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Tag Archives: poverty
Using housing wealth to fund social care: why the Care Act 2014 is unfair
Posted: 04 Feb 2015 06:30 AM PST
Nicholas HopkinsEmma Laurie
The Care Act 2014 reinforces the expectation of leaving housing wealth as an inheritance, which perpetuates inequalities across generations, argue Nicholas Hopkins and Emma Laurie. Intergenerational fairness requires homeowners to use a greater proportion of their housing wealth to fund social care rather than relying on the state.
The issue of funding social care costs is one that provokes strong feelings. Many homeowners resent the idea of having to sell the family home to pay for residential care costs. But with an ageing population, a real concern is raised over who should pay. The Commission on Funding of Care and Support (the Dilnot Commission) was an independent body tasked by government with reviewing the funding system for care and support in England. Its report, Fairer Care Funding, provided advice and recommendations to government and was subsequently enacted in the Care Act 2014.
The Dilnot Commission’s overriding objective was to make the system of funding adult social care fairer as well as sustainable. The Commission took the view that it was fair to limit the extent to which an individual is required to draw on their own wealth, including housing wealth, to pay for the costs of their care. It also recommended that the home should not have to be sold during the owner’s lifetime in order to pay for social care costs.
To achieve these two objectives, the Care Act 2014 places a cap on individual liability for care costs and provides a scheme of Universal Deferred Payment (UDP). UDP is intended to prevent ‘forced sales’ of the home. Despite its name, it is not intended to be available to everyone. We consider that the measure is justified and that its operation could be confined to those who would otherwise have to sell their home. This could be achieved by making UDP available only to those who could not pay the capped sum from non-housing assets.
Our concerns with the Care Act 2014
Our principal concern lies with the Act’s treatment of housing wealth through the cap. Its effect is to preserve individual wealth and, in practice housing wealth, at the expense of the public purse. Ultimately, it will benefit those who will inherit that wealth. The use of public funds to preserve an inheritance lies at the heart of our criticism.
By passing a greater proportion of the costs of social care to the state, the Act will inevitably have undesirable – and unfair – consequence for the younger generation of taxpayers. We therefore advocate a phased scheme which would aim to change the expectation of leaving housing wealth as inheritance and, instead, inculcate an expectation of using housing wealth to fund social care costs.
This will be a controversial argument for many people. We understand the sense of unfairness felt by current homeowners at having to use housing wealth to pay for their social care costs and the desire to leave housing wealth as an inheritance. The ability to provide an inheritance is one of the bases on which homeownership has been promoted. Equally, there is understandable confusion about the different funding models for health and social care. While health care is provided free at the point of delivery, social care is means-tested and incorporates an assessment of a person’s assets to determine eligibility for financial support from the state.
The need for intergenerational fairness
Nevertheless, the wider concern of intergenerational fairness requires homeowners to use a greater proportion of their housing wealth. There is a growing recognition that issues of intergenerational fairness must form part of the ‘social contract’ between individuals and the state. In the UK, life expectancy has been growing while the birth rate has been falling. The consequence is popularly referred to as a ‘demographic time-bomb’, and the phenomenon of an ageing population is a policy concern that has been taken up at international, European and national levels.
But government policy on the need for intergenerational fairness is inconsistent. On one hand, the government has taken steps to increase the age of eligibility for the old-age pension and further increases are planned. On the other hand, it has passed the Care Act 2014 which entails a greater proportion of the costs falling on the state and, inevitably, the younger generation.
Changing expectations
Inculcating an expectation of drawing on housing wealth to fund older age care can address our concerns of intergenerational fairness. Such a policy reflects the principle of asset-based welfare, which entails expanding asset holdings among low-income households as a means of reducing wealth inequalities and promoting wealth-creating behaviour among citizens.
Successive governments since the 1950s have consistently encouraged homeownership and, as a result, housing wealth now exceeds other forms of investment to become by far the largest element in personal disposable assets. Homeownership has spread wealth more widely than any other form of asset or investment. Despite doing so, housing wealth is unequally distributed. Many older property owners have seen large, tax-free capital gains over the past few decades due to the rising value of property. The proportion of housing wealth held by older people is forecast to grow, while the term ‘generation rent’ has been coined to refer to those younger people who have no realistic prospect of buying their home. Inculcating an expectation that people will look to their housing asset, rather than to the state, to fund their welfare can reduce those intergenerational disadvantages by requiring homeowners to use the wealth in their lifetime.
