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George Osborne announced earlier this month that he would support the suggestion of the Low Pay Commission to raise the minimum wage in the UK to £7 from it’s current £6.31. Should the move go ahead, we will see the wage instated around Autumn bringing it in line with inflation for 2015, and catching up three years earlier than expected.

The Telegraph

The Telegraph

This signals an 11% increase and there have been some warnings about potential detrimental effects on SMEs (small and medium enterprises), should the move go ahead. In fact, any raise in the minimum wage, particularly during the recession, has seen a strong backlash from businesses of all sizes.

When the minimum wage was first brought in, in 1999, Conservatives opposed it, and economists predicted that it would have a devastating effect on the economy. It didn’t. In fact, it brought stability to the market, and raised living standards for those entering work.

Indeed, it will be SME’s who will struggle most with adapting to the proposed increase, and had the minimum wage increased steadily over time, this jump would be unnecessary and maybe, more adjustable.

Nevertheless, the raise is much needed, and whilst we focus on the effects on business, we also need to understand what the current rate is doing to our economy and those on the minimum wage.

The Resolution Foundation calculates that the minimum wage is around £1,010 lower a year than it was in 2008, in real terms. “That matters because around 1 million adult workers in Britain are paid the minimum wage, while twice that number earn within 50 pence of the minimum wage.”

Resolution Foundation

Resolution Foundation

The pressure put on keeping the minimum wage low and straggling behind inflation against rising living costs has caused the current rising rates of in-work poverty, where families and individuals working full time continue to live below the bread line. In September, in Wales, the number of people in in-work poverty, outnumbered the ones out of work – proof that retaining the current minimum wage will fail to make work pay, increase poverty and de-incentivise work.

Some help has been provided by the state up to now, in the form of Tax Credits for those on low incomes. Working Tax Credits top up the income of those on low pay, however, they have proved in some areas to be a hindrance to increased pay rates for employees.

The WTC was introduced in 2003, to incentivise people into work on low pay. However, research by the LSE found that it was not necessarily effective, as many potential employees wanted to work, and felt devalued in being unable to support themselves without help from the state:

“The recipients’ motivations to work were far more complex and varied than a simple response to a financial incentive. Recipients wanted by and large to work, and often felt good that they could, but sometimes the value they placed on work had little to do with money, or else the jobs they were doing failed to meet their aspirations or undermined their sense of self-worth.

“Professor Dean said: “Although the WTC scheme was generally viewed positively and most of the people we talked to were grateful for the additional income, there were still some important undercurrents of resentment. WTC does not of itself compensate for the injustices or adverse effects of a precarious and inadequately paid work. Paradoxically, hardly any of the people who took part in this research explicitly recognised that schemes like WTC are in effect a subsidy to low paying employers, but a lot of them felt devalued at work or locked in to menial jobs.”

In 2012, £14bn was spent on Working Tax Credits, as they become used more and more by employees of huge chains and not just SMEs. Supermarket chains, retail stores and other global businesses have been able to take advantage of paying below inflation minimum wages, as opposed to what they can afford, and this has contributed to a culture of large businesses relying on the state to pick up part of the bill they should be paying in wages to employees – essentially allowing the state to pay the profits of large businesses. To be more effective, the WTC should have only been offered to help smaller businesses take on employees – concentrating this help to where it is most needed, and this support should be continued where increases in the minimum wage could seriously affect SME’s.

The proposed increase could see a dramatic reduction in spending on Working Tax Credits. Further, the increase in money among the low paid will see further economic mobility, as the low paid spend much larger portions of their pay, and this re-invests into the economy creating growth, rather than those on low pay accumulating debt or being unable to afford to spend more on essentials.

Living wage campaigners have welcomed the proposed increase but remain adamant that there is much work to do to get their suggested rates of £7.65 an hour in the UK, and £8.80 in London – figures calculated on the basic cost of living in the UK.

Image: citizensuk.org

Image: citizensuk.org

Whilst this seems like a huge jump, working towards this incrementally is possible and should be a goal, because for as long as we legislate minimum wages that keep people in poverty, we are legislating poverty and maintaining a section of the population in poverty.

When the minimum wage faces any increase there is alway strong reactions from businesses in the media, and they often do talk to SMEs at this point. However, there is rarely any input or opinion from the large global traders and retailers who keep thousands on the minimum wage, and rely on the state’s help to top up pay. This culture is not one that we can afford, yet remains out of the limelight as SMEs fight the battle when the issue of a raise for the minimum wage comes up. However, it is the abuse of the minimum wage by large companies that has created reliance on the state to this extent, and to get them to pay, we need the minimum wage raised.

