Few can doubt that Labour's Cost Of Living Crisis Campaign is making headway following George Osborne's volte-face on the Minimum Wage last week. On the 10th January the Chancellor was warning against a 'self defeating' inflation busting increase in the Minimum Wage. However, last Thursday he was trying to grab the limelight by calling for, er, an inflation busting increase in the minimum wage. In 6 days what had been seen as 'self defeating' had transformed into something that the 'economy can now afford'. You could hear the irritation in Business Secretary, Vince Cable's voice as he sought to explain this development in an interview on BBC Radio 4's Today Programme. What could have happened in less than a week? I suspect the arrival of the latest Tory Party focus group polling on attitudes towards falling living standards, rising inequality and fairness.
Before the Minimum Wage was introduced we heard dire warnings that it would cost jobs. This proved to be unfounded and those Conservative MPs who opposed its introduction now seem to be in favour of its retention. Nonetheless, every year when it becomes time to review its rate, various business leaders and their supporters in Parliament and the media warn us that if it is increased too much then jobs will indeed be lost, often citing the fact that we are in a global marketplace therefore not insulated from competition. I think this argument is overdone.
The economy is split into 2 categories, the tradable sector and the non-tradable sector. The tradable sector refers, as its name suggests, to those areas of the economy whose output can be internationally traded, or exported. It is made up largely of manufacturing and business, including financial, services. The non-tradable sector relates to those businesses and organisations that produce goods and services for domestic consumption as they can not be exported. These include areas like government, care, hospitality, food service, education, retail, and construction. If someone is working in the non-tradable sector, then their job is not exposed to international competition. Home-helps for the elderly can not be outsourced to a firm in China and customers in UK pubs can't be served their drinks from a call centre in India. Yet where do the majority of people on the Minimum Wage work? In the retail, hospitality and care sectors.
So how would a substantial rise in the Minimum Wage lead to a loss of jobs due to the workings of free markets in a globalised economy? Its hard to see how paying someone £6.50, £7.00 or even £7.50 an hour rather than the current £6.31 would suddenly cause an upward push in wages rates that would suddenly make UK-based hedge fund managers, investment bankers, lawyers and accountants internationally uncompetitive. It is perhaps easier to imagine a detrimental effect at the marginal end of UK manufacturing as these firms would be forced to pay more to retain staff, pushing up costs and thereby reducing competitiveness.
Yet the relationship between a developed country's wage levels and its export prowess appears to be a counter-intuitive one. According to the World Economic Forum, Switzerland is the most internationally competitive nation in the world, And it's not all cheese, chocolate and cuckoo clocks. Although it has a now rather tarnished reputation for international banking, what is not widely known is that it is a world leader in state of the art industrial machinery and chemicals. Indeed, in per capita terms, Switzerland has the highest industrial output in the world. Behind Switzerland, Finland weighs in at number 3, ahead of Germany in 4th place (the UK is back in 10th place). These are not low wage economies, seeking to slug it out with China by trying to directly compete in the low wage, low skill, assembly of consumer goods. They have managed to evolve from this sort of early state industrialisation to devote themselves to more high-skill, capitally intensive and consequently high wage, advanced manufacturing. The figures speak for themselves: Switzerland exports 52% of its GDP annually, as does Germany; for Finland the figure is 41%; for the UK its 32%. Moreover these countries were doing this while we were preoccupied with our invisible earnings and maintaining the City of London in its pre-eminent role as world leader for banking and other financial services and latterly as the global HQ for investment banking, derivatives trading hedge funds, private equity and the like.
Maybe the time has come for us to escape from our Stockholm syndrome relationship with bankers and embrace the fact that there are very real alternatives for UK PLC.
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