Why work is not enough

If there is one new Labour social policy goal everyone knows about, it is the commitment to abolishing poverty within a generation. Ask how the government hopes to achieve this, and talk quickly turns to employment. ‘Work for those who can, security for those who cannot’ may be the mantra, but only one half of that equation is emphasised. As Tackling Poverty and Extending Opportunity suggested: ‘Work is the most important route to increased prosperity, and most people who are trapped on low income are without work.’

If one looks at poverty from the perspective of an individual poor person this is hard to dispute. The government’s ‘making work pay’ strategy means that even a low paid job can provide a higher standard of living than any benefits, when it is combined with tax credits and other in-work support. And someone with one foot in the world of work through a minimum wage job may be able to move up and out of poverty more easily than someone trying to escape directly from welfare. But that doesn’t end the debate, of course.

There is an important question still to be asked about whether the government’s reforms have yet succeeded in making employment a realistic option for many people currently living in poverty. This is at the heart of many criticisms on the left of the government’s strategy.

Much of the discussion about the government’s strategy has concentrated on the left’s critique, and the government’s response to it. But there is also a criticism from the opposite direction. In this view, the government’s commitment to full employment is absolutely right, but will be fatally undermined by attempts to eliminate poverty. International experience, so this argument goes, shows that we can’t fight on two fronts at the same time.

The debate is often cast as a competition between the European social model and the US alternative – on the one hand, strong social partnership between government, employers and unions, and high levels of social security; and, on the other, hire and fire labour markets and low levels of social protection. While this description makes the US model unattractive, its supporters would maintain that the US approach creates more jobs.

It is certainly possible to over-state this case, but it remains true that US unemployment rates are much lower, and employment rates higher, than those in the EU overall, as we can see from Figure 1.

 A natural response is to claim that the US has paid for this with higher levels of poverty, and again, a quick comparison bears this out as Figure 2 shows.

Hence the claim that there is a trade-off between poverty and unemployment. Does the government want American levels of employment? Fine, but they will eventually have to live with American poverty levels too, or so the arguments goes. But this is a most unattractive argument, particularly when it is used to justify inequality and poverty. Certainly, poverty is a bad thing, US apologists will say, but so is unemployment. You’ve got to live with one, and we prefer the dynamism and opportunity that seem to go with it.

But fortunately it is a false argument. It breaks down as soon as you start to look at what is being compared. This is because the figures used compare the US and average figures for the EU. When you start to look at individual EU states (see Figure 3) the picture becomes much richer and the trade off disappears.

Dividing the countries with higher employment rates from those with lower, and those with higher poverty rates from those with lower, we can see that there are countries in each quarter: countries with high poverty rates and high levels of employment, low poverty and low employment and so on. Thus there are countries that combine high employment with low poverty. New Labour is not contradicting itself in trying to achieve both.

But there is a difficult message for the government. The English-speaking countries – Canada, Australia, the USA and the UK – have the high-employment/high-poverty corner to themselves. Plainly, higher employment levels, by themselves, are not a sufficient anti-poverty strategy.

Is there another factor that has to be taken into account? A UNICEF study, Child Poverty Across Industrialised Nations, which looked at child poverty in industrialised countries, found that the UK had the third worst record of the 25 countries studied – only Russia and the USA were worse. The study identified two main causes. First, employment is an important issue, and the study highlighted this country’s large number of families where none of the adults is employed.

But employment levels don’t, by themselves, explain why some countries are so much less successful than others at reducing child poverty. The level of social protection in each country is vitally important, too. As the authors of the UNICEF study say: ‘Clearly, income transfers and the other services of the welfare state are very important for the living standards of poor children…. Those countries which are “welfare leaders” tend to have low poverty rates, while the “welfare laggards” have much higher child poverty rates.’

It isn’t only child poverty which correlates to a country’s level of social protection. Another international study has shown that there is the same relationship between the level of social protection spending and the poverty rate for people of all ages (see Figure 4).

The contrast with the previous figure is very noticeable. France is just inside the high poverty/high spending quarter, and Switzerland is very successful at reducing poverty for every Swiss franc spent, but the other countries are all in either the low poverty/high spending quarter or in the high poverty/low spending quarter – which is where all the English-speaking countries are to be found. Frank Vandenbroucke, the Belgian minister for social affairs, has called this link between social protection spending and poverty rates the ‘iron law of social policy’.