Homeownership has not been explicitly promoted with the idea that the wealth will be drawn upon to fund the owner’s older age. Combined with the lack of understanding of the difference between health and social care, it is perhaps unsurprising that a strong sense of unfairness is felt at the prospect of housing wealth accumulated over a lifetime being dissipated by the requirement to fund a few years of social care. However, rather than attempting to change expectations, the Dilnot Commission’s proposals, as implemented by the Care Act 2014, appear uncritically to accept the perception of unfairness. The Act reinforces the expectation of leaving housing wealth as an inheritance, which perpetuates inequalities across generations. As a result, the funding model provided by the Act is neither fair nor sustainable.
The Coalition’s Record on Health: Policy, Spending and Outcomes 2010-2015
David Cameron promised in 2010 to “cut the deficit, not the NHS”. But how have the Coalition’s policies – including health reforms which are widely viewed as going beyond election commitments – impacted on health?
– While the Coalition has ‘protected’ health relative to other expenditure areas, growth in real health spending has been exceptionally low by the standards of previous governments. Average annual growth rates have lagged behind the rates that are deemed necessary to maintain and extend NHS care in response to increasing need and demand.
– Forecasts warn of an NHS ‘funding gap’ as wide as £30bn by 2020/21 unless the growing pressures on services are offset by productivity gains and funding increases during the next Parliament.
– Major health reforms emphasising decentralization, competition and outcomes have been implemented. These have transformed the policy landscape for the commissioning, management and provision of health services in England. The overall framework for political responsibility and accountability for health services in England has also changed.
– Minimum care standards, inspection and quality regulation have been revised and strengthened following the Mid-Staffordshire NHS Foundation Trust Public Inquiry.
– Key indicators point to increasing pressure on healthcare access and quality. These include indicators on patient access to GPs, accident and emergency services and cancer care. Public satisfaction with the NHS is considerably lower than a peak reached in 2010.
– The UK’s ranking on OECD “international league tables” remained disappointing for some health outcomes including female life expectancy and infant mortality.
– Suicide and mental health problems remained more prevalent following the 2007 economic crisis.
– Health inequalities remained deeply entrenched. The difference in average life expectancy between men living in the poorest and most prosperous areas of England is nine years, and six years for women.
http://sticerd.lse.ac.uk/case/_new/news/year.asp?yyyy=2015#772
The Chancellor’s 2014 Autumn Statement: Missed targets and missed opportunities
George Osborne’s Autumn Statement was a reminder of the government’s missed targets and missed opportunities, writes John Van Reenen. The Chancellor’s promise to eliminate the structural deficit has failed spectacularly and the UK economy is barely above its pre-crisis level, a major cause of which was the the decision to launch a premature austerity programme in 2010. Crucially, Osborne’s plans fall short in addressing Britain’s chronic problem of low productivity.
There are things to like in the Autumn Statement. The reforms to end the “cliffs” in stamp duty and make it more graduated tax are welcome, but even better would have been to replace stamp duty entirely with a tax on land values. Rather than taxing people who move, tax the unmoveable wealth that they have. And if you have to raise taxes, few will feel sympathetic with multinationals who will find it harder to avoid taxes or banks who won’t be able to offset their accumulated losses against future taxes.
But the economic elephant in the room is what has happened to productivity. GDP per hour is over 15 per cent below where we would have expected on long-term pre-2008 trends. This is why wages are so low and the deficit remains high. There is nothing serious in the Chancellor’s plans to tackle this pressing issue.
Missed Fiscal Targets
In 2010 George Osborne pledged to eliminate the structural deficit by the end of this Parliament – the 2014/15 financial year. This has spectacularly failed to happen with forecasts of government borrowing rising to £91 billion this year and no expectation of balancing the books before 2018/19. And don’t hold your fiscal breath on it happening even by then.
So what went wrong? Less income taxes have come in than expected in the last year, partly because of the increase in personal allowances, but mainly because of low pay. It’s a stunning fact that real earnings have fallen by over 8 per cent since 2008. Many jobs have been created, but they have generally poorly paid. Low wages, low taxes.
Harpo Marxist Economics
The fundamental problem is that growth has been pretty lousy under the Chancellor’s rule. Don’t be fooled by the 3 per cent headline GDP growth rate. The size of the economy is barely larger than it was on the eve of the crisis representing the worst recovery in over a century. Our faster growth this year is like a “Harpo Marx” effect. The story goes that when Harpo was asked why he was banging his head against a wall. He responded “because it feels so good when I stop.” Similarly, it is unsurprising to have strong growth when you’ve been pushed so far underwater. The real surprise is why it took so long.
