By Prue Plumridge

Lord Wolfson, chief of the Next retail chain said recently that the national living wage could drive up inflation as the retailer would have to raise prices to offset the cost of the new minimum wage of £7.20.

The word ‘living wage’ (which £7.20 is not) clearly strikes fear into the hearts of rich businessmen.   The business mantra is that paying people a decent wage can only lead to the bogeyman of inflation or job losses and is the usual stick with which the workforce is beaten to keep it fearful and compliant.

Let’s first put a context onto this claim by Lord Wolfson.  According to Professor Bill Mitchell, Wolfson claimed that a living wage of £6.70 was ‘enough to live on’ and a ‘decent amount for a lot of his staff”.  He also said that it was not necessary for Next to raise wages because ‘the clothing chain had 30 applicants for every job advertised’.  Professor Mitchell went on to note the salary and benefit arrangements for Wolfson who had a base pay of £743,000 in 2014/15 along with a range of other benefits and bonuses which brought his salary to a total of £4,666,000.

A report published by Citizens UK recently noted that:

‘An estimated 5.24 million people in the UK are employed on less than the living wage. Many low-waged workers are in receipt of benefits and tax credits, policy tools used to top up their incomes [and are] criticised in popular media and policy circles.

The calculation of the public subsidy is a new way to think about low pay.  In effect it is low paying employers who are subsidised by state payments to their employees without which they would be unable to meet their basic needs and continue to work for low wages.’ 

In other words this is nothing more than corporate welfare on a grand scale which costs the tax payer a gigantic £11bn a year.  To put this into context benefit fraud is £1bn. Companies, in effect, have no incentive at all to pay decent wages when they know for certain that the State will (for now) pick up the tab through benefit payments.

To understand claims that increasing the minimum wage will lead to an inflationary loop or job losses we first have to understand from where this idea originated.  The post war period between 1948 and 1973 was known as the Golden Age.  Production had increased, there was full employment and living standards had risen.  In the words of Harold Macmillan in 1957 ‘most of our people have never had it so good.’  During this period before the attack on fiscal deficits occurred across the advanced world inequality was lower than it ever had been, workers were more upwardly mobile and GDP was averaging much higher growth.  The country was riding high on the post-war economic boom which had also seen the foundation of the National Health Service, a social security system and education for all and all despite the so called ‘National Debt’.

This was, in fact, the classic era of Keynesian economics which served as the standard economic model in the latter half of the 1930s and the post second-world war years.   Keynes’ theory was that problems such as unemployment were nothing to do with moral shortcomings but were more to do with imbalances in demand and the point at which a country was in its economic cycle – expanding or contracting.  As such he believed that at times of economic downturn when an economy could no longer sustain full employment government should step in to ensure that resources were fully utilised.  To this effect government spending, he believed, should be used to increase overall demand which, in turn, would increase economic activity and reduce unemployment.  It challenged the reigning laissez-faire model which had its roots in the Classical economic theories of 18^th century thinkers like Adam Smith and David Ricardo who believed that markets worked better without government interference.

The 1973-74 recession changed all that.  The certainties of the golden age were to be challenged as unemployment rose and prices spiralled.  The trigger for this was the OPEC oil price crises in 1973 and 1979.   Inflation combined with recession was a new phenomenon and, as it turned out, proved to be the crucible for what is known today as neoliberalism.  The ideas of such economists and thinkers as Friedrich Hayek and Milton Friedman came into their own and quickly began to take root.  By the end of the 1970s, it dominated economic thinking amongst the educated elite in universities and the political and business world.

The study of economics was elevated to that of a science in the belief that through the use of modelling and formulae the future could be predicted accurately and the full employment agenda of the post war years, government intervention and market regulation was abandoned in favour of the magic of market forces.  Such interventions, it was believed, would cause inflation or result in increased unemployment through destabilising the market process which, naturally, sought to find its equilibrium.

Karl Polanyi, who explained the deficiencies of a self-regulating market and the potential dire social consequences of unfettered market capitalism in his book ‘The Great Transformation’ predicted:

‘To allow the market mechanism to be sole director of the fate of human beings and their natural environment…. would result in the demolition of society.’

From the 70’s onwards we start to see a shift in economic thinking which can be summed up in a speech by Prime Minster James Callaghan who told the Labour Party conference in 1976:

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending.  I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.” 

Margaret Thatcher came to power in 1979 and she fully embraced the expansion of neoliberal ideas through government policies.  Her aim was to break with the post war political consensus and pursue policies which deregulated financial markets, rolled back the state through privatisation of publically owned assets and weakened welfare support, undermined union and employment protection and abandoned full employment goals.  The results were that the bargaining power of workers was seriously undermined.  By the mid-80s unemployment had trebled and there was widening income inequality.  Margaret Thatcher who said ‘It is our job to glory in inequality’ laid the foundations for the growing perception that the individual controlled his or her own fate.  On that basis, poverty was a result of one’s own shortcomings and not a failed social system.

