Low pay is a cause of stagnation, not a consequence of it.

Another 'here's tae us' press release from the Scottish Government on jobs. “The employment rate is now higher in Scotland than in the other four nations of the UK”, it proclaims, “whilst the unemployment is now lower than in any of the four nations of the UK”. Leave aside whether there are four nations in the Union, the last time I looked there were only two. Unemployment in Scotland is indeed down 7.000, which is indeed remarkable given the sluggish recovery and the shake-out of jobs in the hight street.

Funny, though, how it's always Westminster's fault when unemployment goes up, but when it goes down down it is thanks to the wisdom of the SNP government. That's politics of course. Governments always try to own good news and disown bad. And it's hard to argue with figures showing that more than 2.5 million Scots are now in employment, which means that nearly 50,000 jobs have been in the last quarter alone.

However, there is a dark side to this good news story of happy Scots toddling off to work in unprecedented numbers. They may be earning, but they're not spending.      An inconvenient statistic this week revealed that that retail sales in Scotland have not been recovering in the way they have been in the rest of the UK. The difference is quite dramatic. As the Herald reported yesterday, the total value of retail sales was up 0.8% last month, year on year, as against 3.4% in the UK.

Retailers always talk about this in terms of “consumer confidence” as if people in Scotland are wandering around in a state of dismal depression at the weather and keeping their purses tightly shut out of spite. The Scottish Retail Consortium says that “in terms of consumer confidence, London is certainly weathering the difficult economic conditions better than elsewhere in the UK”. Well, yes, it would do, since that's where all the money is. Look at London house prices which are rising dramatically as they fall elsewhere.

There is a very obvious reason why people outside the metropolis are spending less: they are earning less. The Institute for Fiscal Studies confirmed yesterday that we have lived through the deepest and longest squeeze on earnings in a century. Far worse than the 1990 recession or even the 1930s. Real earnings are 15% lower today than they would have been had the banking crisis not wrecked the British economy after 2007. It's the biggest five year fall in earnings in history, according to the IFS. One in three workers has suffered a cut or freeze in their pay packets in real terms since 2010.

We all know what has been happening. Many workers are too scared to ask for pay increases because they fear for their jobs. Others have been hired on iniquitous zero hours contracts with no security and minimum wages. But, it's not all exploitation and coercion. There is evidence that many employers have tried to hang on to as many workers as possible and have cut hours to keep staff. There's evidence too that many workers have voluntarily accepted lower pay or gone part time in order to help the companies they work for stay in business through the longest recession since the 1930s.

It is surely better for people to be in work than to be languishing on the dole, even if there is a temporary dip in earnings. The Scottish government is right to boast that youth unemployment has fallen significantly from around 25% to 15% in eighteen months partly through its job boosting measures on modern apprenticeships and training. There is nothing worse for young people than to start your working life on benefits and just about any kind of work is better than none.

Moreover, a temporary reduction in pay levels can sometimes be beneficial. In Germany, workers accepted reductions in wages a decade ago and are in more secure jobs today as a result. However, there is an assumption among too many British businessmen and women that poor wages are a good thing in themselves. We heard this again yesterday from the former trade minister, Lord Digby Jones,  arguing that low earnings for workers would lead to increased investment by employers.

Well, it can do so, but there is no necessary connection between low pay and productive investment. Indeed, the IFS confirmed yesterday that British industrial productivity, unlike Germany's, has collapsed. Not only are we employing people on low wages, they are producing a lot less as well. A low wage economy isn't a firm foundation for recovery, it is a recipe for stagnation.

Germany used its pay pause to retool after national reunification and has become the world's leading manufacturing nation as a result. In Britain by contrast we have continued to use out-dated plant and obsolete methods and are making inferior products. This is why there has been no export-led recovery in Britain despite the pound being devalued by 25%. British exports may be cheaper than ever, but that's not much good if no one actually wants to buy them.  And domestic demand – that's all our wages - has fallen by a staggering £52bn a year since 2008.

The Scottish government could do well to consider the dangers of the low pay/low investment cycle. To hear Alex Salmond, you could be forgiven for believing that the only route to industrial recovery in Scotland is through cuts in business taxes like corporation tax. But there is precious little scope for that in Scotland, now that the UK's corporation taxes are being cut to 20%.

Scotland, and the SNP, are still suffering a hangover from the banking bubble which went pop five years ago. With two of the biggest banks in the world, RBS and HBOS, Scotland was supposed to become a neo-liberal Celtic tiger, a haven of funny money capitalism. Financial services still account for 100,000 jobs and 7% of Scottish GDP, but that is no longer a possible future even if it were morally acceptable.

Scotland has to reconnect with its manufacturing past. Scotland was one of the most advanced industrial civilisations in the world a century ago, a cradle of the industrial revolution. There was nothing inevitable about Scotland's industrial collapse – it was the result of economic policies that allowed Britain to become grossly over centralised in the South East of England.

And it's still happening, with the London Mayor, Boris Johnson, launching his “Vision for 2020” this week, demanding even more national wealth being poured into the infrastructure of the metropolis, in order to make one of the most congested regions on the planet even more congested.

Whatever happens in the Scottish independence referendum, the priority has to be preventing this relentless southern vortex of wealth and power from sucking the economic life out of Scotland and turning this country into a tartan theme park. Scots may be unconvinced about the merits of formal independence, but there is a greater understanding today about the causes of Scotland's decline than ever before, and a greater determination to reverse it. That should be the top line on the manifesto of every party in Scotland in 2014.