Comment: The economy needs a bigger boost to the minimum wage

By Joe Cox

The 12p rise in the minimum wage announced last week equates to a below inflation increase for those already struggling to make ends meet.

It means that if you are earning the minimum wage, then life will be harder this year than it was last year through no fault of your own. It means that your wage will fall even further behind a living wage, the minimum necessary for a safe and decent standard of living.

Two macro-economic trends also mean that this decision is counter-productive. Our ongoing economic stagnation is largely a result of a lack of demand. Household and financial sector debt is high, and as a result of banks trying to repair their balance sheets and households paying down debts, there is not enough spending in the economy.

This is a problem because one person's spending is another's income. This below inflation increase in the minimum wage will further suck life out of the economy. An above inflation increase in the minimum wage would have had the effect of both alleviating work poverty and spurring economic activity.

Another important macro-economic trend, acknowledged by the Low Pay Commission (LPC) in the introduction of its 2013 report, was that real wages have been falling since 2008 and labour is now relatively much cheaper than it was at the beginning of the recession.

All the major political parties argue that they want to make work pay. Should not the minimum wage try to assert some upward pressure on wages in light of this acknowledgement?

The trend of falling real wages is much more problematic then it may seem at first glance. Falling real wages equate to growing inequality, which means that our economy is even more dangerously unbalanced.

When household earnings fail to keep pace with inflation, demand is sucked out of the economy. This means that instead of a thriving market for goods and services with even demand, we see growing inequality where the economy becomes top heavy.

The 'one per cent' search for lucrative investments often inflates asset bubbles. It also means the household debt increases as households are forced to borrow to keep up. As a result, we now have the most heavily indebted households of any major economy.

In short, this latest announcement will contribute to our continued stagnation and do little to bid up the relative price of labour. That said, it is not the LPC's job to address these wider economic challenges but the government's.

Gavin Kelly of the Resolution Foundation recently suggested that the LPC should have an enhanced role tackling low pay, not just setting the minimum wage. I think this would be a sensible move, and the LPC could easily be equipped to give advice and conduct research on important issues such as skills and enforcement.

When the conversation about low pay becomes more politically contested, then that is the time to address the role of collective bargaining in bidding up the price of labour. After all, there is irrefutable evidence that trade unions are vital to ensuring that workers get a fair share of the spoils.

If the Labour party is now committed to the idea of pre-distribution – making work pay for more people more of the time – then are they willing to acknowledge the vital role of trade unionism?

Joe Cox is a campaigner and researcher for the political pressure group Compass.

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