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

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Want to beat child poverty? End the freeze on working-age benefits

Freezing working-age benefits at a time of rising prices is both economically and morally unsound. 

We serve in politics to change lives. Yet for too long, many people and parts of Britain have felt ignored. Our response to Brexit must respond to their concerns and match their aspirations. By doing so, we can unite the country and build a fairer Britain.

Our future success as a country depends on making the most of all our talents. So we should begin with a simple goal – that child poverty must not be a feature of our country’s future.

The Institute for Fiscal Studies projects that relative child poverty will see the biggest increase in a generation in this Parliament. That is why it is so troubling that poverty has almost disappeared from the political agenda under David Cameron, and now Theresa May.

The last Labour Government’s record reminds us what can be achieved. Labour delivered the biggest improvement of any EU nation in lifting one million children out of poverty, transforming so many lives. Child poverty should scar our conscience as much as it does our children’s futures. So we have a duty to this generation to make progress once again.

In my Barnsley constituency, we have led a campaign bringing together Labour party members, community groups, and the local Labour Council to take action. My constituency party recently published its second child poverty report, which included contributions from across our community on addressing this challenge.

Ideas ranged from new requirements on developments for affordable housing, to expanding childcare, and the great example set by retired teachers lending their expertise to tutor local students. When more than 200 children in my constituency fall behind in language skills before they even start school, that local effort must be supported at the national level.

In order to build a consensus around renewed action, I will be introducing a private member’s bill in Parliament. It will set a new child poverty target, with requirements to regularly measure progress and report against the impact of policy choices.

I hope to work on a cross-party basis to share expertise and build pressure for action. In response, I hope that the Government will make this a priority in order to meet the Prime Minister’s commitment to make Britain a country that works for everyone.

The Autumn Statement in two months’ time is an opportunity to signal a new approach. Planned changes to tax and benefits over the next four years will take more than one pound in every ten pounds from the pockets of the poorest families. That is divisive and short-sighted, particularly with prices at the tills expected to rise.

Therefore the Chancellor should make a clear commitment to those who have been left behind by ending the freeze on working-age benefits. That would not only be morally right, but also sound economics.

It is estimated that one pound in every five pounds of public spending is associated with poverty. As well as redirecting public spending, poverty worsens the key economic challenges we face. It lowers productivity and limits spending power, which undermine the strong economy we need for the future.

Yet the human cost of child poverty is the greatest of all. When a Sure Start children’s centre is lost, it closes a door on opportunity. That is penny wise but pound foolish and it must end now.

The smarter approach is to recognise that a child’s earliest years are critical to their future life chances. The weight of expert opinion in favour of early intervention is overwhelming. So that must be our priority, because it is a smart investment for the future and it will change lives today.

This is the cause of our times. To end child poverty so that no-one is locked out of the opportunity for a better future. To stand in the way of a Government that seeks to pass by on the other side. Then to be in position to replace the Tories at the next election.

By doing so, we can answer that demand for change from people across our country. And we can provide security, opportunity, and hope to those who need it most.

That is how we can begin to build a fairer Britain.
 
 

Dan Jarvis is the Labour MP for Barnsley Central and a former Major in the Parachute Regiment.