Back to basics: how do we eliminate pay inequality?

As Britain increases the minimum wage, Rashmee Roshan Lall says other countries are watching closely to see the effect.

The minimum wage in Britain is due to rise to £9 an hour by 2020. Andy Rain / EPA
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From last Friday, Britain’s minimum wage rose. It’s the first of steady increases that will to take it to £9 (Dh46.7) per hour by 2020. At that point, it will be, according to Nick Boles, the minister of state for skills, “one of the biggest increases in the legal minimum wage that any government has done in the western world in living memory”.

It’s certainly something that other governments will watch closely. If there’s any consensus among economists, it’s that anaemic wage growth for decades has discouraged workers and depressed productivity, consumer confidence and spending across most of the developed world. This has slowed economic growth because no one can spend what they don’t have.

Low wage growth has also caused inequality to rise because companies continue to pay workers as little as they can, thereby maintaining their profit margins and share prices, and allowing chief executives and shareholders to get richer while everyone else falls further behind.

How to address growing income inequality is becoming an urgent preoccupation of policy wonks and politicians. Two sets of buzzwords dominate the discussion: minimum wage and universal basic income.

While the new urgency is not driven by the strange spectacle that US politics has become in the past few months, it has undoubtedly concentrated minds in other countries. It is telling that discontented white working-class people have supported Donald Trump’s bizarre policies, while toting metaphorical footlockers full of angst about low wages and a lower standard of living than their parents.

Clearly, leaving income inequality unaddressed can be both politically perilous and economically unwise. Economics professor and author Robert Gordon says that over the past 35 years “an amazingly high fraction of America’s economic progress has been siphoned in to the incomes of the top 1 per cent of the income distribution”. It is this, he believes, rather than the lack of innovation that has caused a slowdown in real growth and the souring of the American dream for so many. In turn, college and professional educational became less accessible for young Americans, as well as the number of high-paying jobs they could realistically expect to obtain.

Is a higher minimum wage the answer? Not unless it spurs the move to upgrade education and skills as well. That said, the fight for decent pay has gone from a fringe effort to mainstream policy, especially in the US. On Monday, California governor Jerry Brown signed a bill that will gradually increase the state’s minimum wage to $15 (Dh55) an hour by 2022. San Francisco and New York city will have it pegged at $15 by July 2018.

A year ago, Seattle became one of the first big US cities to pass a $15 minimum wage law. Though it’s still too early to say, Seattle’s experience may be instructive. The cost of living did not rise dramatically. Employment did not fall sharply and people are not getting laid off, according to Jacob Vigdor, public policy professor at the University of Washington. The quality of life for low-paid people has improved. In the long term, higher wages could reasonably mean more disposable income for workers, thereby creating more jobs.

If $15 an hour becomes the norm across the US, one estimate says it will change lives for just under half of all American workers. That would mitigate the rise in inequality but not enough, according to proponents of the other big idea in social and economic engineering, the universal basic income.

This is an old idea – it was proposed by Thomas Paine in 1797. It is supposed to unshackle basic subsistence from the need to work at low-paying, unfulfilling jobs, thereby providing both a social safety net and the chance for human creativity and productivity to take wing.

Next month, Finland will decide whether to introduce a universal basic income. France, the Netherlands and New Zealand are considering it. Ontario, Canada is soon to conduct an experiment and Switzerland a referendum.

Like a higher minimum wage, though, the universal basic income would be only the start of the battle against rising income inequality. On its own, neither is the solution.

Rashmee Roshan Lall is a writer on world affairs

On Twitter: @rashmeerl