It would be going too far to argue that welfare spending is the only factor that counts and that employment is unimportant. But a comparison of countries’ success in reducing poverty shows a much clearer link to spending on social security than to success in promoting employment. The least we must conclude is that welfare-to-work policies cannot substitute for adequate social protection spending.

And so, are the government’s employment-focused welfare reforms an adequate anti-poverty strategy? It can be difficult to keep a level head in this debate. Pointing out that British benefit rates are still outrageously low is a short-cut to being dismissed as ‘old’ Labour. Some critics who label the welfare-to-work strategy as an ‘attack’ on unemployed and disabled people are equally unwilling to accept that there is anything to be said on the other side.

In some ways, the worst feature of this polarisation of debate is that it can stop participants remembering that the government hasn’t limited its strategy to labour market programmes. The government has increased some benefits by more than inflation. Increases in benefits for children have been particularly generous, and significantly redistributive: The Working Families’ Tax Credit is much more generous than Family Credit. Child Benefit for first children has been raised from £11.05 to £15.50 – much more than the increase that would have been produced even rating in line with earnings. For other children, Child Benefit has been raised to £10.35 – more than the increase that would have been produced by normal uprating policy. Children’s premiums in means-tested benefits have also been increased by more than inflation, especially the premiums for children under eleven, which have been raised to the level paid in respect of eleven to fifteen year-olds. The Child Tax Credit, worth up to £520 a year for taxpayers with children, and to be worth £1,000 in a baby’s first year.

David Piachaud and Holly Sutherland (see Figure 5) have pointed out that these measures, which will cost £6 billion a year, will take substantial numbers of people (especially children) out of poverty. The authors predict that there will be a net movement out of poverty of 1,770,000 people, including 840,000 children. In addition, substantial numbers will be helped out of poverty by the welfare-to-work strategy. Piachaud and Sutherland estimate that this could lead to as many as a million children escaping poverty, though 160,000 is a more likely figure.

So the government’s policies are going to have a significant impact: helping a quarter of all poor children out of their poverty is a record any Labour government would have boasted about. But to claim that current policies are sufficient to eliminate child poverty is a claim too far. To continue the success achieved in the first term the government will have to supplement the welfare-to-work focus with significant benefit increases.

The first step should be the abandonment of the policy of uprating most benefits in line with increases in prices, not earnings. This policy is responsible for structural inequality:

• For the very poorest British people, benefits account for a high proportion of their income – a much higher proportion than for those with average incomes. According to John Hill in Income and Wealth: the Latest Evidence, benefits provide two-thirds of the income of the poorest fifth of households, but only one-sixth for the average household.
• When benefits do not rise as quickly as wages (the most important form of income other than benefits) their relative position will therefore worsen. In fact, wages nearly always rise faster than prices.
• As the people who rely on benefits are already the poorest households the policy of uprating most benefits in line with inflation therefore means that the gap between the richest and poorest must widen.

The other reason for a substantial increase in benefit rates is that there are always going to be people who don’t get jobs:

• No-one is expecting people over pension age to return to employment, but millions of pensioners with little or no private or occupational pension income remain in poverty. An employment focus isn’t going to help them.
• Of course, an equal rights approach to disability recognises that disabled people aren’t incapable of employment. Nonetheless, in a discriminatory society, hundreds of thousands of disabled people won’t get jobs. An anti-poverty strategy for disabled people needsto people help people into jobs and provide decent benefit levels.
• The New Deal has done wonders for lone mothers, helping more than 80,000 into jobs. But many will decide not to look for employment yet, because they judge that it wouldn’t be in their children’s best interest. The only way they can be raised out of poverty is through their benefits.
• Many informal carers want to get (or keep) jobs and more can be done to help them. But others have no time to spare for employment: they will stay poor until their benefits go up.

So while the government deserves praise for many of the measures they have taken, those of us who see the anti-poverty commitment as one of the best parts of new Labour will need to keep the pressure on if it is to be met in full.