Rachel Reeves must be wondering why she ever wanted to be the U.K.’s Chancellor of the Exchequer. If last Wednesday’s Spring Statement did not go down quite as badly as her Autumn Budget, she still finds herself under attack from both left and right. The problem, of course, is that the geopolitical picture has changed drastically in the past few months, and is likely to continue to do so. That is bound to ruin any plans.
But perhaps there is something here to the old adage that if you are being criticized from all sides you must be doing something right. And when it comes to pay and benefits, Reeves could be laying the foundations for real progress. Naturally, since neither she nor her boss, Prime Minister Sir Keir Starmer, are great communicators, there isn’t much of a narrative here. But the proposed cuts to benefits outlined in recent days could be seen as part of a package designed to improve pay and conditions for employees and so create an incentive for people to go to work.
There has been much hand-wringing over the size of the welfare bill, which — given the U.K.’s economic woes and the demographics — is clearly unsustainable. But those involved with claimants are quick to point out that, while payments can look generous, they are often inflated by the cost of housing, which makes up a substantial proportion of what many claimants receive. The real issue is that wages — especially at the bottom of the scale — are so poor that it is daunting, if not impractical, for individuals to make the leap from benefits to work, even if they believe they might be better off in the longer term.
So, in that context, increasing the minimum wage has to be seen as a good thing. And not just in Britain. A strong case for change is made by John Driscoll, an experienced executive in the U.S. healthcare sector. In the recently published book, Pay the People! Why Fair Pay Is Good for Business and Great for America, he and his fellow authors set out several reasons why it is in business’s own interests to take action. One of the most compelling is the claim that companies paying higher wages see improved employee retention, higher productivity and ultimately greater profits.
Another is that paying low wages keeps workers stuck in a cycle of poverty that stalls economic and social mobility and so fuels unrest. In a recent interview, Driscoll explained that people who could not make ends meet with one job were forced to take other work, with a detrimental effect on them and their families. “How do you raise your kid right if you’re working three jobs?” he said.
Nor is it in a company’s interests to have employees who are worried about putting food on the table or being able to pay their rent. Such worries distract them from their work, making it little surprise that — despite a lot of effort on the part of companies and consultants — engagement levels remain stubbornly low. As Driscoll added: “You can’t build a resilient enterprise if you don’t have a team with people who can depend on each other. It may look like you’re saving money, but you’re hollowing out your team.”
Although his remarks concern U.S. businesses, they ring true for the situation on this side of the Atlantic, too. Employers might rail against the increase in their national insurance contributions (which supposedly pay for benefits and state pensions), but the reality is that many people in work in the U.K. are still on some benefits because their pay does not enable them to meet their bills. That is effectively a subsidy from the taxpayer to business.
How did we get to a situation where business leaders thought it was OK to pay their workers so poorly that many of them cannot afford the things their parents took for granted? Well, inevitably, it’s complex. But among the factors is, of course, globalization, which led to the decision to move manufacturing and other components of business to territories where labour was cheaper and less regulated. Another is the notion of the “gig economy” which involved many start-ups — often but not exclusively in the technology area — pushing the idea that it offered the sort of flexibility and independence that many workers craved. Doubtless some people welcomed the opportunity to engage in casual employment while perhaps developing their own business. But the reality is that this approach is not good for either most workers or the economy as a whole. It just benefits the owners of those businesses who have managed to convince their backers that wages are a variable rather than a fixed cost and so make acceptable business plans that in more sensible times would never have won over anybody. Meanwhile, those who do sign up to work for these businesses usually on an on-off basis are deprived of the stability and security that come from having a “proper” job. It is little wonder that there is so little engagement and belief in the merits of “working your way up.”
Naturally, fixing this will be difficult and complicated. Not least because these new working arrangements have brought low prices to consumers. Any attempt to roll back the years is likely to cause those prices to go up, making life even more difficult for those already suffering, although Driscoll claims his research suggests that is not necessarily so. But the nettle needs to be grasped. And, while they are at it, policymakers need to get serious about housing. It is not enough to, as many say, just build more houses. They need to be in the right places and at the right prices, things that the market alone will not ensure. But that is a story for another day. For now, employers in the U.K., the U.S. and indeed anywhere should probably stop complaining about higher employment costs and start thinking about how they can get better value out of their workers by training them and solving the productivity conundrum.