Ed Miliband is right: in-work poverty is the scourge of our time

Ed Miliband has given his first Commons speech since losing the election, where he's focused on inequality and low pay in Britain. He’s almost entirely wrong on the first of those, in my view, not least because most of the problems he identifies come from perceptions of inequality, which are not driven by reality. But on low pay, he makes an important point. In-work poverty really does appear to be the scourge of our time, and free marketeers ignore it at their peril.

By poverty, I do not mean relative poverty, although that is the definition the government uses to define the word. (A household is defined as in poverty if it earns less than 60 percent of the median wage.) I prefer the approach of the IEA’s Kristian Niemietz and the Joseph Rowntree Foundation, which calculates the cost of a basket of goods that most people would consider essential to living a decent life in modern Britain.

This approach is in the spirit of Adam Smith’s conception of poverty:

A linen shirt … is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.

According to the JRF, single working-age people need to earn at least £17,100 before tax to live decently; a couple with two children need to earn £20,200 each (versus £13,900 in 2008), and a lone parent with one child now needs to earn more than £27,100 (versus £12,000 in 2008).

Because real wages have fallen across the board since 2008, and the cost of living has risen, an increasing number of people in full-time jobs are still in poverty. My fear is that this is not simply a product of the financial crisis and Great Recession, but a reflection of a longer-term trend.

Wages usually reflect worker productivity, so simply jacking up the minimum wage is no solution to this. Any worker who is less productive than the minimum wage costs will just not be able to find a job. In general, when minimum wages rise, so does unemployment. So there is no simple way to boost workers’ incomes by forcing wages up.

Changes like automation and offshoring work (to call centres in India, for instance) will raise global living standards overall, and should be welcomed for that reason, but they may hurt the incomes of low-skilled British workers by increasing competition for the jobs they have been doing and leaving only relatively unproductive work left to be done. Some people say low-skilled immigration does the same, but labour market liberalization seems to be a tidy solution to that problem.

The techno-pessimist view that machines may simply replace workers in some jobs, without creating new ones for them to move into, is not impossible or even particularly unlikely. Even if it is wrong, improvements in automation or competition from abroad may make low-skilled workers’ marginal productivity too low to earn a decent amount. Their productivity might just not be enough to earn as much as we would like them to.

As I see it, there are three possible ways we could reduce in-work poverty:

1. Reduce the cost of living. Instead of trying to raise workers’ take-home pay, we could reduce the cost of things they want to buy. Housing and childcare are two of the most expensive things in most people’s budgets. Housing could be made much cheaper if the supply of housing was increased by liberalising planning. Britain has the tightest staff:child ratio requirements in Europe, and in a labour-intensive industry like childcare that has driven costs extremely high. Allowing as many children per staff member as they do in, say, Denmark would let costs fall considerably. However, both of these reforms, as well as most other supply-side deregulations, face considerable political opposition.
2. Cut taxes on low-income earners. The government has already pledged to raise the income tax threshold to be close to the minimum wage level. But National Insurance payments kick in at a much lower level – £155 a week, or 23 hours of minimum wage work. Raising this threshold, ideally to kick in after forty hours of minimum wage work, should be a major priority. But the higher the threshold goes, the fewer of the poorest people it helps, because they are already earning less than the threshold amount.
3. Just give money to poor people. Whether we do it through something like a Negative Income Tax, a Basic Income, or a significantly simplified and reformed tax credits system, direct cash transfers seem to be a good way of boosting the incomes of the poor without messing markets up in other ways. If they are only conditional on income, they can be designed to avoid severely perverted incentives that exist in the current welfare system. But paying for this would mean major changes to existing benefits system, which the Universal Credit reforms have shown are a minefield. There is also a danger that this kind of system would be implemented as a costly addition to existing welfare payments, rather than a revenue-neutral replacement.

In practice, some combination of the three is probably our best bet. There is no single political grouping that favours all three of these policies; indeed the false solution of massive minimum wage hikes is popular across the political spectrum.

This is worrying, but there is so much evidence against it that it will surely fail, and accepting that we have a problem may be the first step to solving it. So, in highlighting low pay as one of the central problems of the 21st Century, allow me to say something rarely heard on this blog: Ed Miliband is right.