In truth, increasing the minimum wage will bring lots of positives to our economy. And, the question that seems to escape media attention most when it comes to this subject, is what we want to work towards in the larger scale of things. As the 7th richest country in the world, shouldn’t we be doing all we can to ensure our minimum wage is one that lifts people out of poverty and can deal with the basic cost of living? And if our current system is one that legislates in-work poverty, then maybe we need some drastic action and a re-think of what our economy should be providing.

Minimum Wage Poverty Image: unisonactive.blogspot.co.uk

Minimum Wage Poverty Image: unisonactive.blogspot.co.uke

by Kam Sandhu @KamBass

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Despite an outward stress on the necessity of work, the coalition government have helped to garner an employment landscape of insecurity, poverty and low worth. Welfare policy and employment laws changed over the last two years have been crucial in creating a power imbalance in favour of employers, ultimately damaging employee worth, status and work life.

At the beginning of this year, David Cameron announced plans to make it easier for employers to fire workers. By increasing the length of service from one year to two before a hearing can be called following dismissal, and by reducing the sick pay, redundancy pay and compensation amounts employees can claim for, Cameron said that these relaxations in employment laws would make companies see less risk in hiring more people, and this would also ‘get rid of the bad’ to let in the skilled employees.

David-Cameron1

However, allowing employers to fire employees more easily by cutting red tape does not solve the problem of a lack of jobs. Further, the report that David Cameron commissioned from Adrian Beecroft in support of law relaxation was admittedly based on a ‘hunch’ rather than economic proof or explanation:

“Quantifying the loss of jobs arising from the burden of regulation, and the economic value of those jobs, is an impossible task…How many more businesses would there be, how many people would they employ, how many more people would existing businesses employ, how profitable would all these businesses be? Who knows?”

Yet, Cameron pressed to apply these measures, insisting that America had relaxed it’s laws and seen a drop in unemployment. But, while the US remained relatively stagnant in it’s position, Germany halved it’s unemployment figures whilst maintaining much stronger laws and regulations for employers.

Whilst Cameron was forced to retreat on these plans by deputy Prime Minister Nick Clegg, the subject has surfaced again a few times, with support from Vince Cable and some Tory Ministers. Still, changes to laws like this during a fragile recovery will only cause anxiety for workers who feel the threat of losing their jobs on top of the hardship of the current climate. It also assumes the employer acts in employee interests which has been disproven time and time again, says lawyer Edward Cooper:

“An underlying assumption in these proposals is that employers all act reasonably. We see day in and day out that employers do not always act reasonably, especially when there is money to be saved.”

Edward Cooper, Channel 4, 2012

Despite these proposals being put on the back burner, changes to employment tribunal fees were passed in July this year, meaning that employees seeking justice, investigation, hearing or tribunal would now have to pay to have their case heard. Again, at a time of fragility for the market, this put employees on the back foot should they be treated unfairly by their employer.

Under the new rules, it would cost £160-250 to lodge a claim and a further £230-950 if the claim goes to court, which is usually the case with claims such as unfair dismissal or discrimination. The Ministry of Justice also charge £1200 for a full hearing if people want to challenge the decision of an employment tribunal.

Government have said that these fees were brought in to encourage ‘mediation’ and negotiation without the Courts, in the hope more cases could be settled outside the legal system.

However, these fees are attacks on the employee’s rights alone, and only make it harder for employees to fight companies who often already have the upper hand. The fees give companies more leeway to treat employees unfairly, in the hope they cannot afford to bring them to justice. For some grievances, the cost is more than the money an employee feels they are owed, but could count highly as a case for morality or discrimination and be important in ensuring a company is reprimanded for treating someone unfairly.

Despite the fees now existing, trade union Unison has won the right to take the case to judicial review, in the hope the fees will be lifted. Unison, with the support of the Human Rights Commission, argue that the fees make it impossible for workers to exercise their rights. The Ministry of Justice have vowed to refund all fees should Unison win the case.

Dave Prentis, Unison General Secretary said the fees “give the green light to unscrupulous employers to ride roughshod over already basic workers’ rights.”

The hearing continues.

As well as these changes to laws, the government have implemented their own damaging schemes, which are currently taking their toll on the employment market. Welfare-to-work schemes which incorporate workfare policies are forcibly sending unemployed people to work for 30-60 hours a week for their unemployment benefit or they risk sanctions or withdrawal of benefits.

Minster for Work and Pensions, Iain Duncan Smith insisted these policies were designed to allow people to gain work experience to secure future employment. However, the schemes have just widened the already burgeoning ‘work experience’ and ‘intern’ industry which already operates cruelly in the fashion, media and music world and employs an entire workforce of free labour for the same, often unlikely, chance of employment at the end.