A major cause of low growth was the Chancellor’s decision to launch a premature austerity programme in 2010 which choked off the nascent recovery. Austerity eased somewhat since 2012/13, but even the OBR estimates that this knocked off a percentage point off growth per year in 2010/11 and 2011/12. The Eurozone crisis also played a part, as EU leaders administer the same fiscal medicine as Dr. Osborne with similarly disappointing results. Southern European countries can at least say they have no choice if they wish to keep the Euro, but there is no excuse for Northern EU countries like Germany to insist in balancing their own budgets in the face of serious deflationary risks.
Attempting even more severe austerity to meet the 2010 targets – as some on the right have argued – would have been an even more serious error. Like the government’s policy to reduce net migration to under 100,000, it is better to fail at imposing a silly policy than to cause terrible harm in trying to meet it.
But what to do about the productivity elephant?
As analysed by the LSE Growth Commission, Britain has a chronic problem of low productivity rooted in the failure make long-term investments. We argued that we could address this though radical supply side changes in the way we support innovation, and educate, tax and finance our citizens.
A major way of reducing public spending after 2010 was to slash public investment. With low interest rates, under-utilised resources and falling private investment, this was the exact opposite of standard economic advice. The outcome was widely predicted – rather than building, we dug ourselves into a deeper economic hole.
Some of this infrastructure destruction has been reversed, but the Chancellor plans again to accelerate public spending cuts to pay for tax cuts after the election. Since public investment creates capital that can be used in the long-term, it should not be lumped in with current spending like civil service salaries. But for purposes of creating an absolute budget surplus it has been and so, once again, will be ripe for the chop. The Liberal Democrats and Labour rightly want to keep capital investment separate. Let’s hope, if re-elected, this will be one more target that the government misses.
About the Author
John van Reenen is Professor of Economics at the LSE and Director of the Centre for Economic Performance. He tweets from @JohnVanReenen
Labour needs policies that end low paid and low skilled work
By Tony Burke | Published: October 27, 2014
The UK has too many poorly performing workplaces, according to a new report
On October 23, the Smith Institute launched a report entitled ‘Making work better: an agenda for government‘ – an independent inquiry into the world of work by Ed Sweeney.
Sweeney of course is the former chair of the Advisory Conciliation and Arbitration Service (ACAS), former deputy general secretary of Unite and former general secretary of the finance union Unifi, now part of Unite.
The report, which runs to over 100 pages, is the product of a nine month inquiry involving research, interviews, discussion events around the UK as well as opinion polling.
It sets out the argument that the UK has too many poorly performing workplaces, with poor treatment of workers who Sweeney’s report states are “underpaid, over-worked and ignored”.
The report also argues that the UK has a “long tail of broken workplaces” which are holding back the recovery and costing the country billions in lost income and in the payment of welfare benefits to those out of work but also to those workers eking out a living in low paid, precarious and agency work.
The report has been welcomed by Labour, the TUC and EEF (the manufacturing employers’ organisation), who were all represented at the report’s launch: shadow business secretary Chuka Umunna for Labour; general secretary Frances O’Grady for the TUC and Judith Hogarth, head Of employment policy of the EEF
Sweeney’s report highlights the UK’s poor performance on a range of indicators, including:
poor productivity, with the USA, France and Germany being 30 per cent more productive than the UK;
a skills shortage and mismatch, with half of employees interviewed saying that their jobs do not make full use of their skills and abilities;
job insecurity with over half of employees worried about loss of employment or job status – the Office of National Statistics now estimates there are 1.4 million zero-hour contract workers;
stagnating pay levels – since 2004 wages for workers on the median wage or less have stagnated or fallen in real terms and since 2010 median wages have fallen by more that 6 per cent in real terms;
and 50 of workers interviewed said they faced unreasonable treatment, while 40 per cent faced disrespect from employers.
The report also recommends that the government should amend the Information & Consultation Regulations to giver workers a stronger voice and bring the UK into line with other EU countries.
The ICE Regulations are barely used by unions to establish these structures as they are dauntingly complex and unions usually face open hostility from some of the worst employers who do not wish to hear the views of their workers, never mind consult with them.
