Businesses won't put up wages just because David Cameron tells them to

The Prime Minister is clearly electioneering, but increasing pay isn't necessarily a bad idea.

by Rachel Savage
Last Updated: 24 Mar 2015

David Cameron is out on the stump today, telling businesses at the British Chambers of Commerce conference that they should put up wages and they should do it now. Any would think there was an election a few months away.

‘Economic success can’t just be shown in the GDP figures or on the balance sheets of British businesses, but in people’s pay packets and bank accounts and lifestyles,’ he will tell the annual shindig. ‘Put simply, it’s time Britain had a pay rise.’

Why, though, should any business increase pay just because Cameron says it’s a nice thing to do (or, more accurately, because he has an election to win)? There has to be a business reason – the clue is in the name.

The Prime Minister does have some better arguments – albeit fuzzy ones. ‘That’s good for your employees, it’s good for you to have happier and more productive staff, and frankly it’s good for anyone who wants to make the argument for business.’

The UK does have frustratingly low productivity – but Cameron doesn’t look likely to produce any actual evidence that higher wages equals more productive workers (as far as MT can see, the jury is out on that anyway). A potentially better reason, as hinted at by the PM, is putting up pay would go some way to repairing business’ tattered reputation. But companies would have to be convinced that the reputational gain outweighs any losses from higher spending on wages.

A rather more substantial argument – specifically for raising the minimum wage – was put forward by Tory grandee and MT owner Lord Heseltine at the Britain's Most Admired Companies awards at the end of last year: lifting people out of low pay would save the country billions in benefits.

The ‘mad idea’ wouldn’t increase unemployment, as low-paid jobs still need doing, he argued. ‘When we introduced the minimum wage, everyone said it would be a disaster,’ he pointed out. On the other hand, Heseltine didn’t consider the risk of an increased minimum wage pulling prices up in step with it.

Even if the numbers did add up, while companies may well see the benefits of being based in a country with a lower welfare bill, they’re very unlikely to put up minimum wage pay of their own accord. It’s a classic collective action problem – no one wants to be the first to fly and die.

At the end of the day, businesses can’t be cajoled into raising wages. Other than tinkering with the minimum wage, it makes no sense for Government to get out the blunt stick of legislation. Workers, where they can, can make the case themselves or vote with their feet. But they may not have to – when falling inflation is taken into account, real wages are actually rising again.

Credit: ONS

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