Whilst gaining months of free work experience was once expected if you wanted to get into a much sought after industry, now workfare policies insist they are required for minimum wage jobs stacking shelves. As the interns of the music and media industries are trying to gather to gain some rights and protection against being exploited by companies and employers, the welfare-to-work programmes are normalising work experience for the low paid.  Entry level jobs are beginning to carry work experience criteria, and the free workforce donated by the government rotates to feed a steady supply of workers to companies. This sort of policy replaces paid jobs with free labour. It devalues work and treats workers as commodities. It creates higher barriers to work by insisting on months of free work for minimum wage jobs.

Image: legal-aware.org

Image: legal-aware.org

Thus workers are desperate, and employers are often only happy to exploit this, as we have seen in the prevalence of the zero hour contract. Sports direct used these contracts for over 90% of staff. They offered no holiday or sick pay, and did not have to guarantee any hours. To ensure employees would take home money, they would have to take any hours the employer asked of them, at whatever short notice. Giselle Cory of the Resolution Foundation said in an interview with RealFare earlier this year, that these contracts were also found to be used as management tools, to punish employees if they did not take on work when and as the employer demanded:

“But what we see actually, is that these contracts are being used to disempower the employee. We’ve seen evidence of really bad management practice where someone is on a zero hour contract, their boss says ‘I want you to work Saturday.’ They might say ‘I can’t’ or ‘I can’t get childcare’ for example, or ‘I would simply rather not’, and they are zeroed down, which is effectively where they’re pushed to very few or no hours in the medium or longer term. So that’s in effect, using these contracts as a management tool, when that’s not what they’re intended for and that’s a great imbalance of power between the employer and the employee.”

Giselle Cory, Resolution Foundation

And with the rise of these contracts we also see the worst rates of underemployment on record, with 1.46m people in part time work in need of more hours. Thousands of people are desperate for work and so many take on any contract and terms they can. This is at the expense of their rights and their home life as work may demand availability at any time. Many are at the mercy of employers to work at short notice and so sacrifice plans, commitments, family time for minimum wage jobs that offer them no security or help should they fall ill or need time off. The imbalance is clear.

And the government’s moves have made it easier to exploit employees, and treat them as disposable. The priorities have not been to make a secure employment landscape for people in the recovery but to allow employers to use and abuse at will. Whilst the government and media rhetoric has made it shameful not to work, employers are made to feel no shame for making workers poor on time, worth and money.

by Kam Sandhu @KamBass

by Kam Sandhu @KamBass

In the second part of our interview with Giselle Cory – senior research and policy analyst from the Resolution Foundation, we talk about how long the economy will take to recover, and what support there is and should be for those on lower and middle incomes.

The Telegraph

The Telegraph

I think it was Danny Alexander who said that austerity needed to continue until 2020. How long do you think it will take for people to feel the economy has recovered? 

“I couldn’t say a number, because there are too many uncertainties, but I will say a while. We did some modelling which looked at how incomes are likely to change over the next decade or so. And we saw that given the hit that incomes have taken, both from the components that are made from earnings from work – because of that very poor earnings growth I talked about earlier, and because of the hit that non-work income i.e. benefit income whether it be tax credits, child credit or out of work benefit, those have all taken a hit as well. So if you combine those two elements and layer on top the fact that we’ve had inflation running higher than growth in either of those things, you see that actually the pre-recession peak will not be reached again for at least another decade or so. So that’s looking like at least 10 years of families feeling like they’re not as well off as they were before the recession hit, and that’s a very long time for people to be holding on.

“About 40%, of people we asked said that they didn’t think the political parties were doing enough to support a rise in their living standards or mitigate the fall.”

“Another thing I will say is that households are fairly confident about what it is they think will help their living standards. In some recent polling we did, I think large majority, about 40%, of people we asked said that they didn’t think the political parties were doing enough to support a rise in their living standards or mitigate the fall, and we also asked what it was that any politician, irrespective of the colour of their party, could do to help their living standards improve again. The top things were reduce bills – so price rises we’ve seen on things like water, basic amenities, food has been fairly overwhelming for people who’s wages aren’t increasing. Second thing is cutting taxes for low to middle income people, so we’ve seen a certain degree of that in things like the personal tax allowance rise, but families want more of that. And the third is promoting wage increases through whatever economic policy they can and we’ve seen that has not been something we’ve seen in the last couple of years.”

The minimum wage has not kept up with inflation for some years and so, in a way it has eroded what the minimum wage is for. Despite the living wage being implemented by some companies and employers, there is plenty left to do. How important is it to re-instate the minimum wage, which is now pretty far behind the price rises over the years?

