Boris Johnson has said his government plans to build a “high-skill, high-wage” economy across the UK. But it won’t be an easy thing to deliver.
Indeed, the initial response from some business leaders was strong and critical. And while some industries (like logistics) are currently experiencing wage increases, this is due to what economists call a “money illusion” – that some groups experience short-term increases in their incomes due to a lack of money. skills. .
But any income gain will be eroded by higher prices for consumers, rather than higher living standards. Businesses are right to fear that this will only fuel inflation and make the UK less competitive.
After Brexit, some sectors that previously depended on the EU workforce are now facing serious shortages. But whether or not this addiction has forced income in the UK, will only become truly clear when the effects of the pandemic (hopefully) subside.
And while previous research suggested that the effect of European immigration on UK wages was very small, it also recognizes that it may differ from sector to sector.
An important characteristic of why small carriers in particular have seen their revenues stagnate over the past 20 years is simply related to supply and demand. The sector is very competitive in terms of supply, with many companies seeking each contract, but relatively uncompetitive in terms of demand, with a relatively small number of large buyers (supermarkets, oil companies) of these services. This situation has not changed and outweighs any effect caused by foreign competition.
So where wages are currently increasing, it is in response to potentially short-term skills shortages. But these are only sustainable with higher productivity – or higher prices. And because it’s hard to imagine gasoline delivery becoming more productive, if the cost of delivery goes up, so will the cost at the pump.
In the long run, therefore, real wage growth can only be sustained by productivity growth. It is only by allowing workers to become more productive, either in terms of production or in terms of the value of what they produce, that incomes can increase.
And the UK won’t become more productive without a fundamental change in the way its labor market actually works.
How the work works
The UK labor market is efficient in getting people to work, as the costs of hiring companies are relatively low, as are the costs of firing. So compared to, say, France, there is little risk for the employer to hire someone – if that doesn’t work, the employer can let them go and hire someone else.
But this flexibility comes at a cost. And this cost is most noticeable in the poorest ‘left behind’ areas of the UK.
In highly flexible labor markets, where hiring and firing are cheap, too many people stay in entry-level minimum wage jobs, with little incentive for companies to train or develop their workforce. And that helps explain why earnings growth is expected to remain sluggish in many industries.
Currently, many sections of UK industry are deliberately structured to exploit this flexibility. ‘Low productivity’ activities, such as basic manufacturing or assembly, are outsourced to low-wage areas (in the UK as well as overseas) with market power firmly held by companies that control supply chains.
This dominance (by big companies like Apple) is such that even when suppliers improve their productivity, the gains they make only reduce the price of what they produce.
In response to this downward pressure on incomes, recent UK governments have attempted to protect the income levels of the lowest paid with means-tested “work-related benefits”, such as tax credits. But these do subsidize low productivity and discourage businesses and workers, who find themselves trapped in a scenario of low wages and low skills.
Companies can continue to employ low-wage, state-subsidized people, so companies that control labor supply chains can outsource low productivity to these locations. Breaking this cycle requires large-scale investment in skills and training to give workers access to more employment opportunities and encourage innovation.
The government should also pay attention to “low productivity” jobs which are actually “low pay” jobs – public sector activities such as health and social services.
In these industries, productivity is often measured by what people are paid, which is often very little. But these essential roles often mean that “high productivity” work occurs elsewhere – allowing family members to go out to work, for example, while loved ones are being cared for.
These sectors are currently extremely undervalued and underpaid. Recognizing this, funding them properly, and offering career opportunities rather than minimum wage jobs, would be a great place to start.
Nigel Driffield, Professor of International Business, Warwick School of Business, University of Warwick
This article is republished from The Conversation under a Creative Commons license. Read the original article.