Government as ‘shop steward’

Last week I posted the first blog in a short series on what a new Department for Economic Reform might look to do and how. Below is the next instalment, on government as shop steward. Next week: government as industrial activist.

Mission:

Government as shop steward

Diagnosis:

Britain has a jobs problem – and the issue is quality, not just quantity. Structural changes have undercut the position of workers: globalisation means more competition for jobs, technology is replacing routine jobs (and perhaps not-so-routine ones) while trade union coverage has fallen. All this has weakened the hand of employees further to bargain for good pay, terms and conditions.

The result is that living standards are tailing off for all but those at the top. Low wages benefit investors, while a global marketplace produces high rewards for those with the most marketable skills, but the ordinary employee is feeling the squeeze. This is bad news not just for workers, but also the treasury, which finds itself topping up low pay through the tax credit system. In an era requiring greater fiscal discipline, the task is to reform market outcomes, not just compensate for the results they produce. This means aiming for a more equal distribution of income before tax, rather than relying so much on redistribution.  

Policy tools:

Skills policy has been seen by successive governments  as the best way of equipping people to add value and earn higher wages. Under the last government, this involved an expansion of higher education. Increasingly the focus is now on technical and vocational learning. Ken Baker, the former Education Secretary, has outlined the promising idea of University Technical Colleges, which teach business skills and vocational learning together. Demos has publishedproposals for the ‘forgotten half’ that does not go to university, a theme since adopted by Ed Miliband. The government has expanded apprenticeships – though there are concerns over the quality of them – and is experimenting with ‘traineeships’, which combine training with work experience.

The minimum wage is a more direct route to higher pay for those at the bottom. There is support for a rise, from across the political spectrum, following the chancellor’s supportivecomments yesterday. This is partly because the rate has fallen in real terms in recent years. The argument is that this gives scope for lifting the rate, allaying fears of job losses as a result. The final decision will lie with the low pay commission, which adopts a social partnership approach, bringing together unions and employers to work through changes together.

The living wage is now almost universally accepted in theory, though what this means in practice is far less clear. Some want a statutory rate, which would see four million people receive a pay rise and save the treasury around £3.5 billion, but the Resolution Foundation and the IPPRestimate this would cost 160,000 jobs. Others have argued that more carrot than stick is required, with employers awarded tax breaks for paying the living wage – something that Labour has committed to. An alternative approach would be to give civil society campaigns a helping hand, by demanding more transparency from firms on what they pay their staff.

Employee ownership and profit sharing and are two further alternatives for boosting income. Demos has explored the former but the sector remains small, at just 2% of GDP. In government, Nick Clegg has been a big advocate of employee share ownership schemes, though George Osborne was roundly criticised for his ‘right for shares’ idea, which has had very low take up. Some argue that profit sharing has the potential to go much further, as it does in many European countries.

Social partnership is a final option, popular among Blue Labour thinkers and some Blue Collar Tories. The idea is to bring employers and employees together to take long-term decisions, based on compromise and mutual interest. This is the traditional territory of trade unions, organisations which a Conservative backbencher argued should be valued more highly in this Demos pamphlet. Supporters of social partnership want co-determination, which would see employees represented on the boards of companies, as is the case in Germany. Meanwhile, there is interest in Labour circles in the idea of social partnership at sectoral level, with agreements to set minimum wages within each industry.

Verdict

Skills policy is a key ingredient in helping Britain attract firms and keep good jobs. But it would be a mistake to expect too much from it. Supplying the economy with more highly qualified people does not necessarily mean that employers will change their business models. Ask all the graduates doing non-graduate jobs. A rise in the minimum wage now looks a likely and welcome move. But this can only go so far without jobs being put at risk – and would only benefits those at the bottom of the income scale.

The living wage is attractive, in theory, as an alternative to state-driven redistribution, but many do not recognise how ambitious that idea is. At present, the ‘living wage’ actually factors in the tax credit system. If it were to replace means tested benefits entirely, it would need to rise from £8.55 to £10.70 an hour in London. Tweaking the tax system or ushering in more transparency are unlikely to achieve that.

More promising is the right blend of social partnership and employee share ownership. Employee representation on the boards of companies works well in Germany and should be imported to Britain. It gives employees their own voice in workplaces, rather than leaving them reliant on distant regulators to speak for them. Crucially, it demands not just that employers listen to their workforce, but also that employees take more responsibility for the long-term health of firms too. That should be a recipe for jobs that are more rewarding in all senses.

Ultimately, though, even better representation can only go so far without the pattern of ownership of firms changing too. If the position of labour is weakening relative to capital – due to globalisation, technology and so on – then the structural answer is to give labour a greater share in capital itself. In plain English, if employee’s salaries are likely to stay low, then they need a share in company profits too. That means having some stake in the ownership of firms. The long-term policy question is how we get to there from where we are now.