Image: citizensuk.org

Image: citizensuk.org

“As you say we’ve seen a dip in the real terms value of the minimum wage which as you say hasn’t kept up with inflation and the minimum wage is very important as a wage floor. And though a very small proportion of the workforce are actually on the minimum wage, a significant proportion are just above it – so hovering at the £6.50 – £7.50 sort of mark. So it’s important that the wage floor reflects the costs that families are having to face and it’s a fair increase, whether that means changing the way it’s set, whether that means indexing it to some other metric of growth so that we know it grows in parallel to some broader indicator of economic growth. I think the details of that need to be fleshed out and in fact, we’re looking into that at the moment with an expert group, to work out how it should be best looked into. But one thing’s for sure, too many people are trapped on those very low wages that are too low to make work pay. The living wage is an excellent pseudo-floor, a voluntary floor for organisations that sign up to it, but the problem with that is there are always limits to a what voluntary action can do rather than something that’s supported through legislation.”

What would you ask the government to do now, to help the economy and help those on low to middle incomes?

“How long do you have? I think the biggest area to target is around low pay, so it is reviewing how the minimum wage is set. It is reviewing how we can embed the living wage better, it’s understanding how we can influence the labour market, influencing the growth specific industries in the UK so there are more medium and high paid jobs. Because what we have seen is a hollowing out as such, of the labour market, where there’s jobs at the bottom and jobs at the top but the jobs in the middle are disappearing, and that’s based in large part due to technological change, but a lot of other factors as well. There are a lot of things the government can do to support growth of those jobs in the middle, and that will have a consequent effect on people at the bottom and the ability of people at the bottom to progress up and increase their wages – that’s one of many things you can do about low pay.

“Secondly, I’d say for low income families, the cost of childcare can be completely restrictive in terms of their ability to work so you see that a lot of families have to pay to work if they are on the lowest incomes, and that’s obviously a terrible work incentive. So the support for childcare should be increased so that no family has to face that decision.”

George Osbourne recently announced that he would give families £1200 of childcare for families earning up to £300,00 (if each parent earns £150,000). Will that help? 

“The tax free voucher scheme, as you say £1200 per child, that will do some good for families who are eligible for it. However, though that goes very high up the income spectrum, it does not cover any family who is also receiving Universal Credit, and many low to middle income families with children will be receiving Universal Credit. For those families, they don’t benefit from the voucher scheme, which is equivalent to £1.5 billion worth of spending because it’s £750 million new money and £740 million old money that they’re taking from another scheme that’s being shut down.

“They don’t benefit from any of that £1.5 billion, but at the same time they are the earners who are on the lowest wages and therefore face the highest barrier to income because their wages simply can’t absorb heir childcare costs. So I think a much better way to spend the money, is to make sure the people who can be persuaded into work and can be helped into work – because a lot will say ‘I want to but childcare is a barrier’ – is that we focus whatever funds we can on childcare on these families, because it’s firstly, unlikely that higher income families would change their decision about work based on that support, and secondly, it’s unlikely that a large proportion of their income would be taken up by childcare. So we’re not changing their lives much. We’re helping them a little bit, but the life changing stuff is for the people on low incomes. The government have proposed £200 million of extra childcare for this group, but the problem is that £200 million doesn’t really go far enough. You either have to target a specific sub-group or everyone and it’s spread out amongst everyone and you lessen it’s bite significantly.

George Osborne delivering the Spending Review Image: The Telegrapg

George Osborne delivering the Spending Review Image: The Telegraph

“And in terms of your other question on what else do we do for this group, the other two big areas I talk about is prices. So as you said, this group faces costs higher than their wage increases, and they also face more severe levels of inflation than higher income people because what we know about low and middle income people is they spend a large proportion of their income on essentials and unfortunately it’s these essentials that have experienced the highest price increase. So they are effectively spending a large chunk of their money, and an increasing chunk, on things they can’t afford like they used to whilst their wages aren’t going up. So attempting to address things like rising water prices and energy prices is going to help this group a lot.

“In a vast majority of local authorities, you simply can’t afford private rented sector housing if you want to spend less than 35% of your income on housing, which is seen as the affordability definition. In a third of local authorities, private rented accommodation costs around a half of your income.”

