Ed Balls can't ignore the growing ranks of people working for themselves. Photo: Getty
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Labour need to address the self-employment problem

Of all workers in the UK, over one in every seven is self-employed. Labour should account for this in its economic proposals.

In the early years of the coalition government, Labour had an easy argument to trot out. The route to economic recovery was painfully slow, and all the talk was of double dips and possible triple dips. When the recovery (and some happy revisions to the economic statistics) finally happened, Labour had to start talking about living standards instead. This was a risky strategy – there was a fair chance that the cost of living problem could have evaporated by now.

Unluckily for the rest for us, but luckily for Labour strategists, the argument still holds. The recovery hasn’t yet been strong enough to raise GDP per capita to what it was before the crisis. Wages grew by 0.7 per cent in the past year. Over the same period, prices rose by over double that – 1.6 per cent. Prices have been going up faster than regular wages in every quarter of every year since 2009. Around 1 in 5 working people are in low pay. Labour say we can’t carry on like this.

This has felt like safe territory for Labour – a policy without a big spending commitment price tag. Ed Balls has already talked about increasing the minimum wage, ending zero-hours contracts, and encouraging more firms to pay a Living Wage – a wage level that allows workers to meet basic living costs. The logical next step now, eight months before the election, is to set out some specifics. Ahead of the start of the Labour party conference this week, Ed Miliband has been busily doing interviews talking about a new pledge to raise the minimum wage to £8 per hour by 2020.

The lack of growth in wages is a real one, and needs to be addressed. But – should Labour find itself in government in 2015 – it will need to tackle the underlying cause, and not the superficial symptom. Getting strong, sustainable growth from businesses will mean that businesses will be able to afford to pay more. That will take investment in skills, infrastructure and innovation.

But there is an even bigger problem than this. The debate about policies like the minimum wage seem to take place in a nice neat world where most people neatly fit into a box labelled “employee”, and most firms are of a reasonable size. It’s neat, because it means that government can help workers by leaning on employers to improve conditions or raise wages – whether by regulation or through tax incentives. But it is becoming harder and harder to believe that this reflects the reality of the new world we are in.

Of all workers in the UK, over one in every seven is self-employed. Among men in work, the figure is even higher – almost one in five men in work are self-employed. In the last year, the numbers in self-employment grew around five times faster compared to the numbers working as employees.

These people will not be touched by increases in the minimum wage – the minimum wage does not apply to the self-employed. And if the minimum wage rises at a rate that businesses cannot afford, we may find that it isn’t the unemployment figures that go up: more people may effectively be pushed into working at what is effectively a lower hourly wage rate in self-employment instead. Almost a quarter of those living in in-work poverty are in households where at least one person is self-employed. To ignore these people would leave a gaping hole in any strategy for tackling low pay.

This is not to say that self-employment should be discouraged. Among the ranks of the self-employed are many success stories. For some, it may well be a route to greater freedom and higher income, and that is a good thing. More self-employment may well help create a more flexible, productive economy. But if Labour is serious about tackling low pay and increasing economic growth, it can’t carry on ignoring the growing ranks of people working for themselves. Politicians need to reflect the new reality of the working population. 

Nida Broughton is chief economist at the Social Market Foundation

Nida Broughton is Senior Economist at the Social Market Foundation.

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Leader: The unresolved Eurozone crisis

The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving.

The eurozone crisis was never resolved. It was merely conveniently forgotten. The vote for Brexit, the terrible war in Syria and Donald Trump’s election as US president all distracted from the single currency’s woes. Yet its contradictions endure, a permanent threat to continental European stability and the future cohesion of the European Union.

The resignation of the Italian prime minister Matteo Renzi, following defeat in a constitutional referendum on 4 December, was the moment at which some believed that Europe would be overwhelmed. Among the champions of the No campaign were the anti-euro Five Star Movement (which has led in some recent opinion polls) and the separatist Lega Nord. Opponents of the EU, such as Nigel Farage, hailed the result as a rejection of the single currency.

An Italian exit, if not unthinkable, is far from inevitable, however. The No campaign comprised not only Eurosceptics but pro-Europeans such as the former prime minister Mario Monti and members of Mr Renzi’s liberal-centrist Democratic Party. Few voters treated the referendum as a judgement on the monetary union.

To achieve withdrawal from the euro, the populist Five Star Movement would need first to form a government (no easy task under Italy’s complex multiparty system), then amend the constitution to allow a public vote on Italy’s membership of the currency. Opinion polls continue to show a majority opposed to the return of the lira.

But Europe faces far more immediate dangers. Italy’s fragile banking system has been imperilled by the referendum result and the accompanying fall in investor confidence. In the absence of state aid, the Banca Monte dei Paschi di Siena, the world’s oldest bank, could soon face ruin. Italy’s national debt stands at 132 per cent of GDP, severely limiting its firepower, and its financial sector has amassed $360bn of bad loans. The risk is of a new financial crisis that spreads across the eurozone.

EU leaders’ record to date does not encourage optimism. Seven years after the Greek crisis began, the German government is continuing to advocate the failed path of austerity. On 4 December, Germany’s finance minister, Wolfgang Schäuble, declared that Greece must choose between unpopular “structural reforms” (a euphemism for austerity) or withdrawal from the euro. He insisted that debt relief “would not help” the immiserated country.

Yet the argument that austerity is unsustainable is now heard far beyond the Syriza government. The International Monetary Fund is among those that have demanded “unconditional” debt relief. Under the current bailout terms, Greece’s interest payments on its debt (roughly €330bn) will continually rise, consuming 60 per cent of its budget by 2060. The IMF has rightly proposed an extended repayment period and a fixed interest rate of 1.5 per cent. Faced with German intransigence, it is refusing to provide further funding.

Ever since the European Central Bank president, Mario Draghi, declared in 2012 that he was prepared to do “whatever it takes” to preserve the single currency, EU member states have relied on monetary policy to contain the crisis. This complacent approach could unravel. From the euro’s inception, economists have warned of the dangers of a monetary union that is unmatched by fiscal and political union. The UK, partly for these reasons, wisely rejected membership, but other states have been condemned to stagnation. As Felix Martin writes on page 15, “Italy today is worse off than it was not just in 2007, but in 1997. National output per head has stagnated for 20 years – an astonishing . . . statistic.”

Germany’s refusal to support demand (having benefited from a fixed exchange rate) undermined the principles of European solidarity and shared prosperity. German unemployment has fallen to 4.1 per cent, the lowest level since 1981, but joblessness is at 23.4 per cent in Greece, 19 per cent in Spain and 11.6 per cent in Italy. The youngest have suffered most. Youth unemployment is 46.5 per cent in Greece, 42.6 per cent in Spain and 36.4 per cent in Italy. No social model should tolerate such waste.

“If the euro fails, then Europe fails,” the German chancellor, Angela Merkel, has often asserted. Yet it does not follow that Europe will succeed if the euro survives. The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving. In these circumstances, the surprise has been not voters’ intemperance, but their patience.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump