Economic Solutions to In-Work Poverty

Graeme HarrisonAssociate DirectorOxford Economicsgharrison@oxfordeconomics.com

Belfast, 28th May 2014

NICVA Centre for Economic EmpowermentWorking Poverty Economic Conference

Outline

• Background

• Economic and social policy

• Why does in-work poverty exist?

• Challenges for NI addressing in-work poverty

• Solution aims

• Solution options

• Forward-planning, target-setting and economic realism

• Useful research areas

Background

• Nature of UK and NI poverty has been transforming

• Long-term trend has been falling out-of-work poverty and rising in-work poverty

• Working households now make up the majority of those in poverty in UK, more than non-working households; two-thirds of children in poverty are from households where at least one adult works

• NI share of working age adults in absolute poverty at its highest

• There has been much greater success in reducing poverty for non-working household like pensioners and lone parents – have working households been neglected?

• Implication: Getting into work is not a sustainable route out of poverty

• Median household income, poverty rates and labour market indicators have worsened more in NI compared to GB … but NI was living in an economic bubble pre-recession

Background: NI poverty trends

14%

16%

18%

20%

22%

24%

26%

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Working age adults

Pensioners

NI: Relative income poverty (AHC)

Source: FRS

0

50

100

150

200

250

300

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

000s

Working age adults

Pensioners

NI: Absolute income poverty (AHC)

Source: FRS

Background: NI poverty characteristics

CompositionComposition

(000s)%

Economic status of adults in the family

One or more full-time self-employed 16% 64 26%Single/couple, all in full-time w ork 6% 24 5%Couple, one full-time, one part-time w ork 5% 18 9%Couple, one full-time w ork, one not w orking 9% 37 22%No full-time, one or more part-time w ork 13% 55 36%Workless, one or more aged 60 or over 11% 46 17%Workless, one or more unemployed 13% 53 -Workless, other inactive 27% 110 53%Total 100% 406 23%

Working 49% 198Workless 51% 208

Source: FRSNote: Below 60% median income AHC

NI: Low income households (2011/12)

Economic and social policy

• Social and economic policy are traditionally not joined up, for example a lack of connection between national economic and poverty strategies and government departments responsible

• The assumptions that poverty will be solved by trickle down economic growth (the orthodox economist view), and higher income is the sustainable solution to long-term poverty (the social view), are flawed

• Often a lack of consideration of how social policies can deliver economic objectives, e.g. the link between labour market programmes or progressive taxation and growth

• Equally social policy is sometimes designed in a vacuum and is not grounded in business and economic realities

• Together this leads to neither economic or social targets being met

Why social policy should matter to economists?

• Benefits of economic growth do not automatically reach all

• To maintain citizen support for governments

• Highly unequal societies are associated with lower rates of growth and can lead to social tensions

Economic and social policy

What is economic policy?

•GDP

•Exports

•Exchange rates

•Productivity

•Innovation

•FDI

•Competitiveness

•Business environment

•Macroeconomic management

•Fiscal policy

What is social policy?

•State intervention that directly affects social welfare, social institutions and social relations/cohesion

•Social security, health, housing, social care

•Redistribution of income and wealth, equality of opportunity, participation, voice

•Aim to maximise people’s chances of a good life – but what is a good life?

•Social policy can also produce new social institutions, behaviours or norms

•Much more than a limited set of safety nets and services to cover market failure

Economic and social policy: Grey areas

• Taxation and subsidies

• Public expenditure

• Labour market policy (e.g. minimum wage, labour mobility)

• Skills

• Credit market policy

• Pensions

• Regulation

• Migration

Economic policy

Social policy

Economic and social policy: Need for more alignment

• Social policy should complement and work in tandem with economic policy

• Social policy analysts tend to define social policy in relation to, often in opposition to, economic policy

• Those who analyse/develop “economic policy” tend to be economists; those who analyse “social policy” are by and large not economists

• Thinking about objectives and targets - is economic growth a sensible final objective of national strategy, or better as an intermediate objective?

• There is a lack of clarity about the hierarchy of and linkages between objectives, and a lack of distinction between intermediate and final objectives, or rather, too easy an identification of intermediate objectives with final ones on the basis of an implicit mechanism linking the two

• Possible joint objectives - “sustained and sustainable growth in per capita income, accompanied by diversification of production, reduction of absolute poverty, and expanding economic opportunities for all citizens”

Why does in-work poverty exist?