The report makes a series of important recommendations, including a new mandate for the Low Pay Commission to increase the national minimum wage towards 60 per cent of the median wage; a target for government of lift one million workers to the living wage by 2020 and, interestingly, a requirement on the government to promote the positive role trade unions play in achieving fair pay and giving ACAS the power to promote collective bargaining and good employment relations.
At the launch, the issue of collective bargaining was a major talking point, with a number of speakers and questioners (including academics and trade unions) arguing strongly that the restoration of widespread collective bargaining would do much to restore decent work and pay equality.
Speakers pointed out that this was always ACAS’s role (it was the Major government who scrapped ACAS’s role in promoting collective bargaining) and it would require significant political and financial support.
On the role of trade unions, Chuka Umunna said in his remarks:
“The report is right to highlight that trade unions have an important role to play here in boosting training, pay and conditions for their members and helping Britain win that race to the top.
“At a time of rapid global economic change and a cost of living crisis at home, it is vital that the UK continues to have strong and modern trade unions as a genuine voice fighting against discrimination and abuse.”
Building on Ed Sweeney’s report, Chuka Umunna also announced the setting up a further review of Labour’s policies in regard to the world of work, to be lead by John Monks, former head of the TUC and the ETUC, Douglas McCormick, former MD of Atkins UK Rail and Alison Downie, head of the Employment Department at Goodman Derrick LLP.
Frances O’Grady hit the nail on the head at the launch when she said:
“With so many facing stagnant pay and too many new jobs made insecure through zero-hours contracts, agency working or low value self employment, we won’t fix the economy without fixing the workplace.”
Labour has to recognise that in order to win the election and win back working people, there is crying a need to promote clear policies to end low paid and low skilled work; but also to end exploitation, firmly regulate precarious work and create decent employment in decent workplaces.
Tony Burke is assistant general secretary of Unite
http://leftfootforward.org/2014/10/labour-needs-policies-that-end-low-paid-and-low-skilled-work/#more-89607
Increase in number of people on low pay
Increase in number of people on low pay
By Left Foot Forward | Published: November 3, 2014
The number of people on low pay has risen by 147,000 to 5.3 million in the last year, according to a study by KPMG.
Childcare vouchersjThe research indicates that 22 per cent of employees are now earning less than the Living Wage – up from 21 per cent last year.
According to the data, part-time, female and young workers are the most likely to be earning a wage that fails to provide a decent standard of living.
The research, conducted by Markit for KPMG, also found that the proportion of people earning less than £7.65 per hour (£8.80 in London) is higher amongst part-time workers. More than 4 in 10 part-time workers take home less than the Living Wage, compared to 13 percent of full-time employees.
There are also more part-time roles paying less than the Living Wage (2.98 million) than full-time jobs (2.29 million), despite making up less than a third of all UK jobs.
The research revealed that during October of this year almost three times as many people who earned less than the Living Wage (29 per cent) reported that their household finances had worsened over the month, compared to just 10 per cent who saw an improvement. Meanwhile, twice as many people who earn below the Living Wage (18 per cent) reported an increase in their need to borrow, compared to 9 per cent who saw a reduction.
The financial outlook for many remains bleak. Five per cent of those earning less than the Living Wage said they expected to see their household finances worsen between now and November 2015. Almost a quarter (22 per cent) also reported fears over job security.
Commenting on the research, head of Living Wage at KPMG Mike Kelly said:
“Although there are almost 1,000 organisations pledged to pay a Living Wage, far too many UK employees are stuck in the spiral of low pay.
“With the cost of living still high the squeeze on household finances remains acute, meaning that the reality for many is that they are forced to live hand to mouth. Inflation may be easing, but unless wages rise we will continue to see huge swathes of people caught between the desire to contribute to society and the inability to afford to do so.
“For some time it was easy for businesses to hide behind the argument that increased wages hit their bottom line, but there is ample evidence to suggest the opposite – in the shape of higher retention and higher productivity. It may not be possible for every business, but it is certainly not impossible to explore the feasibility of paying a Living Wage.”
http://leftfootforward.org/2014/11/increase-in-number-of-people-on-low-pay/
Why did Britain’s political class buy into the Tories’ economic fairytale?
