Moving up the value chain is the key to keeping well-paid jobs

Large numbers of UK workers are paid too much. This statement may seem extraordinarily out of touch after ten years of stagnant wage growth – but, when considered at a global level, our workers are expensive. It is a pattern repeated across much of the western world. The challenge for policymakers is to put in place conditions where UK-based businesses can maintain and grow their worker’s wages.

There are broadly two ways to achieve this. One is intuitive and increasingly popular. The second has a chance of success.

The first approach would be to embrace protectionism and put barriers in the way of cross-border economic integration. This can take many guises and includes higher import tariffs, more stringent migration controls and imposing formal and informal market-access conditions. It is an approach now being formally pursued by the US government. Its target is a Chinese economy that also has a better track record at speaking about openness than actually delivering it.

While barriers to trade come in different forms, all involve attempts to reintroduce regional monopolies. This limits the opportunity for consumers to buy cheaper or better products and services. That 2018 sees a battle for hegemony between US and China should not mask the fact that this is a scaled-up version of a similar battle that has raged for years between Britain’s supermarkets and independent retailers. Steel and aluminium tariffs are ideological cousins to local communities using planning laws to ban the arrival of Tesco.

Thrown into this old battle is a relatively new weapon. Online price information is smashing down these protectionist defences. Where once the promotional mailshot tempted consumers out of town, cutting the natural monopoly of the high street, today electronic marketing from anywhere on earth can highlight price disparities. This in turn has highlighted how relatively expensive many UK workers are.

Similar deflationary forces have swept UK industry before as technology has let in more competition. In modern history the first industries to feel this were agriculture and mining. Falling transport costs and a wave of shared production processes opened up less costly supply. This stagnated the wages of many workers. As a result these industries now make up less than a tenth of the UK economy. Households and businesses have simply voted with their feet and bought from more keenly-priced overseas sellers.

More recently the big change has been in the provision of services – now three quarters of the UK economy – where the price of moving both people and information has plummeted in recent years.

My own industry of financial services shows how far these competitive forces have reached. Large multinational banks are increasingly sourcing their internal stock market analysis from researchers based in developing nations such as India. The cost of employing a PhD-educated analyst on the subcontinent can be a fraction of a similar analyst based in London, New York or Frankfurt.

With technology enabling an instantaneous transfer of data and written content, the economics of such outsourcing is compelling. These approaches are cutting the costs of banking services to companies and investors, but there are obvious implications for the salaries that western-based analysts can command.

President Trump, Premier Xi of China and Hungary’s Viktor Orban are three politicians who understand these forces and whose instinct is to introduce barriers to foreign influence. There are plenty in British politics who would like to follow suit.

Our current Conservative government is torn. Indeed it is facing something of an identity crisis. To one audience it has a ‘Global Britain’ strapline with an implicit promise to tear down trade barriers and lead the world in a new era of liberal mercantilism. To another audience it blinked at the first sign of trouble amid the furore over the award of the new passport contract to a Franco-Dutch firm, Gemalto. UK trade strategy will be fatally undermined the longer this continues. Trade envoys recently posted around the world will return to Whitehall empty-handed should this confusion persist.

The role of government is not to stand in the way of powerful economic forces, but to support British business’s efforts to embrace them. It doesn’t win many votes to go on Radio Four and say that the government will engage with British firms on how to win future procurements both home and abroad. Yet for business leaders listening, it would be a sign that ministers understand their own industrial strategy and modern market economics.

And this is one of the real tragedies of the 2017 General Election. Such long term reform requires strong governments, not ones fatigued by knife-edge votes. An effective Industrial Strategy inevitably pays off outside the five-year term granted to a single government.

There is another way. One that will enable UK workers to remain amongst the best paid in the world. This involves continually moving the UK’s industrial base and workers up the value chain and moving into areas less susceptible to foreign competition. Again, the lessons of the UK high street loom large. Retailers that have innovated into offering higher quality products or services have not only survived, they have thrived. Those that have stood still have perished or seen revenues and wages stagnate.

What is needed is a plan to shift more UK workers into roles that cannot be easily replicated, for less, elsewhere. This involves higher investment that, at less than 17% of the UK economy, is the lowest in the G7. It requires a pivot of resources, both public and private, into underfunded research and development. And these changes need to be supplemented by innovative management practices and an active career service that channels students into growing industries.

After Brexit the UK must get better at producing what the rest of the world wants to buy. That is the way to ensure that its workers are well-paid for years to come.

A version of this piece was published in The Times.