Moving the UK to a high pay economy.

The UK has set about transforming itself from a mixed economy where some professionals enjoy high earnings whilst a lot of the population has earned closer to a minium income and therefore lived a relative modest lifestyle , to one where everyone enjoys a good standard of income.

Growth has been seen for the last 10 years in the UK economy

The first thing to note is there are no precendents for this around the World, it is true that countries like Sweden have a higher living standard though this has been achieved by high taxes and a social policy of support. The UK has experimented with this type of approach in the past but has not had the same success with it as scandanavian countries.

So how is the UK going about this? The answer is step by step, George Osborne announced the policy change around 10 years ago and it was met with some considerable concern by businesses. Lets look at the aspects of this.

First off the UK now has a Living Wage this is set annually by the chancellor of the exchequer in his budget, but the actual rate is formulated by a low pay commission / unit which comprises representatives of business, unions, and economists. The aim is to move the legal minimum rate to 60% of median (or average) earnings by 2020. This has meant that for the last 10 years or so incomes have been rising for the lowest paid, those earning the legal minimum by around 4.5% per year.

The interesting and somewhat paradoxical outcome has been that unemployment has fallen in each of the years that this policy was introduced, so each year employers have to pay more but the numbers unemployed has fallen. Part of the explanation for the success of this policy is that overall demand in the economy has gone up, so the extra earnings are being spent creating more demand which then creates more jobs. This was what the Unions claimed would happen and in fact has.

Clearly the economy can only absorb a certain rate of increase each year without inflation becoming an issue. But the rate so far has been acceptable.

Employers whilst concerned have managed to cope with this change and have welcomed that the low pay commission who sets the rate gives forward guidance so to the likely future rate for the next two years, this means that business can budget and plan for the change in a logical way. Costs rise but there is time to pass that along to their customers in turn.

The UK will soon reach the point where earnings are at 60% of average incomes. For areas such as London that is not enough to live on, but the gap between the actual legal living wage and the real living wage is narrowing.

There may need to be a pause in the progress after this point as the UK is going through a lot of turmoil with Brexit, and it is important that companies remain viable and report sustainable profits, but long term the UK Government has started a consulation on increasing the living wage to 66% of median earnings.

Conclusion

So far the policy has been a real winner, incomes have risen, poverty has reduced and company insolvencies have remained limited so overall the economy has grown.