What does the wages rise mean for Labour?

The gap between inflation and wages has now closed. The Office for National Statistics released figures this week showing that inflation, as measured using the Consumer Prices Index, grew by 1.6 per cent in the year to March. The average weekly wage, comparing December 2013 to February 2014, rose by 1.7 per cent. Figures of this sort are open to interpretation. But what is clear is that money is worth more now than at any time since the crash of 2008.

There remain problems, not least the issue of weak productivity growth which, so long as it remains sluggish, will inhibit any substantial recovery in living standards. But this crossing over of the lines marked “inflation” and “wages” is undoubtedly a pleasant Easter gift.

Labour’s economic positioning, in contrast, is complicated by this. The party’s view is that in recent decades, Britain’s economy has undergone a profound structural shift. A greater share of economic output, goes the thinking, has been permanently directed towards the asset-owning classes at the expense of the rest. Large numbers of middle-ranking earners have been squeezed, companies have become less incentivised to invest in training and skills, and so the opportunities available to the many have been sacrificed to the interests of the few.

This thesis mirrors closely that set out by Thomas Piketty in his new book Capital in the 21st Century, about which so much has been written lately (see Jonathan Derbyshire’s excellent interview with Picketty in Prospect.) The French economist argues that, at present, returns to capital are greater than economic growth in western economies and in such circumstances, inequality will inevitably rise.

Ed Miliband so far has stuck to his message that the “cost of living crisis” is here to stay, and that only a Labour Government can aid the “squeezed middle classes.” There have been various announcements on strengthening the minimum wage, the energy markets, bank reform and childcare. The Labour leader’s headline-grabbing speech in Birmingham earlier this month laid out his most coherent economic strategy to date. In it, he promised a devolution of powers to cities and other regional authorities “the like of which we have not seen in living memory.”

As Labour hone their electoral stance on the economy, a trap must be avoided—that of parochialism. An analysis that omits the outside world and the consequences of globalisation cannot stand. The suggestion that opportunities have been lost by one section of British society with corresponding gains by another section falls into precisely this trap, by suggesting a hydraulic relationship between the two in which one side can only rise at the other’s expense.

The changes in the structure of the British jobs market that have been identified by Labour have occurred in part because of jobs going abroad, which in turn has allowed the British, and other, economies to increase borrowing while importing deflation from overseas. The downward pressure on British wages and job creation has been driven by this process. Simply, business costs are cheaper overseas, so that is where large numbers of companies go.

Labour cannot ignore globalisation. A successful Labour message on the economy cannot be one that rests on considerations of domestic inequality alone. Aside from anything else, good news like that we have seen today, whether it be temporary or more long-lived, will prove damaging to a Labour party determined to sell itself on prophecies of doom and gloom.

Labour has been asking itself the wrong question. Inequality in Britain is a severe problem—but it is a function of external phenomena. So the question that Labour needs to answer is not “how can we make Britain more equal?” The real question is: “How can as many British people as possible prosper in an inter-linked, globalised world in which other nations are growing rapidly and have workforces that will work longer hours for less money than our own?”

If Labour can answer that question, then it has an economic policy.