PMQs: Growth up, wages down and Balls points to the floor

The subject of today’s Prime Minister’s questions was pay. Wages. Money in your pocket. The first exchange between leaders was, in a somewhat unusual twist, about their own pay. Miliband demanded to know why the Prime Minister had not immediately sat on the proposed 11 per cent pay rise that IPSA had said should be granted to MPs. The Independent Parliamentary Standards Authority recommended the pay rise, only to be met with a volley of protest from the beneficiaries of the proposal. At today’s session it became clear that neither leader wanted the pay rise, recognising it to be the hottest of political hot potatoes.

But from this the debate moved perhaps inevitably to the other pay-related question, and to what Labour terms “the cost of living crisis.” The leaders rehearsed a ping-pong of lines now wearyingly familiar, whereby Ed Miliband pointed to stagnating wages, David Cameron pointed to improving growth figures and Ed Balls pointed to the Commons floor (it is his latest PMQs gesture, signifying the line that earnings plotted over time would display on a chart. He has invented economic semaphore.)

It is the point towards which each session of PMQs now heads, driven on by a sort of political necessity—growth is up, wages not so. What is to be done? Economists recognise the complexity of this problem, not least Robert Chote of the Office for Budget Responsibility. At the Treasury Select Committee’s Monday hearings on the Autumn Statement, Chote suggested that the reason for stagnant wages was the decline in productivity. It is this that is causing wages to remain depressed and without improvements in productivity, there will be no improvement in wages and by association, living standards. Chote offered no solution to this problem, but it was noteworthy that his analysis made no reference to growth.

But there is a further, perhaps more worrying analysis of current conditions. There is an assumption implicit in the Government’s position that living standards lag the economic cycle. So when the crash came in 2008, living standards were not immediately affected. The immediate consequences of the crash—the failure of the inter-bank market, liquidity squeeze etc—were confined to financial markets and left the outside world unscathed. It was much later that the impact was felt by the general public—in this way, the real economic downturn occurred perhaps 18 months after the financial economic collapse. The Government’s position on growth assumes that the same lagging effect will occur on the upswing. A period of sustained GDP growth—say, a year or so—will be followed by a similar upturn in living standards. There will be a lag, but it will come eventually.

But the government could be wrong in that assumption. A senior economist has recently reminded the Prospector that wages were stagnating even before the crisis hit in 2008. The implication of this is that the living standards problem predates the financial crisis, which is often held to be the starting point for current economic conditions. The suggestion that this is not the case and that wages were depressed even before disaster struck suggests that moderate economic conditions in the run up to the crisis were, in some sense, unreal. That the sense of economic wellbeing that attended the Blair era was nothing more than the result of an asset price bubble that created an artificial sense of affluence, predicated on rising prices and government spending. It was only once that veneer was stripped away by the crash that a more “real” picture of average earnings was revealed.

Could it be that there is no natural, higher level to which wages can be restored? If this is the case, then the Government’s suggestion that living standards can only be raised by encouraging growth is unfounded. At this, the argument comes back to productivity—it is productivity that must recover if wages are to rise. The head of the OBR offered no suggestion for how this might be done. The exchanges at PMQs made no mention of it.

The rumpus in Westminster is all about MPs’ pay—the outcome of next election may well be determined by what happens to everyone else’s.