Tony Blair’s Third Way attempted to humanise the market by reconciling traditional left of centre values with laissez-faire capitalism.  However, it still accepted the neoliberal doctrines linked to income distribution and the idea that there was a natural rate of employment which was determined by supply and demand.

As Professor Bill Mitchell commented recently:

“They preached equity yet watched income and wealth inequality rise under their stewardship.”

As part of this new Third Way approach, a minimum wage was introduced in 1999 by the Blair government.  However, whilst it was seen as one of the best achievements of New Labour and didn’t lead to the predicted job losses and increased costs the truth was that it was set at too low a level to have any real impact on people’s lives.   What is more, although unemployment fell during its first two terms in power overall, it did increase and the lowest unemployment rate it achieved was still more than 1% higher than in the early 1970s.  This combined with the fact that the low public investment as a share of GDP, which began under Thatcher, largely continued under New Labour and the effects of weakened bargaining power and wage stagnation further increased pressures on the working population.  Furthermore, Blair’s human face of neoliberalism was betrayed by a step change in attitudes to welfare when the Blair government moved to cut single-parent benefits in 1997 and tried to introduce cuts to disability benefits in 1999.  This culminated in 2008 with James Purnell’s Welfare Reform Paper under which everyone would have to do something in return for their welfare payments.  Tony Blair also boasted that the UK had ‘the most flexible labour market in Europe’ but we shall see shortly at whose expense.

When the Conservatives returned to power in 2010, the framework was virtually in place for a full scale assault on the public sector and workers’ rights.  Workfare forced claimants to work for nothing but their benefits under the guise of work experience and training and Tony Blair’s flexible labour market literally found themselves on an even faster race to the bottom.  Temporary contracts, zero hours and low paid work have all facilitated the normalisation of a flexible labour market which is a trademark of neoliberal economics.  In addition, as part of their goal to reduce public spending, the Conservatives also introduced high fees for employment tribunals which has led to a noticeable reduction in claims, clearly at the expense of working people’s rights.

In May 2015, the Tories were re-elected and in only a few months we have seen yet more attacks on Trade unions and working people’s rights and benefits.

Caroline Lucas summed up the last four decades in an article in the Independent:

‘The economic project that has dominated politics since the 1970s has had at its heart the strangulation of the Trade Unions. Why? Because it is the unions which stand as a last line of defence against repeated Government attempts to privatise, deregulate and cut back on the public services upon which we all rely.

The results of that economic project – skyrocketing inequality, the loss of thousands of public sector jobs and increasingly precarious work for many – are plain to see. For more than 30 years, successive Governments have sold off our national assets and deregulated our economy – but to continue the project the Conservatives know they need to remove a key barrier to change: the remaining power of the millions of members of Britain’s trade unions.’

One of the premises of neoliberal thought is that wealth trickles down as a result of markets having the freedom to act without government interference.  We have not found this promised market equilibrium.  What we have seen instead is wealth pouring into the hands of fewer and fewer people.  Unemployment, underemployment and low wages have become a scourge in our society as they disempower people and dispossess them of dignity and the means to ensure their well-being.  Market competition and globalisation have spurred a race to the bottom by allowing companies to suppress real wage growth and accept unemployment as part of the price we have to pay for reaching the promised-land.

So this bring us back to the start of the story.  We have nearly 2 million unemployed people but the real picture is of many more millions who are underemployed, on low incomes and temporary and zero hours contracts having no job security at all and facing the prospect of reduced income support from the State.  Ninety percent of the McDonald’s chain work on zero hours contracts – that’s 82,800 people, Sports Direct employ 20,000 and J D Weatherspoon 24,000 on such contracts.  The employers’ justification for such working arrangements is that it makes Britain more competitive in a harsh economic climate.  Compare that assertion to an increasingly unequal income distribution in which those at the top benefit at the expense of those at the bottom.  Remember Lord Wolfson’s salary last year.

With high unemployment, companies have no trouble finding people to work at the prevailing wage rates.  And yet, whilst profits and bonuses increase, the price for market competition and globalisation is being paid by those least able to ride the waves of economic uncertainty.

Michal Kalecki in his work ‘Political Aspects of Full Employment’ posits a number of reasons why industrial leaders are opposed to full employment.  Although it was written in 1943, his propositions seem as true today as when he wrote it.  Business leaders were, he said, averse to government interference in employment matters, feared losing control of government policy, loathed the idea of public investment and disliked the idea of publically funded welfare.

In 1943 the Times editorial explained why full employment was not a good idea. It said:

‘Unemployment is not a mere accidental blemish in a private enterprise economy. On the contrary it is a part of the essential mechanism of the system, and has a definite function to fulfil.  The first function of unemployment which has always existed in open or disguised form is to maintain the authority of master over man.  The master has normally been in a position to say if you do not want the job there are plenty of others who do.  When the man can say if you do not want to employ me there are plenty of others who will the situation is radically altered.’

