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Why 'Investment in Jobs' Is a Route to Low Wages

25/09/2014 17:08 BST | Updated 25/11/2014 10:59 GMT

Mr Miliband wants to raise the minimum wage to £8 by 2020. This could be worth £3,000 a year, he tells the Labour Party Conference, deftly multiplying the £1.50 increase by 40 hours and 52 weeks. Factor in inflation, however, and the result is less impressive: if RPI (which includes housing costs) continues at its 2014 average of 2.55%, this year's £6.50 will need to be £7.56 in 2020 just to keep up. Given how far average real wages have fallen in the past five years, even a real increase of nine pence a year over a five-year period might seem welcome. But it is hardly the stuff to bring conference to its feet.

The reasons for such a modest proposal are not difficult to trace. The Labour Party has a visceral fear of appearing "anti-business", and the knee-jerk response of business leaders to this policy when it was trailed last weekend suggests that their caution is, at the very least, understandable. Dark mutterings about the impact on jobs find a ready echo in many quarters: in a society in which paid employment remains the way in which most people access a share in society's wealth, the idea that "investment in jobs" is the key to growing the economy is not difficult to grasp.

Not difficult, but wrong, nonetheless; indeed "investment in jobs" is close to being an oxymoron. An economy that is advancing should not generate more paid work, but less. Producers invest in plant and equipment in order to do a given amount of productive work with fewer people. By increasing output per worker they become more productive, and it is only by increasing productivity in this way that the economy can truly grow. This is why, in 1930, the economist J M Keynes predicted that, a century on, people would only have to work 15 hours a week to lead comfortable lives.

Keynes's deadline is rapidly approaching, but the signs are that he could not have been more wrong. Productivity has risen enormously since 1930, it is true, but with no effective mechanism beyond paid work to distribute that wealth, the effect has stalled. An economy that is creating jobs is either growing so rapidly that technology cannot keep up, or it is going backwards, replacing technology with people because they are cheaper. The latter condition is now well established in Britain, where, although the technological possibilities are almost unlimited, productivity has fallen back, real wages are also falling and working hours are increasing. Many people work excessive hours, while others take multiple jobs. Most households now have two wage-earners (or would like to) which would be a big surprise to people of Keynes's time.

Government bragging about recent record levels of employment, therefore, completely misses the point. What matters is not the number of workers, but the amount of real wealth that each of them is producing, and since much employment is largely transactional in nature (i.e. it circulates existing wealth around the system, rather than producing real, new wealth) many people in work are probably producing less than they would do if left to their own devices. After all, much of what people do in their personal lives (housework, exercise, education, caring for children, the sick and elderly) is economically productive, even if the people who measure GDP do not recognise it as such.

Mr Miliband is right, therefore, to concentrate on raising wages. Low wage employment destroys, rather than creates, value, by devaluing the work that is being paid for at such lowly rates. High wages increase productivity by encouraging investment in productive technology. Such investment increases the total wealth in the economy, which means that there is more to go round. For this to happen however, wages need to rise a great deal faster than Labour is planning, and a parallel policy is needed to ensure that the wealth does, indeed, "go round" without recourse to millions of low paid jobs that send the process into reverse.

The terminology of redistribution may long have been banished from the party lexicon, but the challenge for Labour is to resurrect the "distribution question" in terms that reflect the success of a modern, productive economy rather than merely "soaking the rich". Political economics is the art of manipulating the levers of power in ways that produce social benefit, and if the manipulation is deliberately timid in order not to risk frightening the horses it is bound to fail.

The distribution of real wealth is the single greatest challenge to social policy in the 21st century, and a few frightened horses may be exactly what are needed to challenge the prevailing assumptions. More paid work is not the answer: about a third of Britain's GDP is already spent by government in redistributive ways (pensions, benefits, healthcare and education are the big ticket items) because the pay people receive for their work is not sufficient for them to purchase the goods and services that they need, and still it is nowhere near enough to meet the basics of a civilised society such as good housing and care services.

Mr Miliband's speech was strong on recognising the problems that society faces: his enthusiasm for meeting "real people" on his walkabouts can leave him in little doubt that the crisis many face is a real one. But a nine pence an hour real increase in low wages over the five year term of a Labour government is no substitute for the far more radical solutions that will be necessary to achieve the social justice for which he clearly yearns.