Ha-Joon Chang
Falling wages, savage cuts and sham employment expose the recovery as bogus. Without a new vision we’re heading for social conflict
Sunday 19 October 2014 17.46 BST
The UK economy has been in difficulty since the 2008 financial crisis. Tough spending decisions have been needed to put it on the path to recovery because of the huge budget deficit left behind by the last irresponsible Labour government, showering its supporters with social benefit spending. Thanks to the coalition holding its nerve amid the clamour against cuts, the economy has finally recovered. True, wages have yet to make up the lost ground, but it is at least a “job-rich” recovery, allowing people to stand on their own feet rather than relying on state handouts.
That is the Conservative party’s narrative on the UK economy, and a large proportion of the British voting public has bought into it. They say they trust the Conservatives more than Labour by a big margin when it comes to economic management. And it’s not just the voting public. Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity. The trouble is that when you hold it up to the light this narrative is so full of holes it looks like a piece of Swiss cheese.
First, let’s look at the origins of the deficit. Contrary to the Conservative portrayal of it as a spendthrift party, Labour kept the budget in balance averaged over its first six years in office between 1997 and 2002. Between 2003 and 2007 the deficit rose, but at 3.2% of GDP a year it was manageable.
More importantly, this rise in the deficit between 2003 and 2007 was not due to increased welfare spending. According to data from the Office for National Statistics, social benefit spending as a proportion of GDP was more or less constant at about 9.5% of GDP a year during this period. The dramatic climb in budget deficit from there to the average of 10.7% in 2009-2010 was mostly a consequence of the recession caused by the financial crisis.
First, the recession reduced government revenue by the equivalent of 2.4% of GDP – from 42.1% to 39.7% – between 2008 and 2009-10. Second, it raised social spending (social benefit plus health spending). Economic downturn automatically increases spending on many social benefits, such as unemployment benefit and income support, but it also increases spending on things like disability benefit and healthcare, as increased unemployment and poverty lead to more physical and mental health problems. In 2009-10, at the height of the recession, UK public social spending rose by the equivalent of 3.2% of GDP compared with its 2008 level (from 21.8% to 24%).
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When you add together the recession-triggered fall in tax revenue and rise in social spending, they amount to 5.6% of GDP – almost the same as the rise in the deficit between 2008 and 2009-10 (5.7% of GDP). Even though some of the rise in social spending was due to factors other than the recession, such as an ageing population, it would be safe to say that much of the rise in deficit can be explained by the recession itself, rather than Labour’s economic mismanagement.
When faced with this, supporters of the Tory narrative would say, “OK, but however it was caused, we had to control the deficit because we can’t live beyond our means and accumulate debt”. This is a pre-modern, quasi-religious view of debt. Whether debt is a bad thing or not depends on what the money is used for. After all, the coalition has made students run up huge debts for their university education on the grounds that their heightened earning power will make them better off even after they pay back their loans.
The same reasoning should be applied to government debt. For example, when private sector demand collapses, as in the 2008 crisis, the government “living beyond its means” in the short run may actually reduce public debt faster in the long run, by speeding up economic recovery and thereby more quickly raising tax revenues and lowering social spending. If the increased government debt is accounted for by spending on projects that raise productivity – infrastructure, R&D, training and early learning programmes for disadvantaged children – the reduction in public debt in the long run will be even larger.
Against this, the advocates of the Conservative narrative may retort that the proof of the pudding is in the eating, and that the recovery is the best proof that the government’s economic strategy has worked. But has the UK economy really fully recovered? We keep hearing that national income is higher than at the pre-crisis peak of the first quarter of 2008. However, in the meantime the population has grown by 3.5 million (from 60.5 million to 64 million), and in per capita terms UK income is still 3.4% less than it was six years ago. And this is even before we talk about the highly uneven nature of the recovery, in which real wages have fallen by 10% while people at the top have increased their shares of wealth.
But can we not at least say that the recovery has been “jobs-rich”, creating 1.8m positions between 2011 and 2014? The trouble is that, apart from the fact that the current unemployment rate of 6% is nothing to be proud of, many of the newly created jobs are of very poor quality.
The ranks of workers in “time-related underemployment”, doing fewer hours than they wish due to a lack of availability of work – have swollen dramatically. Between 1999 and 2006, only about 1.9% of workers were in such a position; by 2012-13 the figure was 8%.
Then there is the extraordinary increase in self-employment. Its share of total employment, whose historical norm (1984-2007) was 12.6%, now stands at an unprecedented 15%. With no evidence of a sudden burst of entrepreneurial energy among Britons, we may conclude that many are in self-employment out of necessity or even desperation. Even though surveys show that most newly self-employed people say it is their preference, the fact that these workers have experienced a far greater collapse in earnings than employees – 20% against 6% between 2006-07 and 2011-12, according to the Resolution Foundation – suggests that they have few alternatives, not that they are budding entrepreneurs going places.
