Economics Scotland's Economy Uncategorised

Holyrood Needs the Powers to Tackle Stagnating Wages and In-Work Poverty

Written by Dominic O'Neill

Stagnating wages in the UK are becoming a major problem both for working people and the economy. Wages have not kept up with the rising cost of living. As a result, the majority of working-age adults in poverty (52%) are now from working households. The idea of work as the best route out of poverty is being proven false in the modern age and the Scottish Government does not have the powers to address the causes of stagnating wages or to rebalance our economy towards a more sustainable model.

In 2018 the average weekly wage for someone working full-time residing in Scotland was £563.20. When you compare the growth of wages over a ten-year period, you could be forgiven for thinking there has been a significant rise in wages. In 2008, the average weekly wage for a full-time worker in Scotland was £462.60. The average weekly wage reached £563.20 in 2018, corresponding to a £5,000 rise in earnings per year over 10 years, indicates that the economy is doing well and those who contribute their labour to the economy are reaping the benefits. However, this is not the case as inflation has not been taken into account. Inflation is important when looking at wage growth because when inflation rises faster than wages, you can purchase fewer goods and services than you previously could even with those higher wages. 

When taking inflation into account, wages in Scotland have fallen by 2.7% since 2008. 

For example despite the average weekly full-time earnings in 2008 being £462.60, when inflation is taken into account, the 2008 weekly wage would be worth £579.20 in 2018. Essentially, this means fewer goods and services can be bought with the current average weekly wage than in 2008.

While the poverty rate in the UK has fluctuated between 21% – 23% in recent years, the rate of those in poverty who work has risen from 37% in 1994 to above 50% in 2019. In Scotland, this is also the case with estimates suggesting that the majority for those in poverty are employed with 52% coming from a working household. The rise of in-work poverty is combined with other factors, such as rising living costs and zero-hour contracts, creates a wholly unstable environment for hundreds of thousands of people struggling to get by in the 5th largest economy in the world.

The human cost is plain to see, the Trussell Trust provided 5,726 emergency food packages in Scotland in 2011 – by 2018, this had risen to over 210,000. The trust also states that at least 26% of referrals to their food banks are the result of low income. The knock on effects of poverty affects our entire society and economy. The Joseph Rowntree Foundation estimates that the cost of poverty accounts for every £1 in £5 spent on public services in the UK.

Increasing wages is not a simple task, simply raising the minimum wage would not be sufficient – and is not something the Scottish Government have the power to do, although they do require those under the public sector pay policy to be paid the living wage. While it would improve a large proportion of those experiencing in-work poverty, there are other issues that need to be resolved to improve wages.

Exploitative zero-hour contracts are an issue. This is where working hours and wages are not guaranteed which usually benefits the employer, not the employee. This can partially explain why despite record levels of employment, neither living standards or wages are increasing. The Scottish Government has attempted to reduce the use of zero-hour contracts, by not directly employing anyone on a zero-hour contract and providing guidance to ensure that companies bidding for public sector contracts don’t use zero hours contracts. However, much like increasing the minimum wage, the Scottish Government does not have the powers to ban exploitative zero-hour contracts.

In reality the best way to improve wages and reduce poverty is through improving the economy extensively. Increasing employment should not be seen as a means to an end, if that employment is insecure and low paid. Through increased innovation and added value employment, productivity can be improved which leads to higher wages.

When discussing increasing wages for workers, many argue that it would have a negative impact on the economy as businesses become uncompetitive due to higher costs. However, this is a misconception. The belief that in order to have an attractive business environment a country must prioritise the needs of business over that of workers is simply not true. If we take Norway as an example where employee protections are far better and wages are negotiated by unions, it is rated higher than both the UK and the USA on the World Bank’s Ease of Doing Business Index – however unlike the UK, it’s rate of in-work poverty is far lower. The proportion of the UK population that experience in work poverty is around 11% whereas in Norway it’s only 4%.

This shows that it is possible to improve wages and reduce poverty without affecting business, but it requires having an economy that is built to support this. Despite moves from the Scottish Government to reduce poverty such as the Bedroom Tax mitigation, Carers Allowance or the Family Income Supplement set to be introduced in 2022 (aimed at topping up the earnings of low-income parents), external events such as the Financial Crisis of 2008 or Brexit have an extensive impact on our economy. This, in turn, has affected wages, prevented growth as well as a reduction in poverty from occurring.

The only way to protect our economy from these events is by ensuring it is built in a sustainable way that works for everyone, not just big business. However, is this possible when the Scottish Government does not have the power to raise the minimum wage and to ban exploitative zero hour contracts? Or when their ability to support R&D development is limited by business taxation mainly being reserved to Westminster? It seems unlikely.

 

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About the author

Dominic O'Neill

Dominic is an Economics graduate of Glasgow Caledonian University with a particular interest in Macroeconomics, Trade and Business Policy.

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