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.
Getty
Show Hide image

How tribunal fees silenced low-paid workers: “it was more than I earned in a month”

The government was forced to scrap them after losing a Supreme Court case.

How much of a barrier were employment tribunal fees to low-paid workers? Ask Elaine Janes. “Bringing up six children, I didn’t have £20 spare. Every penny was spent on my children – £250 to me would have been a lot of money. My priorities would have been keeping a roof over my head.”

That fee – £250 – is what the government has been charging a woman who wants to challenge their employer, as Janes did, to pay them the same as men of a similar skills category. As for the £950 to pay for the actual hearing? “That’s probably more than I earned a month.”

Janes did go to a tribunal, but only because she was supported by Unison, her trade union. She has won her claim, although the final compensation is still being worked out. But it’s not just about the money. “It’s about justice, really,” she says. “I think everybody should be paid equally. I don’t see why a man who is doing the equivalent job to what I was doing should earn two to three times more than I was.” She believes that by setting a fee of £950, the government “wouldn’t have even begun to understand” how much it disempowered low-paid workers.

She has a point. The Taylor Review on working practices noted the sharp decline in tribunal cases after fees were introduced in 2013, and that the claimant could pay £1,200 upfront in fees, only to have their case dismissed on a technical point of their employment status. “We believe that this is unfair,” the report said. It added: "There can be no doubt that the introduction of fees has resulted in a significant reduction in the number of cases brought."

Now, the government has been forced to concede. On Wednesday, the Supreme Court ruled in favour of Unison’s argument that the government acted unlawfully in introducing the fees. The judges said fees were set so high, they had “a deterrent effect upon discrimination claims” and put off more genuine cases than the flimsy claims the government was trying to deter.

Shortly after the judgement, the Ministry of Justice said it would stop charging employment tribunal fees immediately and refund those who had paid. This bill could amount to £27m, according to Unison estimates. 

As for Janes, she hopes low-paid workers will feel more confident to challenge unfair work practices. “For people in the future it is good news,” she says. “It gives everybody the chance to make that claim.” 

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.