How helping the working poor can deliver economic recovery

December 12, 2012

By Stephen Evans.  The opinions expressed are his own.

Following the Autumn Statement last week, pressure remains on Chancellor George Osborne to tackle the continuing fall in living standards and the growing divide between the UK’s highest and lowest earners.

While battles rage about the nature of the Government’s welfare reforms, it was refreshing to see a growing number of commentators acknowledge that it is not just those out of work that are struggling to get by. Indeed those in work will feel the greatest impact from the Government’s upcoming benefits cap, as tax credits, maternity pay and other in-work benefits are affected.

There are millions of hard-working people and families struggling to make ends meet as prices rise faster than their earnings. In fact, it is now estimated that living standards for low to middle income families in 2020 will be back to the levels of 2000 – meaning no progress in 20 years.

The living standards crunch, coupled with low economic growth, are both long-term  challenges the Government must address as we manage the aftermath of the financial crisis. These are two sides of the same coin: only by helping the economy to grow can we boost living standards and social mobility. Yet the challenge is how to do this in the context of long-term austerity in public spending.

I will join the Shadow Home Secretary and Shadow Minister for Women and Equalities, Yvette Cooper, and a round table of policy makers in the House of Commons to argue that by investing in support to help people on low to middle incomes boost their earnings, the UK can take the first step toward building a strong economy for the future that both creates and shares growth.

So how can helping people get on, rather than just getting by, help the whole of the economy?

The wage gap between top and bottom earners has been growing for 30 years, while those on low to middle incomes have benefited less and less from economic growth. The cause has been global economic changes, such as growth in emerging economies and technological change replacing intermediate jobs and ‘hollowing out’ the labour market, and a decline in union membership giving workers have less bargaining power.

The result has been a polarisation of the labour market, with job growth concentrated at the top and bottom ends. This leaves little room for people to progress.  Because the rungs of the career ladder have moved further apart, there are more households in in-work poverty than are poor due to unemployment. This shift has fractured an implicit social contract in place in the UK since 1945. People’s attitudes to welfare have hardened. Yet surely a bigger challenge than tackling a supposed ‘something for nothing’ culture is tackling the ‘nothing for something’ deal many people on low and middle incomes face – they pay into the system, but don’t get anything from it.

So far, so depressing. But the good news is that none of this is inevitable and even in straightened times there are choices we can make that lead us to different outcomes.
So how can we turn this situation around? My research makes the case for Government to place full employment and living standards at the heart of economic policy. In practice this means that welfare to work programmes should not only help people find and keep a job, but also help the lowest earners to progress into more secure, or higher-paid jobs.

A new ‘Getting On’ service could give 500,000 low-paid workers the skills and support they need to progress in work. Both of these ideas can be paid for through savings in benefit bills as people earn more money and skills funding.

Finally, by consolidating a number of disparate existing funding streams into a single Growth and Opportunity Fund could give Local Authorities power to trial ways of boosting productivity and progression in their respective regions.

It is more than a generation since living standards were so high on the political agenda. In that time, inequality has grown dramatically and social mobility has fallen. This and ongoing economic weakness make this a tough challenge to meet. But redressing the income gap is essential to preparing the UK for a competitive economic future and ensuring everyone benefits from our shared prosperity. The alternative path would lead to a 20 year freeze in living standards. There are clear choices we can make now to build a brighter future.

Stephen Evans, a former Senior Policy Advisor for HM Treasury, is Director of Employment & Skills at Working Links.

Image — Britain’s Chancellor of the Exchequer, George Osborne (L), leaves the Treasury with the Chief Secretary to the Treasury Danny Alexander in central London November 29, 2011. REUTERS/Dan Kitwood/Pool

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