produced for each hour worked in the UK has not risen since 2007 with whole-economy output per hour at around 16% below the level implied by its pre-financial crisis trend. Employment is at record levels, but the work people are doing is of lower and lower productivity. Without productivity increases, it will be very hard to deliver sustained increases in real wages over the longer term.
We are, as a society, doing more work, less effectively, for less pay. And then we are taxing the little most of us earn to dissuade companies from paying us more.
The solution to this has to come in two parts. First, tax avoidance campaigning has drummed home the message that major corporations need to meet their obligations to society. But businesses also need to pay their own way, and pay their staff properly.
This part of the solution is relatively simple. Raise the minimum wage to the Living Wage level – from £6.50 an hour to £7.85 an hour outside of London. Economic modelling suggests that this will not only lift 5 million workers out of poverty pay, but create around 30,000 extra jobs as their higher pay feeds into more spending.
None of the main parties are approaching this level of ambition. But the case is there to be made that a serious and significant increase in the statutory minimum wage would not just lift people out of poverty pay. It would save us all money.
The second part is harder. Falling productivity and the hollowing out of the labour market are long-term problems. Addressing them seriously will require a restructuring of the whole economy towards producing better-paid, more secure work. That will only happen with investment.
Britain has always been a low investment economy, and business investment (after rising from its post-crash slump) actually fell at the end of last year. Shifting the pattern of work people perform will require breaking the low investment habit. Direct government investment can be one part of this, helping meet the estimated £500bn cost of upgrading our ageing infrastructure of transport and energy supplies to Western European standards. So, too, would the creation of a national investment bank, able to steer capital into sectors creating high-quality, secure jobs.
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