10 October 2017

By Sarah Glenister, National Development Officer, Institute of Employment Rights

Health secretary Jeremy Hunt has confirmed that the NHS pay cap is to be scrapped, but asked whether the NHS would receive more funding to cover higher pay, he said: "That is something I can't answer right now."

Neither did he confirm whether pay rises would meet the rate of inflation and thus halt the real term loss in income seen by workers across the public sector.

The government's backtrack from years of austerity is welcome, but it seems the Tories' actions are driven by a desire to quell negative press rather than truly rebalance and improve the economy.

As part of our Manifesto for Labour Law – which informed the Labour Party's 2017 General Election Manifesto and has been adopted by the Party as its blueprint for future employment law reform – 15 leading lawyers and academics from across the UK proposed the reinstatement of sectoral collective bargaining. This process sees minimum labour standards - including pay and conditions but also extending to training, apprenticeships and dispute resolution proceedings – negotiated at the highest level of each industry by trade unions and employers' associations. Once a mutually acceptable agreement has been made, these labour standards are applied across the relevant sector and can be built upon at enterprise level.

This allows for pay to rise in a sustainable manner across the economy, contributing to closing the wage inequality gap, providing decent conditions for workers, and stimulating the economy through improved consumer purchasing power.

With the Office for Budget Responsibility warning in its latest report today that the UK's economic productivity forecasts need to be "significantly" lowered – signalling a potential decline in expectations from 1.6% productivity growth to 0.2% – it is vital that robust reforms take place to restructure the labour market. The government must lead by example in the public sector by taking a holistic approach to industrial relations that takes into account real wages and conditions of work, rather than focusing simply on the the tokenistic gesture of lifting punitive caps.

The news of the OBR's downbeat prediction for the economy come after a release last week from the Office for National Statistics confirmed that productivity growth is still lagging, with hourly output falling 0.1% in the second quarter of 2017. Many experts have pointed to the proliferation of low-skilled, low-pay work in the UK, with little hope of promotion or training, as a key driver of low productivity, and have called on employers to invest in upskilling their workforce in order to improve their output. Not only could this improve the health of the national economy, but it can provide ways for people in low-wage work to raise their income and their job satisfaction.

Writing for the IER last year, Özlem Onaran, Professor of Economics and Director of Greenwich Political Economy Research Centre at the University of Greenwich, highlighted that UK companies increasingly focus on financial speculation in order to enhance their profits rather than improving the output of their primary business, thus moving resources away from training and innovation.

"Among developed countries, Britain ... has one of the lowest private investment rates as a ratio to GDP," she said, adding that this lack of investment is further encouraged by recent wage stagnation and the associated fall in consumer demand.

"In the past, the UK relied on household debt to maintain consumption levels in the absence of growth in wages. After the crisis, recovery is still based on the same shaky grounds as it is driven by a massive increase in private household debt and will remain fragile to any increase in interest rates in the future. The rise in inequality and stagnation in wages has been one of the fundamental flaws in the neoliberal economic model, which has been at the root of the Great Recession, and we are far from correcting this imbalance.

"Overall, the mixture of financialization and rising inequality has created an increasingly more fragile mode of production with volatile and stagnant demand and investment. In the absence of strong investment performance and stagnant demand, it is no wonder that Britain is in a phase of low productivity and low potential growth," Professor Onaran said.

She called for "alternative progressive labour market policies targeting the top, middle, and bottom of the wage distribution to reverse inequality embedded in a broader macroeconomic and industrial policy, financial regulation and corporate governance framework" in order to reverse the trend of low productivity and poor investment.

The Institute of Employment Rights proposes that the best way for the UK to create this new system of labour reform is through a dialogue between employers, workers and government to create an industrial strategy that works for all. That is why we recommend, alongside the reinstatement of sectoral collective bargaining, the establishment of a new Ministry of Labour to represent workers in parliament; and a National Economic Forum that brings together workers, employers, academics and other key stakeholders to highlight the impact of policy across society.

Without approaching pay from this wider scope, the government's decision to scrap the pay gap is simply too little, too late.