Monday 18 November 2013

Abdicating power

The TUC claimed recently that low pay is costing the UK Treasury more than £3.2 billion in means tested benefits and tax credits, and called for the introduction of a living wage.  Well, they would say that, of course; but the argument that using tax revenues to top up wages of working people is an effective subsidy to underpaying companies is a compelling one.
Both the CBI and the FSB have responded – equally predictably, I suppose – by saying that businesses “can’t afford” to pay their employees a living wage.  In my mind, that simply raises a question as to whether the businesses concerned are actually economically viable concerns at all.
It isn’t just wages that are at issue here.  The same organisations complain – almost daily it seems – that they “can’t afford” to comply with environmental or health and safety legislation, and they “can’t afford” to pay business rates or other taxes.  What exactly can they afford?  Well, many of them seem to have no major problems in playing executive salaries – or shareholders’ dividends; but then that’s what they are in business for, not to pay their employees.
But here’s the thing – classical economics says that any company unable to charge a high enough price for its products and services to be able to pay its costs of production and still make a profit is simply not viable.  And surely, paying a wage which is adequate for employees to be able to live on without claiming benefits is – or should be – a basic minimum requirement when calculating the cost of production.  The fact that it clearly is not merely underlines where economic power actually lies.
The real question which needs to be addressed is about pricing, rather than cost.  Why is it that businesses are unable to charge prices at a level which enables them to cover the costs of production, rather than forcing down wages?
The answer they would give of course is “competition”.  They have to compete with other companies to sell their wares, and to do that they need to keep their prices down.  It’s another obvious conclusion of classical economics.  But the way they’re setting about ‘competing’ at present is little more than a race to the bottom.  And it's the employees who are paying the cost of that race.
There’s something of a vicious circle here.  They’re mostly competing with each other; the greatest rewards go to those who can most ruthlessly reduce the cost of labour.  If all of them had to pay a basic living wage, then they would all be subject to the same rules – and cost-cutting would have to focus elsewhere.
There is a complication when those companies are competing on a wider stage than merely the UK.  But allowing our wages to be set at a level which is primarily driven by competition with low-wage economies is just another example of abdicating responsibility and leaving power in the hands of multi-national capitalists rather than elected governments.


Anonymous said...

Have you ever run your own business and employed people to work for you? If so, you will know how difficult it is.

John Dixon said...

I don't doubt the difficulty, but being difficult is no excuse for not paying proper wages or avoiding other obligations.

Actually, I don't object to businesses receiving subsidies - with two caveats.

The first is that subsidies are open and honest and not disguised as things like 'working tax credits'; and the second is that those receiving subsidies don't try and pretend that they're running highly successful businesses and should be rewarded accordingly.

Spirit of BME said...

Reading this blog has a little bit of an “out of world experience” to the world of small /medium business that I come across?
The facts:
-Regulation in the real world really does add cost
-Price fixing by HMG (minimum wage) in some sectors makes it nearly impossible for some markets to grow.
-Suppliers and buyers are hanging on to money and causing all kinds of problems in the cash flow issues.
HMG has pumped vast amount of money into the banking system with a clear understanding that insolvent (in reality) companies should not be closed down in order to fake the data up to 2015 election and all of this is creating an artificial market place, which as the Blessed Adan Smith stated years ago, will not defy gravity for ever – believe me its tough out there.
Business is suffering from the lack of competitiveness as the buying power of the market has diminished, but real growth can only come from this sector and hand outs from taxpayers money is not the answer, growth will only come if this vital sector is cut free from the dead hand of regulation and reduce its overhead cost.

John Dixon said...

"pumped vast amount of money into the banking system with a clear understanding that insolvent (in reality) companies should not be closed down"

Isn't that, in reality, just another aspect of the point that I was making? Companies which are, in classical economic terms, unviable are being kept afloat by back-door subsidies - and those running them are not only pretending that they're profitable, they're taking their rewards on the basis of that pretence.

I don't doubt for one moment that "Regulation in the real world really does add cost". Protecting the environment has a cost; health and safety has a cost; paying decent wages has a cost. But these are costs faced by all businesses; they are part of the environment within which successful profitable businesses have to operate. And, if they can't operate in that environment (in the same was as they can't operate without the money being pumped into the banking system in your analysis), then let's stop pretending otherwise.