Wednesday, 13 August 2014


Economists are puzzled by jobs and wages data that continue to show rising employment accompanied by falling real wages. The puzzlement arises because classical supply and demand theory dictates that when the need for workers grows (as rising employment suggests that it is) the price of employing workers grows with it. It makes no sense that wages would fall when the jobs market is so buoyant.

Classical theory is all very well, but when the facts don't fit it's time to move on. What's new in the British economy in the last 40 years or so is that most people in paid work don't produce anything new - i.e. anything that looks like real wealth of the sort that people really want and need. Most work is simply cycling existing wealth round and round the system, which is great for GDP but absolutely useless in terms of how wealthy Britain really is. Some of this work in the transactional economy is well paid (think currency trader or commercial lawyer) but a lot of it is not (think call centre worker or delivery driver).

If labour is cheap, it may make sense to employ more telephone sales agents, for example, flogging insurance or electricity or PPI claims-processing, because the employer can get a marginal gain by attracting more business. Since the business comes from another supplier, however, there is no net gain to the economy. Except GDP says that there is, because the wages paid to the sales agent count in the total of economic activity.

Similarly, someone with a bit of money to invest might think it worth while to start a courier company, to try to grab a bit of the burgeoning market for delivery of online purchases. Wages are so low that it doesn't matter if the vans are half empty. If the extra competition puts pressure on rival companies they respond by forcing down the wages of their own workforce. Ultimately no more work gets done, but because more vans get driven more miles, GDP registers a boost in activity.

The point is that the market is responding to the opportunities provided in a low wage economy by becoming less efficient. Productivity is on the slide because labour is now cheaper that investment in technology. Finally the Luddites are having their day, as work is being created that either doesn't need doing at all or could be done much more efficiently with appropriate technology and even - whisper it quietly - productive collaboration.

The government has created these circumstances with policies such as benefits cuts and sanctions, employment deregulation and service outsourcing to the cheapest provider, all of which force people into the jobs market at low rates of pay. In so doing they're forcing the economy to go backwards in terms of real production. If wages were much higher, investors would find more efficient, more productive ways of wealth-generation, so ultimately there would be more wealth to go round.

Getting the wealth to "go round" is the heart of the problem. Forcing people into paid work is the only way anyone can imagine of distributing wealth, even though "more work" is less efficient and produces less wealth in total that would be produced by a highly technologised economy. Until governments face up to the need for a more effective way of distributing wealth, this problem can only get worse. A citizen's wage may be part of the answer, but although it sounds radical even that would be only a start.


  1. This comment has been removed by a blog administrator.

  2. This comment has been removed by a blog administrator.