“And the other area, that I think is dear to all of us, is housing. And we’re sitting in London, so it’s not news to anyone that housing is unaffordable but actually across the country it’s very difficult for people to get into housing. We’ve got three main types of housing in the UK. So you can own, you can rent or you can be in social rent – own, private rent or social rent. What we find with low to middle income people, they can’t own in most part because they can’t drum up the deposit, it’s a lot of money particularly in post-recession, and the ongoing costs of that mortgage would be quite demanding in comparison to the wages they receive. They can’t access social housing because they are not perceived to be vulnerable enough and stocks aren’t what they need to be. So they’re increasingly in the middle, in the private rented sector, which isn’t in itself a problem. However, given that rents in many areas absorb very high proportions of people’s income, given that renting doesn’t allow people the security of tenure that they’d like, particularly if you’ve just put your young child in school and you don’t want to have to move them out of school because your landlord puts your rent up. Private rented tenants also can’t make their house a home, people want to be able to put a picture up, paint a wall, so a lot of families don’t feel particularly comfortable in that sector, but don’t have a choice. So addressing the overall affordability of housing but also low and middle income families’ access to ownership, whether that be through shared ownership schemes, where you buy a bit and rent a bit, or full ownership is very important, and on the top of the priority list for a lot of low income people.”

Resolution Foundation

Resolution Foundation

Boris Johnson recently said that he was setting affordability at 80% of the private sector. What do you think about that figure? 

“It’s very high. We’ve looked at affordability of different tenure types and found that social rents, as they are, are bordering on the unaffordable already, so to look at affordable rent as 80% of private rent is pushing that rent way above current social rents, much closer to market rents, which we know at the moment are unaffordable. In a vast majority of local authorities, you simply can’t afford private rented sector housing if you want to spend less than 35% of your income on housing, which is seen as the affordability definition. In a third of local authorities, private rented accommodation costs around a half of your income. By anyone’s standards that’s a lot of money to pay, so if we’re pushing affordable rents up to that limit it’s simply going to be very, very difficult for families that can’t sustain that level of housing expenditure and as I mentioned before, they don’t have any choice. There’s no other options for them. So I think a lot of people are going to find it very tough.”

Research by the Resolution Foundation has found that government plans to offer up extra childcare support will benefit higher earners, but leave lower income families worse off.

In the budget earlier this year, the government announced new plans and a £1bn investment to help parents get back into work with extra childcare support. 600,000 families under the Universal Credit scheme will benefit from extra help, as well as 2.5 million higher earners benefitting through childcare support vouchers worth £1200 a year.

Image: The Guardian

Image: The Guardian

However, in a report called ‘All Work And No Pay’, the Resolution Foundation has found that the plans still may not benefit those on the lowest incomes, who also face the biggest barriers in getting into work. If one parent is already in full time low income work, and the other parent chooses to work, the childcare benefits do not provide as much help as for second parent in a higher earning family.

Using a comparison of a low income family and a higher earning family, the research said:

“A part-time cleaner with two children in childcare and working 25 hours a week would be £7 a week worse off than if she didn’t work at all while a part-time teacher with the same hours and childcare arrangements would be £57 a week better off under the Government’s new proposals to help working families with the costs of childcare.

“Higher earning families in universal credit will have 85 per cent of their childcare costs paid, while lower earning families will be able to recover only 70 per cent.”

Changes in benefits and income when a second lower income earner goes into full time work means that work does not pay. As families on low income wages may not meet the £10,000 threshold for paying tax, they must incur more of their childcare costs. Also, increasing hours means that low income families may become eligible for less, with some potentially losing out on thousands a year if the second earner is full time at 40 hours.

The research does highlight that lower income families are better off under Universal Credit if the second earner works 16 hours or less. But a shift from part time to full time will leave families working to pay, in contrast with the aims of government to encourage work, and making work pay.

Below are the comparisons of income with increasing hours for the two families described above, demonstrating the problems facing lower income earners should they choose to work more:

Screen shot 2013-08-24 at 17.25.29

Screen shot 2013-08-24 at 17.26.30As the government open up the policies to consultation, the Resolution Foundation suggest that some amendments need to be made to the policies. While the added help for parents is welcomed, to achieve the government’s aims, they must ensure that work does pay for those facing the biggest barriers and challenges in entering the jobs market.

The Resolution Foundation has suggested that the 85% support should be offered to all families under universal credit, not just higher earners. This would require extra funding of £200m, which could be recovered by lowering the cap for claiming the £1200 childcare vouchers. These vouchers will be available to anyone not under universal credit, earning up to £300,000 a household (£150,000 each parent). By lowering this cap, the Resolution Foundation suggests it will be easier to help those worst off, and ensure the £1bn investment does make work pay, adding that the 900,000 families under Universal Credit that would not otherwise be eligible, will also benefit.

Resolution Foundation

resolutionfoundation.org

by Kam Sandhu @KamBass
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