Predistribution is no silver bullet for wage stagnation

The pressures militating against wage growth are strong and will grow even stronger in the future. But public insurance offers a way forward.

'Predistribution' may be a smart approach for the centre-left, but it's likely to prove an inadequate remedy for the problem of wage stagnation facing the UK’s lower-half households. A predistributive approach would aim to address the problem without increasing government transfers. It could embrace a range of strategies. One is more and better education for children who grow up in less-advantaged circumstances. This would increase the likelihood of them finding employment in analytical fields that pay relatively well. But even if successful, it will leave a non-trivial number of people in low-end jobs.

Increasing manufacturing jobs would help, but manufacturing's share of employment has been shrinking for decades in all rich nations, and that's certain to continue. Boosting trade union membership could counteract the downward pressure on wages, but unionisation rates, too, have been falling in almost all affluent countries, and nobody has worked out how to reverse this.

A tight labour market ('full employment') puts upward pressure on wages; achieving that on a regular basis, though, would require greater tolerance of inflation by the Bank of England. The minimum wage can be raised, but it tends to have limited impact above the very bottom of the wage distribution.

Allowing employees to elect a percentage of their company's board of directors ('codetermination') could help to prevent long-term wage stagnation, yetfirms won't opt for this unless it is required by law. Profit-sharing would ensure that pay increases when company profits rise, but here too the uptake is likely to be small.

Rising employment is a way to boost household incomes even if wages are stagnant. However, it's by no means a given that we can continue to generate employment growth. Also, not all low-end households will benefit from a rising employment rate. And even if this strategy works well, it will eventually hit a ceiling; once we reach maximum employment – perhaps 85 per cent of working-age men and 80 per cent of working-age women – there will be no more possibility of relying on rising employment to secure rising incomes.

Finally, a means of improving material wellbeing even if wages and employment are stagnant is to increase provision of public goods and services. From paid parental leave and childcare to spending on roads and parks, these increase the sphere of consumption for which the cost to households is minimal or zero.

Pursuit of the more promising elements of a predistributive approach would undoubtedly do some good. But I'm sceptical that such an approach will be up to the task. The pressures militating against wage growth in lower-half jobs– competition, globalization, technology, nearsighted shareholders ­– are strong, and in all likelihood they will grow even stronger going forward. We may need to do more. Fortunately, we have another option.

Public insurance is a widely used tool for mitigating economic and social risks. Schools, government-financed health insurance, public pensions, unemployment compensation and most government transfers are versions of public insurance. We contribute collectively via taxes, and those who experience the risk event or condition receive transfers or services.

Through this lens, wage stagnation is a new social risk. There is a simple insurance mechanism for alleviating it: an employment-conditional earnings subsidy, along the lines of the UK's working tax credit (gradually being replaced by universal credit) and the US earned income tax credit. These programmes provide a subsidy, in the form of a refundable tax credit, to households with low earnings. The amount of the subsidy increases with earnings up to a point, then flattens out, and then decreases as earnings reach into the middle class.

These employment-conditional earnings subsidies help to compensate for low wage levels, but in their current form they don't address the problem of wage stagnation. To do the latter, the amount of the subsidy needs to rise over time in sync with economic growth. One way to achieve this would be to index it to GDP per capita. Or, decisions about yearly changes could be entrusted to an independent commission.

This won't compensate fully for wage stagnation. If the subsidy amounts to a quarter or even half of a household's earnings and the subsidy rises in line with the economy but earnings don't, then the household's income (earnings plus subsidy) growth will lag behind growth of the economy. It's a partial remedy, not a full solution. But it will help.

What, then, should we do – predistribution or public insurance? If forced to choose between the two, I would opt for defending and expanding employment-conditional earnings subsidies. But over the long run, we ought not think in terms of one or the other. We'll very likely need both.

Lane Kenworthy is professor of sociology and political science at the University of Arizona. A full version of this article is published by IPPR in Juncture.

Ed Miliband at the Labour conference in Brighton last month. Photograph: Getty Images.

Lane Kenworthy is professor of sociology and political science at the University of Arizona

Photo: Getty
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Sooner or later, a British university is going to go bankrupt

Theresa May's anti-immigration policies will have a big impact - and no-one is talking about it. 

The most effective way to regenerate somewhere? Build a university there. Of all the bits of the public sector, they have the most beneficial local effects – they create, near-instantly, a constellation of jobs, both directly and indirectly.

Don’t forget that the housing crisis in England’s great cities is the jobs crisis everywhere else: universities not only attract students but create graduate employment, both through directly working for the university or servicing its students and staff.

In the United Kingdom, when you look at the renaissance of England’s cities from the 1990s to the present day, universities are often unnoticed and uncelebrated but they are always at the heart of the picture.

And crucial to their funding: the high fees of overseas students. Thanks to the dominance of Oxford and Cambridge in television and film, the wide spread of English around the world, and the soft power of the BBC, particularly the World Service,  an education at a British university is highly prized around of the world. Add to that the fact that higher education is something that Britain does well and the conditions for financially secure development of regional centres of growth and jobs – supposedly the tentpole of Theresa May’s agenda – are all in place.

But at the Home Office, May did more to stop the flow of foreign students into higher education in Britain than any other minister since the Second World War. Under May, that department did its utmost to reduce the number of overseas students, despite opposition both from BIS, then responsible for higher education, and the Treasury, then supremely powerful under the leadership of George Osborne.

That’s the hidden story in today’s Office of National Statistics figures showing a drop in the number of international students. Even small falls in the number of international students has big repercussions for student funding. Take the University of Hull – one in six students are international students. But remove their contribution in fees and the University’s finances would instantly go from deficit into debt. At Imperial, international students make up a third of the student population – but contribute 56 per cent of student fee income.

Bluntly – if May continues to reduce student numbers, the end result is going to be a university going bust, with massive knock-on effects, not only for research enterprise but for the local economies of the surrounding area.

And that’s the trajectory under David Cameron, when the Home Office’s instincts faced strong countervailing pressure from a powerful Treasury and a department for Business, Innovation and Skills that for most of his premiership hosted a vocal Liberal Democrat who needed to be mollified. There’s every reason to believe that the Cameron-era trajectory will accelerate, rather than decline, now that May is at the Treasury, the new department of Business, Energy and Industrial Strategy doesn’t even have responsibility for higher education anymore. (That’s back at the Department for Education, where the Secretary of State, Justine Greening, is a May loyalist.)

We talk about the pressures in the NHS or in care, and those, too, are warning lights in the British state. But watch out too, for a university that needs to be bailed out before long. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.