Is predistribution or redistribution the best way forward?

Economies built around poverty wages and huge corporate surpluses are unsustainable. Relying on extra redistribution will not provide the correction needed.

Is 'predistribution' as championed by Ed Miliband, or old fashioned 'redistribution' as favoured, if stealthily, by Labour from 1997, the best way to create greater equality? An article by the American academic Lane Kenworthy in Juncture argues that because of the obstacles to securing a narrower gap in market incomes, we need to stick with redistribution. 

The most important element of the predistribution debate is how to tackle the problem of shrinking earnings. The share of national output going to wages has fallen from an average of 59% in the two post-war decades to 53% today, with most of the fall borne by low earners. Britain is an economy where both profits and low pay have been booming.

The spread of low pay has capped opportunities, boosted in-work poverty, weakened the incentive to work and increased the cost of income support. Kenworthy argues that reversing the earnings squeeze will be hard: the UK will continue to hemorrhage better-paid manufacturing jobs and there is limited scope for raising the minimum wage. Instead he calls for more generous tax credits to boost take-home pay.

So is this the best way forward? In 2011/12 aggregate wages in the UK stood at £835bn. This is £85bn less than if the wage share had held its 1979 level. Much of the debate about predistribution is about how much of this £85bn shortfall or 'wage-gap' could be restored.

A recent study looked at the potential impact of four ‘predistribution` style measures. It found that a modest 40 pence boost to the minimum wage and policies that halved the numbers earning less than the living wage would, by raising the wage floor, together add around £4bn to the aggregate wage bill, closing about 4.5% of the ‘wage-gap`.

A much more significant impact would come from strengthening labour’s bargaining power which has slumped to one of the weakest amongst rich nations. A doubling of the proportion covered by collective bargaining - bringing Britain closer to the European average - would significantly boost low and middle earnings, adding some £13bn to the wage pool and closing 16% of the gap.

The other most significant measure would be a cut in unemployment. Because tight labour markets are associated with higher wage growth, a rise in employment would boost the wage pool by a further £4bn. Together, these four policies would close around a quarter of the wage-gap, adding over £20bn to aggregate wages. Not huge, but a good start.

So is such a package feasible? The increase in the minimum wage would merely restore its real level to that of 2008. A phased halving of the number below the living wage could be achieved without significant job losses or increased costs. Indeed, living wage companies enjoy improved retention and lower recruitment costs.

Moreover, relying on extra redistribution would also face its own constraints. While Labour from 1997 embraced a strategy of 'stealth redistribution' the policy had run out of steam before 2010. The cost of welfare is increasingly born by middle income groups, helping to harden public attitudes towards benefits. Without reforms that tackle the explosion of tax avoidance and create a more progressive tax system, a further boost tax credits would do little to secure redistribution from the top.

There is a further critical argument for predistribution: restoring economic sanity depends on rebalancing the output of the economy in favour of wages. According to economic orthodoxy, the wages to profits shift should have improved economic health. Instead, it has brought highly damaging distortions, fracturing demand, promoting debt-fuelled consumption and raising economic risk. As profits boomed, private investment plunged. Cheap labour is also a disincentive to raise productivity, and has helped turn the UK into today’s low value-added and low-skilled economy.

According to the International Labour Organisation, nearly all large economies are ‘wage-led’ not ‘profit-led`. That is, they experience slower growth when an excessive share of output is colonised by profits.

The growing imbalance between wages and profits has, arguably, also helped prolong the crisis. While living standards have been falling across rich nations, and wage-based consumption has slumped, corporate profitability has reached new heights. The result – a global economy awash with spare capital. Instead of delivering a sustained recovery, renewing infrastructure and creating jobs, this record mountain of corporate cash reserves is lying idle – 'dead money' according to Mark Carney.

There is now a growing consensus that economies built around poverty wages and huge corporate surpluses are unsustainable, that we need a new economic model that gradually returns the wageshare closer to its post-war level with big firms devoting more of their profits to pay. Despite this, the gap between wage and output growth across rich nations - the primary explanation for falling wage shares - has risen sharply through the crisis. Kenworthy argues that this widening gap is likely to be the 'new normal' rather than a temporary aberration. If so, it will have profound economic and social implications. The signs are that, even at this early stage of recovery, stalled living standards and the growing mountain of idle money are sowing the seeds of the next crisis. 

Consumer credit levels are rising at the fastest rate since 2008 while there are signs of bubbles in house prices and company valuations. As recovery gathers pace, global cash surpluses will be used to finance business activity that raises economic risk. Private equity giants are sitting on billions of 'dry powder' waiting for takeover opportunities.

