A Perspective from Shanghai

I am a British economist currently working in Shanghai. Discussion about manufacture of Solar PV panels with a friend, who is CEO of a major producer, brought home to me the urgency of establishing a Citizen’s Income and lower marginal wage rates in the developed western countries. Factory labour in Shanghai is paid around 500 yuan per week – about £50. Looking forward say three years the figure is likely to increase to say £75 because of three factors :-

  1. shortages in Shanghai
  2. inflation in Chin
  3. strengthening of the yuan exchange rate.

Long term, companies will need to experience very similar marginal labour costs in different countries. Manufacturing can take place in many locations and no country will be able to enjoy a sustained advantage due to knowledge or skills that is large enough to maintain high employment. There is probably little support now for the idea that the insurance, banking and retail sectors can together provide enough in the UK for us not to worry about manufacturing. Insurance and banking are easily copied, while good retailing mostly creates jobs in the country where the outlets are situated. The only sectors likely to persist as edges for the UK for many years are expensive legal services, educational services and global expert institutes. Germany has good international competitiveness currently based on quality and efficiency. But it will not be sustainable long term over China. In the short term, getting quality to an adequate level is a major challenge for China. But equally, it needs to be recognised that there are already exceptions, such as Solar cells production. Of course, long term equilibrium is rarely reached, but given differences in key economic measures between China and the West, it is clear that more needs to be done to increase global competitiveness. And in practice change can only be made progressively, so a figure of £60 per week as a Citizen’s Income is a great start, but much more will be needed to sustain competitiveness long term.

A sound long term expectation is for working individuals to receive a Citizen’s Income plus a globally competitive pay level, the latter element varying by skill level. The level of the Citizen’s Income should mainly reflect the cumulative wealth of the country, though some income redistribution could also take place. By contrast, if countries choose to use their cumulative wealth to support high marginal wage rates and simply exhort their citizens to be innovative, that is a recipe for unemployment and a trade deficit. And it will get much worse as China develops and improves quality.

The tax/benefit system need not really balance to current revenue levels – a progressive increase in VAT (together with energy consumption taxes) would anyway be beneficial. A move to a Citizen’s Income will reduce company costs and mitigate inflationary pressures from an increase in VAT. The same general arguments about competitiveness mean that the income tax threshold should be increased significantly.

To return to the figures, if reasonable income for a low skilled manufacturing worker in a developed country is £300 per week, then a more efficient (and fairer) economy would develop from a Citizen’s Income of £200 per week plus a manufacturing wage of £100 per week. That latter figure is close enough to the Chinese equivalent of £75 estimated above. For now, the European economies will still have skill and quality advantages that can offset some labour premium.

Some will argue that this balance would discourage work in the UK. I think that this is a small risk. In their hearts most people understand the importance of work and will make decisions at the margin. Moreover, there is enormous scope for an expansion in the work force (including part-time) from the over 60’s, the under 18’s, housewives and people with disabilities. The social and emotional benefits of working are well understood. In any event, implementation – though urgent – would have to be progressive and £60 per week is a good start. But it is important that the minimum wage is reduced as the Citizen’s Income is provided and increased.

Alternatively, a Citizen’s Income of £150 per week plus a wage of £100 is a balance, because of household structure – in that approximately 50% of women of working age are carers – but this is a theoretical debate at this stage. The effect on the economy of establishing a Citizen’s Income and reducing minimum wages, will be so dramatically good as to easily support a progressive increase in Citizen’s Income while maintaining a prudent fiscal policy. The figure of around £200 per week is also supported by the current old age pension level and would sweep away the debate on retirement age.

One effect of a Citizen’s Income and a reduced minimum wage would be immediate cancellation of some unnecessary automation projects, which typically involve expensive imported machines. Some other savings will also be readily available – maybe coal mining would become viable again. And at the margin, a much lower wage rate would make employing a few more staff in many areas in a company sensible.

With current levels of global communication and popular understanding, a Citizen’s Income and lower marginal wages is the only economically sound way of avoiding increasing unrest in Europe. There is some chance that people will put up with the alternative of years of austerity, but not a high one. The situation in the United States is possibly even more serious. Even though many will theoretically agree with the strength of the arguments in favour of a Citizen’s Income, getting significant change achieved in the USA is notoriously slow and difficult.

The opportunity for the UK to major on Solar PV equipment is a great one. The market is currently expanding by 40% per annum and a major scale increase, ranging between 50 fold and 250 fold, is highly likely in the next few decades. To compete with China, we need a Citizen’s Income and lower marginal wage costs as soon as possible.