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Pre-distribution • Reform • Living Standards

Fleshing out a pre-distribution agenda

James Plunkett - 28 November 2012

Given fiscal constraints and demographic change, reforming Beveridge's welfare state is a must

The idea of pre-distribution might be an ugly duckling, but it does seem to be here to stay. That’s because, behind its inelegance, it is onto an unavoidable truth: mature economies like the US and UK now need to restore the link between economic growth and rising living standards – and they need to do so in a world of tight fiscal constraints. That requires new strategies for shared growth that rest more heavily on boosting employment income in low to middle income households, and less on rising redistribution. And, in part, that means being more willing to influence market outcomes.

There is now quite a developed, high-level discussion about what this means for the UK progressive project. In this series of essays, Martin O’Neil and Thad Williamson have discussed the link between pre-distribution and the work of John Rawls while Kitty Ussher has argued that pre-distribution should be taken up ambitiously, as a radical project. But what of the policy substance? What big new choices does pre-distribution take us to? Although the details will take time to develop, it is possible to flesh out four key areas now, each a major new priority for early 21st century progressives.

The first is to build pro-employment public services that enable higher employment rates among parts of the workforce that have grown in importance over time, most notably parents and older workers. This means finally adapting to late 20th century transformations in our labour market, including soaring female employment and the ageing of our workforce. The UK has significant headroom in both these areas, ranking 15th in the OECD on female employment (largely because of underperformance among mothers with dependent children) and being a middling performer among older workers, with many forced to drop out of work early due to caring responsibilities.

Given fiscal constraints, building pro-employment public services means revisiting old priorities. The government should, for example, switch money out of generous and unproductive tax incentives for the wealthy (for example, by lowering the lifetime allowance for pension tax relief from £1.5m) and into more productive spending on affordable childcare for working parents. Working parents with preschool children could be provided with three days a week of childcare for £10 a week at a cost to government of £2.1 billion. And for older workers, the Dilnot recommendations point the way to a more reliable, sustainably funded system of social care.

Second, we must make our tax and benefit system do more to support employment by reforming it to reflect today’s working patterns. The single male breadwinner model, in which economic activity rates were close to 95 percent among a fairly homogenous group, is dead. Today's labour force is heterogeneous and full of people making marginal choices – parents deciding when to restart work as their children get older, couples deciding whether a second earner should enter work, people in their late 50s and 60s deciding how to retire gradually. As things stand, we are actively hindering employment rates with a tax and benefit system that is blind or even hostile to these choices.

Again, there are reforms or spending switches that could make the system better support employment. Parents could be given relatively more cash support when their children are young and relatively less once they start school, when more want to work. Dual-earning couples could be better supported under Universal Credit by giving second earners the same rights as first earners, allowing them to keep the first £2,000 they earn before support is withdrawn. Older workers could be rewarded for staying in work longer by raising National Insurance thresholds to £10k for those over 55, paid for by means-testing universal non-pension benefits as part of a mature new, pro-work settlement with the older population. In short, our tax and benefit system could do much more to support living standards beyond simply undertaking more direct redistribution.

Third, it is time to go beyond the minimum wage to a broader strategy to reduce low pay, increasing upward pressure on hourly pay in low paid labour markets. One in five UK workers is now paid below £7.50 an hour, double the extent of low pay in some other European countries. With the costs of low pay now running to as much as £4 billion a year in in-work benefits, this is a fiscal crisis as much as a personal one. We can no longer rely on a strategy that simply prevents the worst abuses of low pay through a national pay floor and then compensates for low pay more generally after the fact.

Building a new low pay architecture will be a long-term project. As a first step, the Low Pay Commission (LPC) which sets the minimum wage should be given a far broader and more strategic remit. This would include a new role of judging which sectors of the UK economy could pay an “affordable wage” above the legal minimum. And it would mean requiring the LPC to advise government on how to reduce low pay, measuring the fiscal impacts of such reductions. It would be backed with new steps to change pay norms, including a requirement that publicly listed firms report the proportion of their workforce paid below the Living Wage, not least in recognition of the amount they are costing taxpayers. This is about finding new ways, in a flexible economy, to push up pay when companies can afford to pay more.

Fourth, our priorities on skills must be redefined for today’s polarising labour market. In the UK this is more urgent than elsewhere because the skills profile of our workforce actively worsens the effects of polarisation. At the top, non-graduates – that is, most people – are squeezed out of prosperous and growing knowledge jobs because of the variable quality of UK intermediate skills. At the bottom, a lack of basic skills speeds the growth of low-skilled personal service roles, fostering an epidemic of low pay. This is particularly toxic when mixed with the UK’s lack of labour market institutions, which encourages employers to take the world as they find it rather than getting together to invest in skills for the long-term.

Building a new skills architecture will also be a generation-long project. We could start by boosting demand for skills through new sectoral institutions with the power to issue occupational licences. And when it comes to skills supply, we need our policy debate to shift finally away from distracting arguments about GCSE reform to take on the defining skills challenge of the early 21st century: boosting the acquisition of good intermediate skills by age 18. The raising of the education participation age to 18 in 2015 will be a key opportunity to catch up with other leading economies by, over time, matching this new requirement with a standard leaving exam at age 18.

In one sense, a greater willingness to intervene in market outcomes is a brave next step for progressives. But given the scale of the crisis now facing living standards, and the extent to which Britain underperforms in some key areas, it is also possible to set out a practical and politically viable agenda. In fact, far from being an outlying view, all the recommendations above were endorsed by the Commission on Living Standards, a wide-ranging group of leading employers, economists and trade unionists with diverse views on the size and role of the state. They show that, in many areas, not least childcare and low pay, the consensus is shifting more quickly than the positions of our leading political parties. This suggests that fleshing out a pre-distribution agenda isn’t just important for living standards; it might also help secure valuable political terrain.

James Plunkett is Director of Policy and Development at the Resolution Foundation and was formerly Secretary to the Commission on Living Standards.  He writes in a personal capacity.

Tags: Pre-distribution , Reform , Living Standards , James Plunkett , Opinion , U.S. , U.K. , Living Standards , Fiscal Crisis , Economic Crisis , Financial Crisis , Growth , Employment , Middle Class , Martin O’Neil , Thad Williamson , John Rawls , Kitty Ussher , OECD , Organisation for Economic Co-operation and Development , Gender Equality , Healthcare , Dilnot Commission , Tax , Pensions , Social Welfare , Employment , Universal Credit , Demographic Change , Redistribution , Minimum Wage , Living Wage , Low Pay Commission , General Certificate of Secondary Education , GCSE , Skills , Education

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