Economic logic suggests that free determination of employment contracts, like free trade, normally benefits both parties and leads to high levels of employment and economic growth.
But this view has never been popular. Fifty years ago, it was the accepted belief that governments should determine pay increases, leading to the dead end of incomes policies and Labour’s Social Contract disaster. Thatcherism destroyed this mindset, we thought – but it’s back. Even a Conservative government now supports increases in minimum wages, pressurises firms to reduce gender pay gaps among their employees, and seeks ways to control executive pay.
These interventions are based on poor analysis, and are badly targeted to deal with the problem they are intended to tackle. There are often unintended consequences as businesses react to policies imposed either by legislation or Mafia-style threats.
Support for the National Minimum Wage and National Living Wage is often based on the mistaken belief that firms use market power to exploit workers, while state-determined pay hikes are borne by businesses and shareholders rather than consumers, taxpayers and employees. Minimum wages are an untargeted method of raising living standards: they don’t help the unemployed – whose numbers they likely increase – and benefit many who are not in poverty.
A gender pay gap is assumed to result from employer discrimination, when most of it can be explained by choices made by individual employees. Policy stigmatising particular employers may lead to their taking steps – such as outsourcing low-paid work – which actually worsen the position of some female workers. Moreover, focus on gender pay gaps ignores other pay differences such as those associated with ethnicity – and may indeed exacerbate them.
The focus on top executive compensation assumes that high pay is irrational, that it is the result of cronyism associated with the UK’s system of corporate governance, and that it was an important causative factor in the banking crisis. None of these propositions is firmly based. Attempts to control executive pay are unlikely to succeed, but the anti-high-pay culture may cause collateral damage to public sector and quasi-public sector bodies.
One problem is that strong, organised voices – trade unions, the Living Wage Foundation, the Equality and Human Rights Commission, the High Pay Centre and so forth – continually advocate further intervention. When ill-thought-out policies don’t achieve the desired result, the answer is always to press for further government interference. In the nature of things, it is difficult to organise any opposition to the policies outlined here, which are largely driven by Good Intentions.
Governments should be wary of single-issue pressure groups. Nevertheless, democrats have to recognise that there will always be concern over pay issues. Here are some suggestions:
- We should have just two minimum wage rates, for people 18 and over and 25 and over. There need be no minimum wage for those under 18, who are now required to be in education or training, and we know that minimum wages affect most adversely the employment of very young workers.
- Scotland, Wales and Northern Ireland should be given responsibility for setting their own minimum wage rates, which would introduce an important element of regulatory competition.
- The proposed employer gender pay gap league tables should be abandoned. If private sector employers must report on their pay gap, this should be to their shareholders and not to any official body.
- High pay should be dealt with through simplification of the tax system to eliminate exemptions, loopholes and tax shelters. This would have the benefit of also affecting other rich individuals: chief executives are only a small proportion of top income earners, many of whom earn considerably more.
The politicisation of pay and the increasing threat of political intervention means that companies are having to take into consideration fear of a backlash from activists when formulating pay. Our government must discourage this if it wants to maintain this country’s reputation, post-Brexit, of being business-friendly.