In-work poverty, income inequality and the squeeze on living standards and what to do about them.

By David Coats
A Labour government elected in 2015 will confront three problems deeply embedded in the structure of the British labour market: the persistence of the wide inequalities of income that first emerged in the 1980s, the growth of inwork poverty and stagnant wage growth (since 2004) for all those below median earnings. Of course, British society was considerably fairer in the past than it is today. And many developed countries continue to achieve a more egalitarian distribution of incomes despite the supposed pressures of globalisation and skill biased technical change. The social achievement of the post-war period (1945-79) rested on three pillars. First, the commitment to full employment. Second, the development and maintenance of a generally redistributive welfare state. Third, the presence of institutions in the labour market that delivered a fairer distribution of incomes before the intervention of the tax and benefit system what we now call predistribution. Relatively high levels of union membership, the widespread observance of collective agreements, action by the state to extend these agreements to non-signatory employers, the application of fair wages policies in public procurement and the fixing of sectoral minimum wage rates by the wages councils all helped to sustain this third pillar. The Thatcher and Major governments launched an assault on each element of the post-war consensus. While full employment was an illusion for most of the 1979-97 period and the welfare state became significantly less generous, the real Thatcherite revolution was the comprehensive demolition of the
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institutions of predistribution. From 1997-2010 Labour was largely successful in restoring full employment and did much to refurbish the welfare state, but beyond the introduction of the National Minimum Wage, little was done to reshape the initial distribution of incomes in the labour market. This helps to explain, for example, why the tax credits policy was reaching the limits of its effectiveness as an instrument for the reduction of child poverty. According to the most recent statistics more than 60% of poor children live in families where at least one adult is in work. Most of the recent increase in the housing benefit bill is accounted for by the rising number of claims from working people with low incomes. And the imbalance of power in the labour market explains why workers (with little voice or influence over employer decisions) have seen wages stagnate at the same time as productivity is rising. There is much that we can learn from countries with more inclusive labour markets, most notably the Nordics and to a lesser extent the Netherlands. In each of these cases a coherent set of policies and institutions all pull in the same direction. The initial skills formation system gives young people a strong sense of occupational identity before they enter the world of work and the education to work transition is seen as a critical event affecting sustained labour market participation. There is an emerging system of genuine lifelong learning that equips workers with the capabilities they need to respond to structural and technological change, also creating opportunities for progression and development. A serious effort is made inside the workplace to eliminate inequality and occupational segregation. And active labour market programmes are focused on building the skills of the unemployed instead of just encouraging (or compelling) people to look for work. All of these measures are reinforced by strong and responsible trade unions, a balance of power between workers and their employers and real possibilities for workplace participation. Developing the notion of an inclusive labour market could prove to be a big electoral advantage for the Party, enabling social democrats to tell a compelling story about the world of work that has eluded most politicians on the left for more than thirty years. To be fully persuasive the new labour market model must make a link between the politics of production and the politics of distribution. The case for
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responsible capitalism and the argument for active industrial policy must run in harness with the argument for inclusive labour markets. Translating the analysis into practical policies will prove controversial because it raises questions about power and authority in the workplace. Some employers (although by no means all) may prove resistant to persuasion. What makes the current situation different from the 1997-2008 period, however, is the brute fact of the economic and financial crisis. The legitimacy of British capitalism is threatened, the coalition have failed to produce a credible programme of reform and most of British business seems stuck in defending a discredited status quo. Labour should therefore consider the following as initial policy steps towards both a more responsible capitalism and a more progressive set of labour market outcomes. Establish a commission on corporate governance immediately after the 2015 election: The Party is already committed to the requirement that listed companies include a workers representative on the remuneration committee to restrain the growth of executive pay. This is certainly an important proposal but it still leaves most of the corporate governance terrain untouched. In 1995 Tony Blair outlined a compelling model of stakeholder capitalism, which was quietly dropped when the extent of business opposition became clear. There is a strong case for reviving this approach through immediately after the 2015 general election through the appointment of a Corporate Governance Commission. The Commission would be required to develop the architecture of responsible capitalism and would be expected to report within eighteen months so that legislation could reach the statute book before the general election in 2020. Part of the terms of reference should include some consideration of worker representation in the boardroom, a common practice in much of the rest of northern Europe and arguably a source of resilience for the Nordic and German economies in tough times. Moreover, a wider range of voices in the boardroom might counteract the short-term decision making that has bedevilled British business and proved so damaging to economic performance.

Establish a more robust framework for participation in the workplace: Before the Thatcher reforms, trade unions were sufficiently well-established to give the majority of workers some opportunity to influence conditions of employment and critical employer decisions. This is no longer the case, with trade unions representing barely one in six workers in the private sector. The EU directive on information and consultation of employees creates a framework for the reconstruction of collectivism in the British workplace. The domestic regulations could be used to establish works councils, learning from the experience of much of continental Europe. Major reforms are required, however, to make it easier for workers to vindicate their rights, to give trade unions an opportunity to initiate the information and consultation machinery and to ensure that workers representatives have access to the training and expert advice they need. Reinforce the National Minimum Wage and establish a wage floor in public procurement: The National Minimum Wage is one of the Labour governments greatest achievements. Nevertheless, the minimum wage is simply a minimum and cannot be a substitute for a comprehensive strategy to eliminate low pay. A newly elected Labour government could widen the remit of the Low Pay Commission so that it has responsibility for investigating the causes, consequences and cures of low pay. Recommendations could be made for changes in employer practices, investment in skills development and the dissemination of best practice. In addition, the LPC might develop a model to assess whether an industry or sector can afford to pay more than the NMW. Government could encourage a dialogue between unions and employers in low wage sectors around skills, productivity and eventually pay with a view to raising wages in these industries. It has been suggested that the NMW should be raised to the level of the living wage. This would be a mistake, partly because it would eliminate the need for social partnership through the LPC but principally because it could have a damaging impact on employment. Campaigners for the Living Wage see it as a voluntary initiative, not as a pay benchmark that can be legally enforced. There is a role for the Living Wage, however, in establishing a wage floor in public procurement. It could be part of a modernised approach to the fair wages policies that applied from 1891-1983. During that period all
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contractors in the governments supply chain (including sub-contractors), no matter whether they were providing goods or services, either had to observe the wage rates negotiated by the trade unions or, where there was no agreement, the going rate in that industry or sector. A similar approach today would continue to take collective agreements as the benchmark where they exist and would then look to either going rates or the level of the Living Wage if going rates are lower. No doubt some may argue that this is unaffordable, but what the government pays out in higher contract prices it may recoup at least in part through the reduced payment of tax credits. Rebuild collective bargaining: Trade unions are indispensable institutions in inclusive labour markets. The evidence is clear: trade unions have a sword of justice effect, reducing the incidence of low pay and wage inequality, limiting the extent of unequal pay and encouraging investment in human capital. Many of the measures described above could have the effect of rebuilding modern institutions for collective bargaining or at least would create an environment where strong and responsible trade unions are seen as legitimate institutions. But the results of the policies outlined here will always fall short of expectations unless the unions embrace the new institutional possibilities with enthusiasm. Union modernisation is an essential step on the journey towards an inclusive labour market. A full report outlining these arguments and policy recommendations in more detail will be published by the Smith Institute in June 2013.

David Coats is a Research Fellow at The Smith Institute Political notes are published by One Nation Register. They are a monthly contribution to the debates shaping Labours political renewal. The articles published do not represent Labours policy positions. To contact political notes, email onenationregister@gmail.com