Higher pay boosts economics and politics

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The English language is not enriched by the word “predistribution”. Coined by the Yale political scientist Jacob Hacker, the term has recently been espoused by the leader of the British Labour party. It resembles the trademarked innovations of management consultants. Few of these terms survive long enough to make it into the dictionary; just as well, since the compilers of dictionaries would rarely find their meaning easy to pin down.

But Ed Miliband, Labour leader, is on to something. He observes that when his party was in government from 1997 to 2010, its policy was to help poor people in work through an increasingly elaborate set of means-tested benefits. The present coalition government seeks to simplify that structure by establishing a single universal credit, but retains the general approach. Wouldn’t it be simpler if poor people in work were just paid more in the first place? That is, apparently, predistribution.

Predistribution challenges market orthodoxy. Economics 101 teaches that earnings reflect marginal productivity. The wage equates supply and demand for each type of labour, just as the price of other commodities equates their supply and demand. The analysis invites a moral implication – that the market sets wages that we deserve. The analysis also points to policy implications – to set the earnings of any group at a level above the market rate is not only to reduce employment for that group but to undermine economic efficiency.

Marginal productivity theory is not, however, the only approach to understanding the distribution of income. Complex modern production is undertaken in teams, and the make-up of an effective team is largely fixed by the nature of the production process. It is difficult, perhaps impossible, to attribute output meaningfully to any particular member. Individual rewards are largely determined by custom and hierarchy. And through a political process involving bargaining between shareholders and employees and among different groups of workers.

Anyone who is not a rabid ideologue will see elements of truth in both accounts. I suspect that one reason French supermarket queues are longer than British ones is that the statutory minimum wage applicable to jobs such as checkout assistants is about 30 per cent higher in France than in Britain.

But marginal productivity is only part of the story. British supermarkets, noticing that office workers shop during their lunch break, staff the checkout more heavily then: French ones close tills to allow employees to eat at leisure.

I also suspect that the growth in chief executive remuneration over the past two decades is not entirely the result of similarly rapid growth in the contributions of these talented individuals to output. That growth may have more to do with shifts in national and organisational politics which have raised remuneration expectations and legitimated more aggressive bargaining. You won’t recover in hospital without the services of a team that includes doctors and nurses and hospital managers and ward cleaners, but their relative rewards have more to do with their positions in a hierarchy than calculation of their marginal productivities.

And there needs only be some element of validity to the thesis that pay is the outcome of political negotiation for Mr Miliband’s emphasis on higher pay rather than more welfare to have force. Outsourcing of low-paid functions in the public and private sectors over the past two decades has been a successful strategy for reducing the bargaining power of these employees. The intention, and the outcome, has been to leave more in the pot for shareholders and other, better-paid groups of employees. The state, through tax credits, has moved in to fill the gap. This shift is not necessarily for the better.

The distribution of earnings is the result of individual and collective choices, not an inexorable outcome of an anonymous logic of the market. The excesses of the Greek public sector, and the equally excessive earnings of executives of too-big-to-fail banks, both demonstrate what goes wrong when self-interested lobbying rather than a general sense of fairness drives the political determination of rewards. However ugly the word “predistribution”, Mr Miliband’s approach opens an important debate.

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