Mills responds to Curzon-Price on productivity, wages and the UK's low earners

We may not be able to do much about the top decile protecting their earnings, but we can drive the bottom up if we focus on areas of existing strength in productivity - here's why

In his recent reply to my article on inequality Tony Curzon-Price makes some important comments and I will try to respond to each in turn:

The Exchange Rate and the City

Tony makes the good point that there are no compelling rational arguments for the City preferring a high rather than a low exchange rate. Actually, I agree with Tony that those who work there would almost certainly be better off if the exchange rate was lower. They could charge more for their services and the economy in which they operate would be more buoyant.  Like so many other groups, however, those who work in the City seem to have a clear preference for a strong pound even if it is not really in their interest for their wishes to be realised. The advantages of a weaker currency are just as difficult to sell to people in banking and financial services as they are to other occupational groups.

Top Earners and a lower Exchange Rate  

I think that Tony is also right in saying that the impact on income distribution of a lower exchange rate would not be to make high earners generally worse off. Of course there would be some losers, particularly those whose incomes one way or another depend on relatively cheap imports of goods and services, but most high earners would be better off. This would not, in itself, of course produce more equality, but it might be an important argument in favour of making a more competitive foreign exchange strategy acceptable.

High Tech and Low Tech Manufacturing 

Tony queries whether my contention that we would be better getting the UK into relatively low rather than high tech industries, if our manufacturing base is going to be strengthened, and whether  the distributional consequences of a move in this direction would be towards more or less equality. There are a number of points to be made here:

 - In my view, if we are going to increase our manufacturing base, it would be much easier and quicker to do it in comparatively low tech rather than high tech industries. This is because entry is much quicker. High tech activity takes years to get under way, with correspondingly high risks of failure. The reason why we still have quite a lot of high tech industries in the UK – aircraft airframes and engines, arms, pharmaceuticals, etc. – is not because, in the long term, these are less vulnerable to competition from countries with competitive exchange rates than low tech industries. It is because they are more difficult to replicate and it therefore takes longer for this to happen.

 - It is also a mistake to think that productivity – or wage costs per hour – are generally higher in high tech than low tech industries. Really detailed figures are difficult to find for the UK but much easier in the USA, where the economy is not that different from what it is here. These show almost no correlation between wages levels and the sophistication of the output concerned. The notion that high tech equals high wages – although intuitively attractive – is not borne out by the statistics.

 - Generally, however, productivity is much higher in manufacturing than it is elsewhere in the economy as is shown by the striking contrast in the UK between the percentage of GDP derived from manufacturing – 12% - and the proportion of the labour force employed in this sector of the economy, which is only 8.5%. This indicates that productivity is nearly 50% higher in manufacturing than it is in the economy as a whole.

 - Productivity is also much higher on average in the UK in manufacturing than it is in places such as China. This is why the argument that low wages necessarily involve more competitiveness is wrong. If it was correct, countries in Africa with pitifully low wage levels would out-compete Germany and Japan, but of course this is not what happens. The crucial metric is wage levels adjusted for both productivity and the exchange rate. Because our productivity is still relatively high, we could still be on average competitive with China over a wide swathe of manufacturing, if the exchange rate was right, while still enjoying much higher wages than are paid on average in China – exactly as is the case with Germany and Japan.

 If these arguments are correct, far from new relatively low tech jobs being poorly paid, they would bend to be much higher than the average – as is indeed the case with what is left of manufacturing in the UK at present. This strongly suggests that the recreation of much larger scale blue collar employment in manufacturing would be strongly redistributive. This would be the case both because the wages paid would be much better than average and also because the geographical distribution of the new industries to be created would be much better aligned with the workforce and infrastructure which we have available in the UK.

 Labour’s Bargaining Power   

Tony’s riposte to my paper also seems to me to pay inadequate attention to the changes which the policy I advocate would make to the bargaining power of the UK labour force generally. Globalisation may have generated the highly paid global elite to which Tony refers and there may not be much we can do about their earnings to achieve more equality. At the other end of the social spectrum, however, there is no reason why we should complacently accept the impact of very high levels of unemployment on the bargaining power of labour. With 8% unemployment  - 2.5m people – out of work on international criteria – but nearly twice this number of people who would work if jobs at reasonable wages were available – it is hardly surprising that the proportion of GDP going to wages and salaries has plummeted from 64% in 1975 to 55% now as labour’s bargaining power has been drastically eroded. This would never have happened if the pressure on the labour market had been much higher, as it could have been if sterling had not been so over-valued for so long. It is not globalisation which has produced unemployment and weakened labour’s bargaining power. It is the consequence of having decade after decade with the exchange rate far too high.

 Unemployment   

While the lack of bargaining power among those who are in work has generated an economy where far too many people are paid very poorly in low productivity service economy jobs, we must not forget the millions of people who are not now working at all. These are the ones who have suffered most from the policies which have been pursued which have made it impossible to run the economy at full throttle. The uncompetitiveness of our manufacturing base internationally has produced chronic balance of payments problems which have only been made containable by ensuring that the total demand on the economy has been sufficiently weak to stop the gap between our imports and exports getting too wide. This has resulted in the tragically high levels of unemployment from which we now suffer. In turn, this leaves a huge section of the population living off state support at income levels far below the average and what could potentially be achieved if the economy was in better balance.

 Conclusion 

My conclusion, therefore, is that taking the situation overall, a much lower exchange rate would enable a very substantial reduction in inequality to be achieved in the UK. Of course, no policy is perfect and all have some unwanted side-effects. These have to be set, however, against the major gains which could be made in other respects. Yes, some people in the City would become even better off. I think this is a small price to pay in equality terms for providing the opportunity for well over half of the population to become very much better off relative to all but the very richest.

 

About the author

John Mills is a businessman and economist. He is chairman of direct to consumer retailer, JML, and has published widely as an economist. His most recent book is Exchange Rate Allignments.