So, in between the additional people in underemployment (6.1% of employment) and the precarious newly self-employed (2.4%), 8.5% of British people in work (or 2.6 million people) are in jobs that do not fully utilise their abilities – call that semi-unemployment, if you will.
The success of the Conservative economic narrative has allowed the coalition to pursue a destructive and unfair economic strategy, which has generated only a bogus recovery largely based on government-fuelled asset bubbles in real estate and finance, with stagnant productivity, falling wages, millions of people in precarious jobs, and savage welfare cuts.
The country is in desperate need of a counter narrative that shifts the terms of debate. A government budget should be understood not just in terms of bookkeeping but also of demand management, national cohesion and productivity growth. Jobs and wages should not be seen simply as a matter of people being “worth” (or not) what they get, but of better utilising human potential and of providing decent and dignified livelihoods. Ways have to be found to generate economic growth based on rising productivity rather than the continuous blowing of asset bubbles.
Without a new economic vision incorporating these dimensions, Britain will continue on its path of stagnation, financial instability and social conflict.
Why do wages continue to stagnate in the UK as unemployment falls?
Geraint Johnes
The ONS released figures this week showing expanding employment while wages continue to stagnate. What is behind this puzzling picture? Geraint Johnes writes that the slack that has remained in the labour market, in the form of the underemployed and self-employed, offers one explanation for sluggish wage performance.
The latest labour market statistics show numbers in employment rising by 150,000 during the second quarter of this year while wages, rising at an annual rate of just 0.4 per cent, well below the rate of increase in prices, have continued to stagnate. The employment statistics paint a healthy picture while the data on earnings suggest all is not well. That might look like a paradox. It isn’t – it’s the fall in real wages that has allowed employers to hire more workers. But nonetheless there are aspects of the labour market that have puzzled economists for some time.
On the basis of past experience, one might have expected wage pressures to be growing at this stage in a recovery. Unemployment has fallen sharply over the last year – having been stubbornly static for a long time, it fell from 7.8 per cent in the second quarter of last year to 6.4 per cent in the space of just twelve months. In normal times, that would indicate a significant tightening of the labour market, and would lead to employers playing leapfrog with wages in order to attract a limited supply of workers.
But these haven’t been normal times. They may become more normal soon, but they aren’t normal yet. There has remained considerable slack in the economy. Data that we have published at Lancaster University’s Work Foundation suggest that the recession led to many people in work working fewer hours than they wanted to – that is, it led to a marked increase in underemployment. While these people are employed, they form an army of workers who could readily switch from part-time to full-time work as the demand for labour increases. Indeed, in the latest statistics, we are seeing that begin to happen. Over the second quarter of this year, employment rose by 0.5 per cent, but the number of hours worked increased by twice as much. And over the same period, the number of employees in part-time employment actually declined by some 19,000, while the number in full-time employment grew rapidly.
Another form that labour market slack has taken in recent years, rather unusually, is self-employment. Numbers of workers in this category have increased rapidly, and now over 15 per cent of all those in work in the UK are self-employed. Little is known about these new self-employed workers. Many are likely to have chosen self-employment whatever the weather, but it seems as though some, at least, have chosen it in the absence of other, more attractive, alternatives. Around a quarter of the new generation of self-employed workers would prefer not to be self-employed – a far higher proportion than has been observed in the past. Moreover, there is evidence to suggest that the real earnings of the typical self-employed worker have fallen faster than those of employees. But the latest data suggest that the increase in self-employment is now starting to slow – another sign that the labour market is starting to return to normal.
The slack that has remained in the labour market offers one explanation for sluggish wage performance. Another important factor has been the failure of labour productivity to pick up in the aftermath of recession. There is a plethora of reasons underpinning this so-called productivity puzzle, and we have explored these at length at a recent event at the Work Foundation.There are, however, encouraging signs. Business investment, which had been stagnant since the onset of recession, has made a spectacular recovery in the last two quarters for which data are available; in the first quarter of this year, it stood about 10 per cent higher than a year earlier. That is a quite remarkable recovery. Such investment in capital should help increase labour productivity. Once growth in labour productivity is resumed, real wages will start to rise. Just how quickly that comes about remains to be seen.
