The Need for an Incomes Policy

Why We Need An Incomes Policy

by Chris Winch

We are familiar with the idea that pay increases should be funded by increases in productivity, although this is not a feature of many top director’s pay awards. A recent survey of the payment of many top directors and the profitability of their firms shows a negative correlation between the two. Taken as a group, top directors’ wage increases correlated better with falls in productivity rather than with increases (Independent, 9.9.93).

Such cynicism amongst directors and shareholders does not mean that the relationship between payment and profitability should be ignored. Workers should put it at the centre of their claims for pay increases and should insist that the relationship should be respected by managers, directors and shareholders.

This point is easy enough to understand with firms producing commodities for the market, but what about activities that are essential to commodity production but which, nevertheless, are not themselves commodity producing? It is no good simply saying that they too must show productivity before they can secure pay increases, as Kenneth Clarke maintains. The difficulty is in measuring productivity in a straightforward way.

Public Sector

We can ask nurses to care for more patients, but if more patients die as a result, most people would hardly be inclined to praise the nurses for their increases in productivity. It might be said that ‘quality’ as well as productivity is of the essence. But it is far from clear what quality in the public services amounts to, with the government constantly moving the goalposts, talking about ‘efficiency’ in one year, ‘customer satisfaction’ in another and ‘value for money’ in yet another.

This does not mean that we should not be concerned about the value of the work we do, but there is no reason either why we should work to the government’s agenda, when that agenda is more concerned with saving money and introducing market forces wherever possible than it is with providing good public services.

Behind this contemptuous attitude to public enterprises like education and nursing lies the confusion between productive and commodity labour that Madawc Williams drew attention to in the last issue of L&TUR. Many public enterprises are not productive in the sense that they do not contribute to the creation of wealth through the sale of commodities in the market place.

They contribute, for example, ensuring that people arrive at work safely and on time, are properly educated for work and are healthy enough to carry out their jobs properly. It is absurd that their contribution to wealth creation should not be properly acknowledged in the determination of wage levels.

Wages and Society

However, in the commercial sector wage increases beyond what can be sustained by increases in productivity lead to other problems, like increases in unemployment, as firms shed labour or fail to hire it, because of prohibitive costs or because it suits them to employ a smaller number of workers on higher rates of pay. Excessive wage increases also inhibit the use of profits for other purposes like the creation of economic infrastructure in the form of housing, transport, health care and education. It is only possible to tax profits for such purposes when there are sufficient of them to be taxed.

An incomes policy is a different way of looking at the organisation of society. It is one that puts society in front of the individual but in such a way that individuals and their families are the ultimate beneficiaries. Provided that it is not seen to be unfair, by for example, penalising productive and profitable firms at the expense of those which are not profitable, the trade union movement should welcome it as a way of benefiting its members and increasing the influence and relevance of the unions to society. This is one reason why incomes policies are regarded with such fear and loathing by the new right.

The best way of looking at what an incomes policy can do is by seeing it a-; a solution to a co-ordination problem. There is a solution that is best for everyone, even though it is not the very best possible for some individual or group. Of course it would be wonderful if a trade union managed to bid up wages in its own sector to the limit that the employers were able to pay, even if it meant that the firm had to increase the prices of their own goods.

It would be even more wonderful if the workers in this sector did not suffer through the uncompetitiveness of the products that they made as a result of such an increase. It would be even more wonderful still if no other group of workers tried to increase their own rates of pay in line with the original group, but this is most unlikely. In reality, a competition will start which will lead to inflation and increasing unemployment.

Large pay increases will erode profit margins so that price increases become necessary and a competitive wage round leads to increased inflation to the detriment of everyone. It is equally unlikely that no group of workers will try to increase their wages at the expense of their employers when they think that those employers can pay them more. Both these possibilities are highly unlikely.

The best way of looking at the matter is to recognise that the first and the last possibilities are most unlikely to occur. The second is likely but will result in undesirable consequences, as we saw throughout the seventies and eighties. There is a fourth possibility. This is that wage demands can be co-ordinated through negotiation between government, unions and employers, so that the best increase is negotiated that is consistent with rewarding productivity and restraining costs.

A further benefit is that productive and non-productive labour that is not a direct part of commodity production can be rewarded in a way that is consistent with its contribution to production and its contribution to the common good.

Such an approach is a radical socialist alternate both to free market capitalism and to the kind of fantasy socialism that was encouraged by the Communist Party in the past, which pretended that the working class had no economical effect through its own organised strength in everyday terms at the workplace, while at the same time suggesting that politically it could bring about revolutionary change.

An incomes policy is the way forward for the trade union movement. It would mean that a ceiling would be imposed on wage deals within the private sector which would make allowances for genuine increases in productivity and profitability, but which would also allow the productive but non-commodity sectors of the economy to have a fair share in the increased prosperity to which they have made a contribution

There would also need to be a recognition that some jobs are a form of outdoor relief that cannot reasonably expect the rates of payment of jobs that are part of the productive economy.

No Short Term Solution

Most people think that incomes policies failed in the past. This is only part of the truth. They did succeed for periods of time during the sixties and seventies but were never seen by the trade union movement as more than a short term solution to a particular economic problem of excessive inflation.

They were unpopular as well because they challenged the traditional role of trade unions to win large wage increases to the exclusion of virtually everything else. But above all, they were seen to be unfair, penalising productive workers at the expense of less productive workers.

As long as incomes policies are seen as a way of enforcing unwanted equality, they will be thought of as unfair and unjust and workers will not want to have anything to do with them. However, there is no reason why they should be like this. All that they require for successful operation is a small amount of self-restraint in return for medium term gains in growth, low unemployment and low inflation.

They represent an alternative to the free market policies that have served workers so ill over the last fourteen years. The Labour Party and the trade union movement should start to think seriously about how an incomes policy can be brought back onto the political agenda.


This article appeared in November 1993, in Issue 38 of Labour and Trade Union Review, now Labour Affairs.  You can find more from the era at and