• Note: Work measured at household level

• Low pay and ever lower take-home pay after tax and benefits withdrawn

• Minimum wage below living wage?

• Low working hours / proliferation of part-time, insecure work – many people want to work more

• Lack of progression opportunities

• Too few dual working households

• High cost and low availability of childcare – limits jobs some mothers can take

• Lack of aspiration

• Lack of labour mobility

Challenges for NI addressing in-work poverty

• Long list of legacy and recession-related changes

• Economy faces a number of transitional drivers, many of which are negative and creating new transitional challenges

• Multiple new vulnerable groups

• Current economic data is positive

• But risk of the recovery running out of steam

• Long-term jobs outlook is sluggish, downward pressure on wages

• NI faces the twin challenges of creating lots of jobs and lots of well-paid jobs

Challenges for NI addressing in-work poverty

Historic structural and recession legacy challenges

Historic

High share of working age are economically inactive and have no or low qualifications (low labour mobility) High share of households are workless High share of economically inactive do not want to work and are dependent on benefits as their main income source High cost of childcare Cycle of worklessness and poverty across generations within families and areas; poverty of aspiration High share of young classified as NEETs Low average pay means many working households live in poverty and earn below the living wage; financial returns from

employment are often too low to entice claimants off benefits; in other words creating employment is not a guaranteed exit from poverty

There has been growth in the number of households more at risk of being in poverty such as lone parent and single person households

High rate of fuel poverty Long-standing prevalence of economically lagging areas and regional imbalances Numerous economic challenges including over-dependence on the block grant, limited private sector export base (NI has

been a net loser from globalisation) and competitive weaknesses

Recession legacy

Significant job loss and rise in unemployment, especially amongst the youth, despite the cushioning effect of NI’s large public sector

Squeezed household incomes from downward pressure on wages and upward pressure on the cost of living Upward correction in household saving to reverse past trends and repay debt Negative housing market equity, restricting labour mobility Constrained access to and higher cost of borrowing for households and business Further falling behind in competitiveness as other countries implement more wide-ranging economic reforms such as

ROI

Challenges for NI addressing in-work poverty

Challenges for NI addressing in-work poverty

Solution aims

• Note: Working poor and non-working poor are same people at different times

• Increase pay, including take-home pay – but should be linked to productivity

• Increase working hours for those who want to work longer

• Increase feasibility of more dual working families

• Increase labour mobility

• Increase aspirations for working, pay and progression

Solution options

Policy

•Minimum wage – look at Switzerland’s recent referendum

• Downsides – price out low skilled from labour market, increase unemployment, cost may be passed on to consumer prices, unaffordable for small firms

• But is the welfare system subsidising low wages anyway?

•Working tax credits

•Personal income tax – devolve powers to NI?

•Income top ups

•Labour mobility

•Skills – increase employability, boost productivity

•Child care, including more publicly funded free child care

Institutional

•A poverty strategy

•A poverty agency like ROI

•More joined up and coordinated economic and social policy

•Economic strategy – create different types of jobs?

•Business involvement – what can businesses do to be part of the solution?

•Political commitment and responsibility

•Rebalancing of supply from out-of-work poverty towards in-work poverty

Forward-planning, target-setting and economic realism

• Often strategies are piecemeal and lack the ambition and detailed quantified targets to solve the challenge – they tend to have top-down targets with no bottom-up road map

• There is a need to work back from an ambitious, forward-looking target for in-work poverty• How many jobs need to be created, balance between FT and PT, what pay level, in what location etc

• What changes to tax credit, personal income tax, benefits etc need to be introduced

• And quantify the implications for government• Fiscal implications

• Skills implications

• Child care implications

• Transport implications

• Then consider how realistic the options are – too costly, lack of demand for economic growth sectors, skills mismatch, wage levels unrealistic etc – and reassess ambitions

• Simulate different scenarios

Useful research areas

• Identify countries, ideally broadly comparable to NI, which have significantly and sustainably reduced in-work poverty (or reversed rising trends)

• Why was in-work poverty reduced in these countries? What were the driver economic and social policies? What were the sources and nature of economic growth?

• Understand better the sources and drivers of in-work poverty in NI: low pay versus low working hours; which sectors and occupations

• Consult with business and public sector employers on possible solutions: what is realistic and affordable, where does policy need to change

• Modelling and simulation of different scenarios to observe the impact on in-work poverty – feed findings into strategy

Global analysis for better decisions