Category Archives: Welfare

Predistribution offers Labour a new and radical way forward

Article by Paul Hackett, Director of the Smith Institute, this article originally appeared on the New Statesman’s ‘Staggers’ blog.

Ed Miliband may have at last found his intellectual mojo in the American “predistribution theory”, which talks about fair wages, trade unions and the power balance at the workplace.  Whilist it might be hard to imagine Labour supporters chanting  …..”what do we want – more predistribution! And, when do we want it? – well, preferably a decade ago when real wages started to fall”,the speech Miliband gave to the Policy Network conference could mark the start of something new and radical.  At the very least, a speech by a Labour leader about social justice at the workplace and the need to address in-work poverty through wage bargaining, rather than relying on hand-outs from the state, brings joy to those think-tankers on the centre-left who have been pointing out for sometime that the way forward must be to put more money in people’s pockets.

The fast track to jobs and growth is by boosting real incomes through higher wages, with wealth distribution recalibrated away from the top 1% who have secured more than their fair share of productivity gains.  The Smith Institute’s evaluation of anti-poverty policies shows that efforts by all governments since 1980 (including New Labour) to reduce poverty and inequality were undermined by deregulation of the labour market.

Successive Conservative governments transformed the world of work through the erosion of employment protection rights, tight restrictions on trade unions, the abolition of wage floors (like the Fair Wages Resolution and wages councils), lower taxes for the better off, a deliberate effort to shift the balance of power at work in favour of employers and abandoning the commitment to full employment.  All of which had a disastrous impact on those on low and middle incomes.

Apart from the significant achievement of the National Minimum Wage, New Labour left much of the post-Thatcher settlement on the workplace intact. Miliband is right to say that there was too much reliance on tax credits to tackle inequality.  The history of New Labour’s efforts to reduce poverty and increase pay show that wages stagnated for the “squeezed middle” even at a time of economic growth, rising tax credits and near full employment.

Whilst all the talk has been about falling real wages and outrageous executive pay, little attention has been given to what we are going to do about it. Beecroft and ever more deregulation is the Tory response. Labour has opposed this, but without really setting out its own prescription. Part of the solution has to be reconnecting social and labour market policies. What we know is that policies that ensure a more equal distribution of rewards are most effective when they work in parallel with labour market institutions (notably, trade unions) that achieve a fairer distribution of incomes before the intervention of the tax and benefit system.

There’s unlikely to be a sudden increase in welfare payments, even under Labour. All political parties agree that the resources available for redistribution will be limited in the immediate future in order to tackle the deficit.  Redistribution remains essential if we are to narrow the wealth divide, but it is only possible now with a shift towards a fairer wage distribution –  and that entails a new contract between employees, unions and employers. Predistribution is about pay, but it is also about Miliband’s concept of responsible capitalism.

The solutions are in, many ways, not new but need to be recast for today’s economy. There has to be more transparency in executive pay with an explicit obligation to publish the details of all directors pay packages in the annual reports of listed companies. Listed companies should also record the ratio of high pay to low pay, the distribution of pay across different levels of earnings and the number of workers in receipt of the minimum wage.

Whilst the minimum wage has made a difference for millions, unscrupulous employers continue to short change their staff. Ensuring that the minimum wage is effectively enforced and is fixed at the highest possible level before any negative employment effects appear should also be part of the solution.

Any future Labour government should also seek to reintroduce labour clauses in public contracts. This will not only increase the pay of those working in the public sector (or “para-state”) but also set a benchmark for pay in the private sector.  There may also be role for wages councils, which set wage floors, and place peer pressure on employers to act fairly. The development, in partnership with employers, of programmes focused on raising skill levels, boosting productivity and improving the overall quality of employment at the bottom of the labour market will also help those on lower income.

And last (and not least) as we approach the TUC’s conference, any programme to ensure fair initial distribution of rewards most seriously look at collective bargaining and how workers can have greater power at the workplace. For too long there has been an imbalance of power in favour of owners over workers. This is not a small challenge given low levels of union membership density in the private sector, but there are other models including European Works Councils which can act as bulwark against excessive executive pay.

