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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.

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

'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.