Cradle the rich. Lullaby them with the promise of lower taxation and reawaken the wealth creator. It’s a stance that dates all the way back to me as a nipper undergraduate at Kent. The supply-sider economist would regularly feed us their brew and we could hide from Keynes’ socialist past. We must, after all, submit to the righteousness of market fundamentalism. Other than the vilified Jeremy Corbyn, all politicians celebrate this choiceless consensus. Every 4 or 5 years our election process would only determine the engraving on the prized PM cup. Maggie, Tony and Boris; all would adopt the same script and insist on homogeneous economics. They all agree, through the wonders of the market, that we’ve never had it so good. While the financial crisis and austerity made no dent in their claim, perhaps the free enterprise slot-machine has been pulled one too many times? It is only now, with the current COVID-19 crisis, that noses wrinkle as people spot the topsy-turvy. Friends and foes refuse to play the expected ball. Following Germany’s snub of Greece in their crisis, Cuba demonstrates solidarity and aids Italy. Effort to denigrate China is replaced with Sherlock pandemic research questioning global factory farming. And, arguably the most visible earthquake on perceptions, is how we value employment. Workers, previously deemed to be of little value, are now rebranded as key. These workers are deemed vital for society and the minimisation of the death toll. Hedge fund managers aren’t included. Instead we are provided with a list of jobs that comprise some of the worst paid and most insecure. It includes care workers, notoriously low paid with 40% somehow receiving payments below the legal minimum. It also includes delivery drivers who are deliberately defined as self-employed to avoid sick and holiday pay. GMB, the Union rather than breakfast television, reveal that 3 million key workers earn below the Real Living Wage. Many are left budgeting with a wage of only £4.55 an hour. The GMB, perhaps unsurprisingly, are scathing: “This crisis has inadvertently shone a light on the rock-bottom pay and miserly terms and conditions of the people we now expect to risk their health to protect us”. My question today: Why are the 3 million paid so little?
The standard response is to laugh at the naivety of low wage grouch and crow ‘it’s the laws of supply and demand’. The Econ 101 student is informed that, assuming the terrors of extra-market interference are avoided, these laws guarantee that wage outcomes reflect productivity criteria. Subsequently encouraging a blame game exercise, the accusation of low wages is turned on its head. Lower wages reflect lower productivity. Those desperate to escape poverty pay should be proactive. Invest in your human capital. Retrain. Avoid the rubbish jobs. Admittedly the orthodox economist isn’t necessarily comfortable in this scoff. The focus turns to market failure, with labour suffering the consequences of monopsonistic power. Despite a preference to use game theory to elegantly model the complex maths, the intuition is straightforward. Job search frictions exist. It takes time and effort for the potential worker to find their job. Given those frictions, and a rational desire to maximise lifetime income, folk will be prepared to accept a wage below their worth. Firms are canny and recognise the opportunity delivered by adopting such a ‘reservation wage’. Even in apparently competitive industries, they will derive wage-making power and increase profit by paying below productivity criteria. Underpayment becomes the norm. But hang on! Can we really explain away 3 million key low paid workers just through a market failure, or should we seek an alternative perspective?
Let’s refer to a key problem with the orthodox approach to supply and demand. It does not treat labour any differently to markets for inanimate objects. By adopting an ‘impersonal market’ approach it arguably gives up on credibility. Correcting that error, we shift emphasis onto two key factors critical for understanding the wage negotiation process. First, we should recognise the importance of the institutional framework. Our key worker, for example, will find that trade union protection is rather patchy. They are ripe for the picking, with wage underpayment replaced with less cosy language such as exploitation. Second, we must refer to the distribution of bargaining power. Stripped of labour rights, and operating under a welfare system insistent on employment at any price, the key worker is not empowered. Bargaining weakness will guarantee that unsatisfactory wages are upheld.
So, what’s our lesson? If you’re clapping key workers every week, then of course keep doing it. Workers deserve to feel appreciated. But there is no room for hypocrisy. Our labour markets should not return to callous market fundamentalism. Recognising that the ‘rules of the game’ have changed, we should demand that wages do reflect value. If we don’t then we have learnt nothing.
Banner Image used under the Creative Commons Attribution 2.0 Generic license. Attribution: Aqua Mechanical
Absolutely spot on the rules of the game has changed , however, once this crisis is over I believe that people will go back to where they were post crisis I.e. not giving a damn about low pay or bad conditions as long as they are not the one on a zero hr contract and low hourly rate. As long as we have capitalism and globalisation the general thought that we are all in it together and that governments are trying to improve our lives is just a myth. Just ask Richard Branson what he is doing for his staff whilst taking tax payers money to keep his empire topped up