Queen’s Speech

Baroness Drake Excerpts

Thursday 4th June 2015 Lords Chamber

[Baroness Drake (Lab)]

My Lords, the Governor of the Bank of England recently stressed that productivity performance is the single most important driver of prosperity and growth in wages, but productivity in the UK has not improved in eight years, breaking a trend of around 2% annual growth. The FT reports the Conference Board as showing that, on the measure of total-factor productivity, the UK has suffered three consecutive annual falls. The drop in productivity growth is a global problem, but, as the IMF observed, it is deeper in Britain than in any other member of the G7. The ONS reports that UK productivity slow-down is three times as great as in the rest of the G7.

The Government have announced through Her Majesty’s gracious Speech a series of supply-side reforms. The MPC offers three possible explanations for the problem: low interest rates and lenders’ reluctance to crystallise losses, allowing inefficient businesses to survive; weak business investment; and the growing proportion of lower-skilled employees, which has been bad for output per hour. I comment on this latter explanation.

The UK has a flexible labour market, and the Chancellor’s further drive to deregulate it has not made productivity rise. Indeed, it fell in the last quarter of 2014. Wages may have begun to increase, but productivity has to improve if growth in real earnings is to be sustained. The Government should consider raising the national minimum wage to much nearer the living wage as part of their portfolio of measures to drive inefficient firms to be more productive, to reduce welfare expenditure and to raise the living standards of lower earners.

According to the Centre for Policy Studies, the evidence suggests that increases in labour costs in low-paying firms have been met by increases in labour productivity, not from reductions in employment but from increases in total-factor productivity, and that raising wages at the lower end of the labour market can improve productivity. One hundred and forty research projects from the Low Pay Commission show that the minimum wage had little negative effect on employment even when the rate increased faster than average wages. Yet some sectors and businesses remain stuck in a low-pay, low-productivity cycle that is self-perpetuating. The way in which some companies operate means that increasing numbers of workers are reliant on in-work benefits. In 2014, around 1.2 million over-21s earned the minimum wage, a proportion doubled since 1999, and a further 1.1 million earned within 50p of that minimum. This year, nearly £30 billion will be spent on tax credits to top up the low wages of those in work. Taxpayers are subsidising company pay bills. Seventy per cent of tax credits are paid to in-work families and by far the biggest increase in the tax credit bill has gone to such families, not to out-of work families.

The CPS, whose head of economic research argues the case for raising the national minimum wage as part of a portfolio of measures, demonstrates using data from the Labour Force Survey and the IFS that for every £1 increase in low wages the Government get a 50p fiscal boost due to lower welfare payments and higher tax revenue from higher incomes. Only a quarter of FTSE 100 companies have signed up to the living wage.

Too many British businesses operate on low wages and low productivity. The overall rate of return for British companies in 2014 hit its highest level in nearly 20 years. Profits drive growth and employment. Successful businesses are the bedrock of a growing economy. However, recent growth has within it declining labour productivity and a polarisation of jobs. The employer benefits from flexibility, but risks are transferred from the employer, through the employee, to the taxpayer. When an employer has a limited obligation in the wages they pay, the universal credit system takes the downside risk. This is a disincentive on employers to increase their productivity. Simply cutting tax credits without increasing the minimum wage will simply make working families poorer and reduce productivity even further.

Yes, low-paid workers should be able to keep more of what they earn and be better off in work. The Government are focused on increasing the personal tax allowance to address low pay. However, they are also reducing the work allowance—it is frozen for three years—which is the amount a family can earn before benefits are reduced and is crucial to making work pay. It is an inefficient way of improving incomes for many working families, because increases in net income as a result of reduced income tax payments increase household income brought to account for some benefit purposes and universal credit, thereby reducing the value of benefits received and offsetting the reduced income tax gains.

If low earners were taxed less and paid a higher national minimum wage, public expenditure on in-work benefits would be less, incentives to work would almost certainly be stronger, and companies would be incentivised to increase productivity. It would also benefit the many part-time employees on very low earnings who pay little or no income tax and so benefit little from increases in the personal tax allowance.

I conclude by congratulating the noble Lord, Lord O’Neill of Gatley, on his maiden speech. I hope his desire to increase productivity and drive growth throughout the north and other areas of the country remains a passion, because it certainly should be a passion.