The challenge for Miliband and the Labour movement must be to turn predistribution theory into predistribution practice, which will inevitably mean new popular workplace policies and facing down the vested interests of big business, the right-wing media, and the Tory neo-liberals.  There are obvious political risks with this sort agenda, but the prize of a more equal society is never going to handed to Labour on a plate


The Housing Benefit Bill is Still Rising

Post by Paul Hackett, the Director of the Smith Institute. Originally posted on the New Statesman blog  

Housing benefit is becoming the curse of the Coalition. The Prime Minister promised to cut the benefit bill and back those who work hard. But, latest DWP data (19 July) shows that the number of housing benefit claimants continues to rise, and is now well past the 5m mark. The Housing Benefit bill is £23bn and rising, despite the welfare caps and cuts. Dig deeper on the statistics and you see that by far the largest increase is from those claiming Housing Benefit who are in work (the Smith Institute estimates that the rise of in-work poverty since the Coalition came to power will add £1bn this year to the Housing Benefit Bill).

Contrary to Tory claims, it is the under-employed and underpaid, not the unemployed, who are pushing up the cost of Housing Benefit. In-work claimants now accounts for nearly 90% of the net increase in overall Housing Benefit claims. The rise of in-work poverty belies Tory propaganda about the ‘underserving poor’ and benefit scroungers.  Low growth and falling real wages are pushing more people to the margins of the labour market, where pay is not enough to live on. In London, and other high housing demand areas, the problem is exacerbated by higher private rents.

But, this is not a problem made by the recession and the Coalition’s welfare reforms.  The Housing benefit Bill has been increasing since 2000, and doubled between 1997 and 2010. New Labour got hooked into a spiral of subsidising higher social rents. The number of Housing Benefit claimants stayed roughly the same between 2003-2007 at relatively lower levels, but payments to landlords rose year on year.  As the recession hit, the situation got worse as the numbers of unemployed increased. Now we are in third stage, with more claimants as a result of falling real wages and under-employment.

Social and private rents are still going up (social rents have increased by a fifth over the last five years), but they will arguably have less impact on the future Housing Benefit Bill because of the benefit caps. However, they are being offset by cost pressures on Housing Benefit because more people in work are claiming. This is evidenced by the fact that the gap between pay for the bottom 10% and their rents has widened significantly.

Rising rents, falling wages and benefit caps is a triple blow for low income households, and will lead to higher levels of poverty. Labour can’t ignore the problem, which started on its watch. Part of the solution must be reversing the decline in real wages. But, a future Labour Government is also going to have to grapple with subsidies and the balance between revenue and capital subsidies for those who simply can’t afford to pay higher rents.


It is in-work poverty, not unemployment, that is pushing the Housing Benefit bill up.

by  Paul Hackett (Director, the Smith Institute)  and Sean Kippin (Events and Communications Manager) 

The Prime Minister’s announcement, that he plans to restrict Housing Benefit to the over-25s has, understandably generated a great deal of media attention. It is a policy which delights his party’s grass roots, and dismays the British centre-left in equal measure. The proposals are being sold to the public on two grounds; the first is that it will help to end what the Prime Minister sees as an ‘entitlement culture’, which perpetuates worklessness and engrains benefit dependency. The second is on the grounds of reducing Government expenditure in a costly policy area.

But do these two claims add up? George Eaton of the New Statesman has pointed out that only one in eight claimants are actually unemployed. This ties in with research that the Smith Institute has been carrying out on the relationship between poverty, work and welfare. What is more likely to push people onto benfits is a sluggish economic recovery, when five people are chasing every vacancy (this figure is as high as 7.8: 1 in the North East).

On the second claim, our research shows that welfare changes are actually pushing the Housing Benefit bill up by an extra £1bn per year, with those in low-paid work driving the changes. A full 95% of new claimants between the period May 2010 to February 2011 are in work, with a 7500 increase in claimants (with a £34 million bill attached) February of this year alone. The upshot of this is that the Government will struggle to achieve any intended savings in this area, especially if real wages keep falling.

Our research on in-work poverty has reached some alarming conclusions. The number of households with less than 60% of the median income has risen from 2.3m in 1996/7 to 3.3m in 2009/10. This can be attributed to real-terms wages failing to rise in line with the economy’s wider productivity during the boom years. Now the economy is in recession, and more people are pushed into part-time and temporary work, things are getting tougher still for those earners at the bottom.

The Government have redesigned a welfare programme that rests on the assumption that work will be sufficient to lift people out of poverty and that people become poor because of their lifestyle choices. Our research shows that people on low incomes are finding work, but can’t earn enough to lift themselves out of poverty

Click here to see a briefing note on in-work poverty and housing benefit by the Director of the Smith Institute, Paul Hackett.