Jonathan Dupont is an Economics & Social Policy Research Fellow at Policy Exchange.
The last few years have seen increasing fears that growth benefits only those at the very top. Ordinary workers see their jobs outsourced or automated, wages stagnate and jobs become more unpleasant with the rise of zero hour contracts and forced self-employment. Some argue that we have potentially seen a fundamental decoupling between growth and average living standards.
Given the financial crisis, it is no surprise who often gets blamed for all this: markets. Inequality has soared, many fear, because of a deregulated financial system, the sabotage of blue collar jobs such as manufacturing ones, fat cat corporate executives, the rise of a ‘greed is good’ culture, and ‘neoliberalism’ in general. None of this would have happened if it wasn’t for Margaret Thatcher or Ronald Reagan. Why can’t we be more like Sweden or Germany?
The good news is that most of the fears about average living standards have been overstated. Zero hour contracts remain a tiny part of the labour market, while much of the rise in self-employment comes from positive trends such as older workers choosing to work longer part time. Markets continue to deliver higher living standards for everyone, while overall inequality has been flat for a generation. The bottom 20 per cent has seen its real disposable income after taxes and benefit transfers increase 86 per cent between 1977 and 2013.
Even in America, the level of wage stagnation has been vastly overrated: on the CBO’s numbers, between 1979 and 2007 median household income before taxes and transfers increased by at least 26 per cent. There is little evidence that the growth of the one per cent has come at the expense of ordinary living standards – countries where that one per cent have taken a larger share have also seen faster growth and more generous welfare transfers.
Neither is it markets or deregulation that is to blame for our long-run shift from a manufacturing to a knowledge economy. It wasn’t deregulation that brought about the container revolution, creating ships that could no longer fit in London’s old docks. Modern superstars like Robert Downey Jr and J K Rowling receive an order of magnitude higher incomes than their predecessors not because of their greed, but because we are in a more globalised market. Manufacturing has been in long-term decline as a share of employment in every major economy as technology increases productivity and consumers choose to spend greater proportions of their incomes on non-manufactured goods.
Even if Britain could turn itself into Germany, this would still only reverse half the decline in manufacturing employment seen since 1980. Neither is it clear that it would be a good deal. In the decade before the financial crisis, median household income grew 40 per cent faster in Britain than in Germany. After a decade of the gap rapidly closing, the incidence of relatively low paid workers in Germany is now not much below that seen in Britain. Sweden, meanwhile, saw almost no net job creation in the private sector over the second half of the twentieth century, with the extra one million added to its working-age population simply absorbed by the public sector.
But if markets are more the solution than the problem, that doesn’t mean their defenders should simply ignore these fears. Equally, while improving the supply side of our economy – more competition, less regulation, far more houses – remains the best long term way to improve long term living standards, it should not be the only answer. The great transition away from manufacturing in the 1980s really did increase inequality and long term unemployment.
It took a new agenda of welfare reform and more generous tax credits to slow the rise during the mid-1990s. It is possible, albeit not inevitable, that future structural shifts could have the same effect. Self-driving cars, 3D printing, drones and all the rest of it will make us all much, much richer, but we need to make sure that the benefits go to everyone.
Last week, Tim Montgomerie and Stephan Shakespeare’s TheGoodRight reignited the debate over what the moral purpose of the Centre-Right should be. Fixing the public finances is the most urgent task, but it is not enough on its own: what comes after?\
Here is one idea. The Centre-Right – or all defenders of markets – should make what you might call a “big, bold and comprehensive” promise to all those still in poverty. We should continue to trust to markets to drive the nation’s wealth, and not try second guess them with over the top caps, punitive tax rates, regulation, or central planning. But equally, we should ensure that every single person who works in a full time job receives not just a minimum, but adequate standard of living – a Living Income.
There is no perfect definition of poverty, and it is easy to quibble with all of them. But as good a definition as any comes from the Minimum Income Standard, which is defined by a panel of the public looking at what they think is needed to achieve “a socially-acceptable living standard.” At present, a full-time worker on the Minimum Wage receives only three quarters of this level. That shouldn’t be good enough.
One way to ensure a Living Income is for employers to pay a Living Wage. But while it is great for some employers to voluntarily opt into this, trying to make this mandatory across the economy would have very different effects. Increasing the Minimum Wage to the Living Wage would give the UK one of the highest mandated wages in the OECD, while in any case the majority of the benefits would go to the Treasury in higher taxes, rather than workers in higher living standards.
Moreover, as Tim Worstall has long pointed out, the difference between the Minimum Wage and the current Living Wage is almost entirely down to the taxes the Government still charges on low paid work: Income Tax and National Insurance. The most straightforward way to achieve a Living Income for everyone would be to align the Income Tax and National Insurance thresholds with the Minimum Wage. This would be expensive – around two per cent of GDP, or a quarter of the current fiscal consolidation – but realistically achievable as a long term aspiration by around 2025. Alternatively, the net cost of a Living Income could be significantly reduced through a more generous Universal Credit, or by simultaneously raising one of the main tax rates.
The mass automation of huge sections of the labour market is probably still at least a decade or so away. That gives us time to get ready. Continuing to improve education, retraining and the welfare system are of course a big part of the answer – but the Living Income should be there too.