Since You Asked

Low pay and the rise of the machines

Labour could organise a Luddite revolution against technology

‘4.6 million Britons (20 per cent of all employees) earn below the Living Wage – a leap from 3.4 million (14 per cent) in 2009’
The Resolution Foundation – 4 September 2013

4.6m Britons don’t earn a living wage – are they dead?

Very droll. For “living wage” read “decent wage”. The Living Wage (with capital letters) is a target set by campaigners for a good solid hourly wage – currently £8.55 an hour in London and £7.45 an hour elsewhere. That’s 20 per cent above the legal minimum wage rate. A lot of people don’t make that much money. Some of them will be doing just fine – £7 an hour isn’t bad if you’re 17 years old, living with mater and pater and saving up for a gap year somewhere sunny – but others will not.

I feel like I’ve heard about all this before. Why are we talking about it now?

It’s the new narrative for the Labour party. Here’s the awkward thing for Labour: the economy is slowly picking up steam. So how to attack George Osborne, the chancellor? Ed Balls, shadow chancellor, could argue that Mr Osborne deserves no credit for the upturn – that government austerity made the depression longer and deeper than necessary. To an economist that’s pretty plausible. To the voting public it doesn’t seem to have much bite. And so the new story – pushed by Mr Balls and his deputy Rachel Reeves this week – is that while it’s welcome that the economy is recovering, the problem is that hard-working families aren’t benefiting.

Why is it always “hard-working families”? The phrase conjures up images of a family with six kids, all chained together and sent down a coal mine.

Can we skip the stylistic criticism for a moment and talk about the economics?

OK . . .

What is powerful about this story is that there’s a lot of truth to it, and little Mr Osborne can do is likely to change it. And if Mr Balls were chancellor, little he could do would change it either. There are forces at work in the world economy that are making it hard for people with traditionally valuable skills to prosper.

Such as?

As technology becomes cheaper and better, people are replacing “labour” with “capital” – that is, employing fewer people, or paying the people they do employ less, and replacing them with machines or computers. Research published by two economists at the University of Chicago, Loukas Karabarbounis and Brent Neiman, has documented this trend: it’s global, it’s been going on for three decades, and it is happening in many different sectors of the economy. Some people can get more done in an automated world – but others find themselves shoved out of skilled work and into poorly paid alternatives. So inequality increases. The arrival on the scene of China and other major low-wage economies has also played a part.

We need to fight back!

Maybe. Ed Miliband, the Labour leader, could organise a Luddite revolution against the machines. I don’t think that’s what he and Mr Balls have in mind when they talk about “predistribution”.

What do they mean when they talk about “predistribution”?

It means fixing inequality without the need to resort to redistributive taxation. Which raises the question of how. Improving education is one idea – but then who is in favour of worse schools? It also seems to mean bullying big companies to pay better wages to their most junior staff. But pressure has the same consequences as a too-high minimum wage: it can increase wages but it can also destroy jobs.

Perhaps we should look to Germany for answers: they seem to have solved their economic problems and have a strong manufacturing sector.

Germany has been reliant on low-wage jobs and flexible working conditions as much as anyone – perhaps more than most, as the economist Adam Posen has argued. Even employment in China’s manufacturing sector is in structural decline: it was at its highest back in 1996. And you’re missing one important thing about this argument.

Which is what?

Throughout this long recession, economists have been puzzled by the fact that so many people have managed to keep their jobs – or find new jobs. A key part of the answer: falling wages and flexible hours. The UK’s flexible labour market kept the show on the road in the dark days; now it is being blamed, quite reasonably, for the fact that people have jobs that don’t pay very well. Politicians may talk out of both sides of their mouths – but they can’t have it both ways.

Also published at ft.com.