Why screwing workers screws everyone

Steve Hilton, the Prime Minister’s buddy and deep strategic thinker, has come up with a novel approach to help working women: eliminate maternity leave. He figures employers are dubious about hiring women in their 20s and 30s, because they fear having to shell out a salary if the woman gets knocked up. According to this logic, it is workers’ rights that get in the way of a productive economy. This supply-side thinking has been the Tory mantra for the past thirty years. I think it is time to realise how destructive it has been.

We are all working harder for less money. It used to be that a single salary could support a family. No more. Husband and wife both work and their credit cards are often maxed out. Think about the guy who had your job ten years ago. Unless you are a banker or a CEO, he probably made more money, had more fun, and saw his family more than you do.

Paying workers less and limiting their rights obviously helps businesses.  Corporations have been able to shift risk away from themselves and onto workers. More and more of us are freelance, without paid vacations, without job security. Corporate profits have naturally gone up as more of turnover goes to the entrepreneur and less to the worker. On a micro level, paying workers less goes straight to the bottom line: less salary, more profit.

But on a macro level, it is counterproductive. Henry Ford’s brilliant innovation was to pay his workers a higher wage than the market rate. He realised that for his company to prosper, his workers would be able to afford to buy the cars they made. Workers are also consumers. Cut our share of national income, we will spend less, unless we borrow more.

And that of course is why we are stuck with high unemployment and stagnant growth today. Consumers are struggling to pay off old debts instead of incurring new ones. And that means that businesses have no reason to expand. Without new hiring, workers are going to be cautious about opening their wallets. Without new consumer spending, firms will not hire and the pernicious cycle feeds on itself.

Supply-side thinking has been awful, not only to workers' lifestyles but also to the economy as a whole.  Screwing the workers ultimately screws all of us. It is demand, not supply that is the engine of growth. And making workers' lives more precarious is no way to stimulate demand.