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Frontier Economics - Which Country Will Have the Edge?

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This week a tale of two countries, each at the edge of Europe, unfolds. Greece and the UK, face similar problems: each has spent more than it earns; each needs to borrow money to pay for the lifestyle to which it has grown accustomed. Can they get the cash, can they inspire confidence in the money lenders that they're a good borrower, by cutting back on the lifestyle? The Greeks, reluctantly, have passed the latest austerity budget, yet the creditors, including the ECB and the IMF, want further guarantees. The UK's creditors seem happy enough and the Chancellor's determination to cut the deficit has kept the markets reasonably happy.

Yet, the UK faces the same fundamental problems of other eurozone countries with large debts and deficits: they have and continue to spend more than they earn. Nowhere is this so obvious as the labour market, where politicians and voters have joined forces to pay more than the results of their work earn. However, Greece, by contrast, has now been forced to come to terms with the wage and associated non-wage cost bill: on Friday night the latest austerity package brought a further cut to salaries for a range of public employees from police officers to professors, to work related benefits such as holiday pay and pensions. And it also reduced the minimum wage of £545 (681 euros) per month in Greece.

The UK is, however, travelling in another direction with a minimum wage of almost twice that amount, £1,052.30 (1,248 euros) per month. Politicians in the UK also continue to support fresh benefit packages and are prepared to back higher wages, at a time when jobs are scarce and companies going under. Last week's campaign for the living wage was another example of the phenomenon. UK politicians took to the airwaves to support the campaign to force employers to pay a higher 'living wage' - the wage pressure groups want to replace the minimum wage of £6.19. Government bodies, councils and listed companies would be asked to pay more, £8.55 an hour (£7.45 outside London) and everyone, they say, would gain: The Treasury 's £4bn annual top-up for the low paid would be cut (around 1K a year for each employee); companies would benefit from lower staff turn-over and the low-paid employees would be better off. Though the mechanics are slightly murky, it seems some companies would be pressed or obliged to declare their policy under regulation. Those failing to comply would be punished. Labour's leader, Ed Miliband, would 'name and shame' them. Like London's Mayor Boris Johnson, Labour wants to pay Whitehall contractors the going rate though Labour could also rule that contracts only go to firms who pay the living wage rate.

What they don't say is that is that for some companies, the option would be higher rates for some employees and lost jobs for others on ever tighter budgets, higher employer costs, and tougher global markets for goods. Employers' wage bills could rise at the stroke of a pen from a relatively small 0.5% in sectors such as banking, to over 6% in the restaurant and bar trade. On top of that are the employers' non-wage costs - National Insurance contributions at around 14%, some benefit, payroll and other compliances, holiday pay. One estimate is that employers' budget for circa 62 weeks pay in the year, an extra 10 weeks. With higher costs for employers, jobs may go to lower cost countries or be replaced by technology and the automated services we must grow to love. Those at the bottom end of the jobs market would suffer and what they now have, a job and the chance to move up, would go to robots, overseas workers and technology. So the best help for the low skilled, low paid, is to top up their skills, not pay them to subsist in low paid jobs.

Obliging government and the councils to pay the higher rates, or insisting companies do so, would also mean higher costs for tax and council tax payers to foot the bills, or lead to cuts in services. It would also reverse the implicit duty on public officials to seek the best rates for publicly commissioned works, and could lead to monopoly provision by the favoured to the exclusion of the small and entrepreneurial newcomer.

Not only does this latest twist to the UK story of faltering recovery suggest that politicians are out of touch with problems faced by employers and employees in this country or by those desperate to get on to the first step of the labour market ladder. But they are out of touch with the tough decisions needed and being taken in similar economies, to reform labour and product markets and ensure the stable legal framework needed for economic prosperity. The lessons from Germany, the leading euro economy are of cuts over recent decades to the tax on employment, a curb on rising wages to under 10% (when other members of the zone were near 40%) and no minimum wage.

In this country, the emphasis has shifted in the other direction. Hardly a parliamentary session passes without one or other burden being added to the employers' lot: the focus recently on parental leave arrangements suggested employers' would have more uncertainty and compliance costs with the new status accorded paternity leave, to be added to the other leave, benefits, student loans and the new employee pension schemes - in addition to the hefty NIC contributions they pay. On top of these laws, there is the threat of a different sort of measure: a living wage is being talked up by politicians, to be selectively applied to 'big' business - enforced through populist pressure and official sanctions.

The consequences will be serious. Investors and business leaders - on whom the country's economic recovery depends, can no longer be certain of the UK's liberty and protection under the law. At the very time other crisis economies are cutting costs and increasing certainty, business in the UK will have to contend not just with statutory rules and the costs they impose on employers. They will also face the consequences of pressure-group politics, in which politicians abandon the labour market to the unpredictable operations of twilight law.