About the Author
Geraint JohnesGeraint Johnes is Director of The Work Foundation and Professor of Economics at Lancaster University.
http://blogs.lse.ac.uk/politicsandpolicy/wages-stagnate-unemployment-falls/
In work, but poor: barriers to sustainable growth and the need for a living wage
While the UK has returned to growth, many workers continue to suffer economic hardship as real incomes have yet to recover. This means that, just as in the past, the UK economy is relying on an unsustainable growth model where workers spending more than they earn to support the economy. Setting the UK on a sustainable path and reversing the growth of in-work poverty requires policies to raise real wages, writes David Spencer.
Rejoice. The UK economy is back to where it was before the crisis. The depression is over and sunny economic uplands lie in the future. Feel good, damn it, the economy is growing again. But there is a reason why the positive growth statistics are treated sceptically. That reason relates to the fact that real incomes have fallen in the UK. Despite the restoration of growth, workers in the UK have continued to suffer cuts in their real pay. One of the arguments for growth is that it raises real incomes – in the UK at least, the reverse is proving to be true. The economy has achieved growth, while many millions of workers have suffered increasing economic hardship with little prospect of improvement.
From a growth perspective, the grim facts of the recovery provide cause for concern. The UK economy has only been able to grow by workers spending beyond their means. Workers have run down savings and borrowed more to increase their consumption and this has driven growth. But workers can only go on behaving like this for so long. Without a rise in real pay, the spending must come to an end and with it the recovery.
There is no sign yet of net exports recovering to support consumption and any rises in business investment will need to continually confound expectations to offset the further fiscal tightening to come. Again as in the past the UK economy is relying on workers spending more than they earn to support the economy. This is a growth model that cannot be sustained and will ultimately end in disaster.
Even the most ardent backers of the government’s current policy stance must harbour some concerns about the prospects for growth in the economy. Lower real wages may help firms keep a lid on their costs but from the perspective of raising demand on a sustainable basis they place restrictions on the ability of firms to grow output. Demand side barriers will bite in the end and terminate the recovery.
But beyond growth there are deeper issues here relating to work and its relation to poverty. Work has long been heralded as the best form of welfare and the route to economic success. This view – summed up in the mantra ‘work always pays’ – has been exposed as a miserable lie. Now it seems that work for many is no escape from poverty. Working hard for a living often means struggling to keep one’s head above water.
Evidence shows that in-work poverty is on the rise in the UK. Among working age adults in low income households, the number in working families has been growing and is now greater than the number in workless families. It used to be that worklessness was the prime determinant of poverty. Now it is more likely to be low waged work.
How did we get into this situation? The underlying causes are complex and multifaceted. They include the decline of unions, the deregulation of the labour market, an inadequate training system and the rise of the service sector at the expense of manufacturing. The UK has lacked the necessary modernising forces that would have otherwise led it towards a high wage economy. Instead, it has evolved an institutional structure that has favoured and entrenched low wages.
What can be done? In the short term, policies to raise real wages in the UK would help not only to sustain the recovery if that is the concern but also to address the problem of in-work poverty. The national minimum wage, although a welcome development, has not managed to address the problem of low pay and this is where calls for a living wage come in. Raising the minimum wage to the level of the living wage would be a bold but economically sensible step to take. Critics may say that this will lead to unemployment. Yet evidence shows that minimum wage hikes have not had adverse employment effects. Indeed, their effect has been to increase productivity via higher levels of worker morale and to reduce welfare spending.
Longer-term, the UK needs to break its reliance on a low wage growth model. For this, it needs a new industrial strategy that focuses on building things rather than on making money. It needs to invest in new industries via the help of the State. Challenging vested interests particularly in the world of finance and creating a model of sustainable prosperity based not on endless growth but on the promotion of human flourishing remain the ultimate goals. Whether these goals are achievable under current conditions remains a moot point. Yet they are goals that we need to keep in our sights and agitate for.
In the end, the UK cannot afford to pay workers less. Driving real wages down is a recipe for economic stagnation and human misery. For all our sakes, we should seek a rise in real wages.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Featured image credit:
David Spencer is Professor of Economics and Political Economy at the Leeds University Business School.
Five minutes with Thomas Piketty: “We don’t need 19th century-style inequality to generate growth in the 21st century”
In an interview with EUROPP’s editor Stuart Brown and British Politics and Policy at LSE’s editor Joel Suss, Thomas Piketty discusses the rise in income and wealth inequality outlined in his book, Capital in the Twenty-First Century, and what policies should be adopted to prevent us returning to the kind of extreme levels of inequality experienced in Europe prior to the First World War. Professor Piketty recently gave a lecture at the LSE, the video of which can be seen online here.