As Kalecki describes it very succinctly:
“For here a moral principle of the highest importance is at stake.  The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ — unless you happen to have private means.”

The Golden Age, for a short period of time, challenged the status quo and the power of big business to dictate terms but since that time the ascendance of neoliberal thought has restored the balance in favour employers and has been supported by ever more government legislation to undermine working people’s rights.  As Lord Wolfson’s assertion indicates, they now have considerable control over the labour market and wages and people have become mere pawns in a global game to be exploited in the name of profit.  The cost to the economy and society of unemployment and underemployment is huge in terms of the outcomes on health and well-being and as a consequence on society as a whole.

So how can this imbalance be best addressed? Jeremy Corbyn stood on a platform of anti-austerity and has promised a radical programme. This will require first that he and his Chancellor wholly reject the neoliberal framework of deficit reduction and balanced budgets. These two positions are irreconcilable. Secondly we need to address urgently the issue of unemployment. In the words of Hyman Minsky in his book ‘Ending Poverty: Jobs, not welfare.

‘they involve a commitment to the maintenance of … full employment and the adjustment of institutions, so that the gains from full employment are not offset by undue inflation and the perpetuation of obsolete practices.’

So what would this mean in practice?

Philip Pilkington in an article published in the Guardian in 2013 summed it up very neatly with reference to the work of Hyman Minsky:

“Minsky’s theories of financial instability suggested that capitalist economies were prone to serious downturns in which huge amounts of the labour force would find themselves unemployed. What’s more, this would lead to large shortfalls in demand for goods and services which would further exacerbate such downturns. The result was a vicious circle that would become worse and worse as the financial system evolved into an increasingly fragile entity and households and businesses became increasingly mired in debt. The only way out of this was to build robust institutions that insulated working people from the excesses of the system. While progressive taxation and unemployment benefits went some way toward both protecting workers and propping up demand during downturns, it did not, according to Minsky and his followers, go nearly far enough. They believed that governments should offer a job to anyone willing and able to work and then pay for these jobs by engaging in increased deficit spending – as they currently do with unemployment benefits during downturns.

We have a capitalist system which, in fact, has generated ‘poverty in the midst of plenty’.   Poverty, rather than as suggested being the result of the shortcomings of the individual is, in reality, the consequence of unemployment, underemployment and low pay. The primary objectives of government, therefore, should be to ensure that working people are paid a wage which is sufficient and gives them dignity, and the provision of a job guarantee for all those who want to work.  This should be supported by an adequate welfare system to help those who are physically or mentally unable to work through illness or other misfortune.

Those who, like Mark Carney, decried Jeremy Corbyn’s economic plans for PQE by saying it would imperil the recovery, drive up inflation and hurt the poor and the elderly are in denial and should question the very basis upon which they construct their economic assumptions.   Firstly today’s global economy is suffering from deflationary pressures rather than inflationary and even a Governor of the Bank of England should know that some inflation is beneficial.  And secondly, the economic paradigm which advocates austerity, deficit reduction and balanced budgets is bogus and has been for over 40 years.  It has been used to justify the creation of a small state on the false basis that the private sector is more efficient.

We should understand as L Randall Wray said in his introduction to Hyman Minsky’s book that:

‘…. the primary barrier to attaining and sustaining tight full employment is political will’.

The Universal Declaration of Human Rights states: “Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment. 
The neoliberal paradigm is foundering but those supporting it will not give up without a struggle since so much is at stake. There is an alternative and with Jeremy Corbyn we now have a mandate to take the ‘road less travelled’ to secure the necessary changes which will rebalance the economy in favour of a fairer distribution of available resources and income.

Our next step must challenge the status quo by understanding how we can best implement that alternative and build the mass movement we need to make change happen.

References:

http://www.mirror.co.uk/news/business/next-boss-warns-living-wage-6421023

http://ineteconomics.org/ideas-papers/interviews-talks/demystifying-modern-monetary-theory

www.guardian.co.uk/commentisfree/2013/jun/07/labour-jobs-guarantee#sthash.ikqwo08O.dpuf

Ending Poverty: Jobs not welfare: Hyman Minsky

Political Aspects of Full Employment: Michal Kalecki

http://www.theweek.co.uk/business/54485/zero-hours-contracts-mcdonalds-flexible-or-exploitative

Rejecting the TINA Mantra and the second ‘gilded age’ http://bilbo.economicoutlook.net/blog/?p=31888

Jeremy Corbyn’s new politics must not include not lying about fiscal deficits http://bilbo.economicoutlook.net/blog/?p=31888

A short history of neoliberalism

http://www.globalexchange.org/resources/econ101/neoliberalismhist

From Keynsianism to Neoliberalism: Shifting paradigms in Economics

http://fpif.org/from_keynesianism_to_neoliberalism_shifting_paradigms_in_economics/

http://www.marxist.com/neoliberalism-dead-or-sleeping.htm

Politics in the Pub Your Rights 2 Work

https://www.youtube.com/watch?v=pS7AOaYY6Lo