If we are in a new norm, it is unsustainable. The status quo will end in another crisis. Relying on extra redistribution will not provide the correction needed. Sustainability requires a more proportionate sharing of the cake with wage rises matching output growth. That means making predistribution work. 

Stewart Lansley is the author of The Cost of Inequality and with Howard Reed, How to Boost the Wage Share.

Ed Miliband speaks during a Q&A with party members at the Labour conference in Brighton last month. Photograph: Getty Images.
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Theresa May wants a Global Britain? Then stay in the single market

The entrepreneur Lord Bilimoria argues the Prime Minister risks both the prosperity and reputation of the UK. 

Since coming to the UK as a student in the early 1980s, I have witnessed the shattering of its glass ceiling and the birth of one of the world’s most enterprising nations. Much of this progress is now under threat due to the great uncertainty Brexit is causing.

It has been six months since the referendum, and we are still presented with no clear strategy except a blind leap of faith out of the single market. By continuing to pursue a closed and inward-looking Brexit, Theresa May risks both the prosperity and reputation of this country. 

Last week I joined with thirty other entrepreneurs and business leaders in urging the Prime Minister to keep Britain within the EU single market. In the coming months Mrs May will face having to make a trade-off between immigration control and loss of single market access. The decision she makes will determine whether we retain much of our economic strength. 

That is why I was disappointed to see May’s most recent comments simply reinforcing the message that the government is pursuing a "hard" Brexit. Over the weekend her big interview sent the pound plunging – yet again. 

It is clear the government is solely focused on delivering stricter immigration regulation, regardless of whether it leaves Britain stranded outside the single market. To fall into the trap of calling the PM "Theresa Maybe" masks the decisive nature of her emerging strategy – which is to head for the hardest of exits.

We know that neither Council President Donald Tusk nor chief negotiator Michel Barnier will accept access to the single market without freedom of movement being part of the deal. This is incompatible with the vision set out by the government.

Yet, movement and access to the single market are vital to the future interests of British business. The PM must do more to reassure those set to be affected. We are currently part of a 500m-strong single market; this is good for British business. Although I believe the whole of Europe needs to reform the current free movement of people, not least for security reasons, we nevertheless must continue to have the ability to move freely within the EU for tourism, business and work.

It is becoming unequivocally clear that the PM is willing to pay any economic price to achieve stricter immigration controls for political gain. Driven by the fear that the far-right will use immigration in future election battlegrounds, the issue of immigration is undermining our ability to negotiate an exit from the EU that is in the best interest of businesses and the nation as a whole. 

The government’s infuriating failure to prioritise continued movement of people means we are set to lose a hugely competitive edge, reducing access to talented employees, and undermining the UK’s rich history of an open, diverse, and welcoming nation.  

To achieve the government’s absurd immigration control, we will have to leave the European single market. In doing so 44 per cent of our exports, the current percentage that go to Europe, will be jeopardised, as they will no longer have free access to their original markets. 

In tandem with an exit from the world’s largest single market, British business will also lose access to one of the strongest international talent pools. This has the potential to be even more devastating than the forfeiture of markets and trade.

Access to skilled workers is critical to future success. As a nation we have the lowest level of unemployment in living memory with less than 5 per cent currently out of work, and that’s in spite of 3.6m people from the EU working in Britain.

Britain will continue to need the expertise that free movement currently provides, regardless of whether Brexit happens or not. You cannot simply replace the skilled doctors, nurses or teachers living and working here overnight. 

The focus on immigration has also strayed into more dangerous territory with the government persisting in including international students as immigrants when calculating net migration figures, whilst having a target to reduce net migration to the tens of thousands. The PM’s insistence on this policy not only stifles encouragement of talent flows, but also sends an incredibly negative message to the international community. It is a policy that I have continually called on the PM to change and I will continue to do so.

Our competitor countries, the United States, Canada, and Australia, do not categorise international students as immigrants and, in fact, they also provide generous incentives to stay in their countries to work after graduating. In comparison, we removed our popular two year post-study work visa in 2012.

Brexit poses an increasingly dangerous reality that we are destined to be viewed as an inward-looking, insular and intolerant nation. That is not the Britain I know and love. That is not the Britain that has attracted enterprising individuals. The UK needs to establish itself once more as an outward-facing nation that welcomes international talent and entrepreneurship. This starts with retaining membership of the single market.  

Lord Karan Bilimoria is a leading British businessman and the founder of Cobra Beer.