Your research shows that inequality is rising and that without government action this trend is likely to continue. However, are we correct to assume that inequality is a fundamentally negative development in terms of its consequences on society?
There is no problem with inequality per se. In actual fact, up to a point inequality is fine and perhaps even useful with respect to innovation and growth. The problem is when inequality becomes so extreme that it no longer becomes useful for growth. When inequality reaches a certain point it often leads to the perpetuation of inequality over time across generations, as well as to a lack of mobility within society. Moreover, extreme inequality can be problematic for democratic institutions because it has the potential to lead to extremely unequal access to political power and the ability for citizens to make their voice heard.
There is no mathematical formula that tells you the point at which inequality becomes excessive. All we have is historical experience, and all I have tried to do through my research is to put together a large body of historical experience from over twenty countries across two centuries. We can only take imperfect lessons from this work, but it’s the best that we have. One lesson, for instance, is that the kind of extreme concentration of wealth that we experienced in most European countries up until World War One was excessive in the sense that it was not useful for growth, and probably even reduced growth and mobility overall.
This situation was destroyed by World War One, the Great Depression, and World War Two, as well as by the welfare state and progressive taxation policies which came after these shocks. As a consequence, wealth concentration was much lower in the 1950s and 1960s than it was in 1910, but this did not prevent growth from happening. If anything, this probably contributed to the inclusion of new social groups into the economic process and therefore to higher growth. So one important historical lesson from the 20th century is that we don’t need 19th century-style inequality to generate growth in the 21st century, and we therefore don’t want to return to that level of inequality in Europe.
How would you respond to those who doubt whether there is sufficient evidence to draw this kind of conclusion?
This will always be an imperfect inference because we are in the social sciences and we should not have any illusions about what is possible. We can’t run a controlled experiment across the 20th century or replay the century as if World War One and progressive taxation never occurred. All we have is our common historical experience, but I think this is enough to reach a number of fairly strong conclusions.
The lesson we have already mentioned – that we don’t need the kind of extreme inequality of the 19th century in order to have economic growth – is simply one imperfect lesson, but there are other important lessons if you look at, for instance, the rise of inequality in the United States over the past 30 years. For example, is it useful to pay managers a ten million dollar salary rather than only one million dollars? You really don’t see this in the data: the extra performance and job creation in companies which pay managers ten million dollars rather than one. In the United States over the past 30 years almost 75 per cent of the aggregate primary income growth has gone to the top of the distribution. Given the relatively mediocre productivity performance and the per capita GDP growth rate of 1.5 per cent per year, having nearly three quarters of that going to the top isn’t a very good deal for the rest of the population.
This will always be a complicated and passionate debate. Social science research is not going to transform the political conflict over the issue of inequality with some kind of mathematical certainty, but at least we can have a more informed debate using this historical cross-country evidence. Ultimately that is all my research is aiming to do.
What specific policies can be used to prevent us returning to the kind of extreme levels of inequality you have discussed?
There are a large number of policies which can be used in combination to regulate inequality. Historically the main mechanism to reduce inequality has been the diffusion of knowledge, skills and education. This is the most powerful force to reduce inequality between countries: and this is what we have today, with emerging countries catching up in terms of productivity levels with richer countries. Sometimes this can also work within countries if we have sufficiently inclusive educational and social institutions which allow large segments of the population to access the right skills and the right jobs.
However while education is tremendously important, sometimes it’s not sufficient in isolation. In order to prevent the top income groups and top wealth groups from effectively seceding from the rest of the distribution and growing much faster than the rest of society, you also need progressive taxation of income and progressive taxation of wealth – both inherited and annual wealth. Otherwise there is no natural mechanism to prevent the kind of extreme concentration of income and wealth that we’ve seen in the past from happening again.
Most of all, what we need is financial transparency. We need to monitor the dynamics of all of the different income and wealth groups more effectively so that we can adapt our policies and tax rates in line with whatever we observe. The lack of transparency is actually the biggest threat – we may end up one day in a much more unequal society than we thought we were.
Thomas Piketty is a Professor of Economics at the Paris School of Economics. He is the author of Capital in the 21st Century (Harvard University Press, March 2014).
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