Speech

Living standards, working poverty and social mobility

In a speech to the Resolution Foundation Alan Milburn calls for more action to restore the link between economic growth and earnings

The Rt Hon Alan Milburn

It is part of Britain’s DNA that everyone should have a fair chance in life. Yet too often demography is destiny in our country. Being born poor often leads to a lifetime of poverty. Poor schools ease people into poor jobs. Disadvantage and advantage cascade down the generations. Over decades we have become a wealthier society but we have struggled to become a fairer one.

The global financial crisis has brought these concerns to the fore. In its wake a new public consensus has begun to emerge that unearned wealth for a few at the top, growing insecurity for many in the middle, and stalled life chances for those at the bottom is not a viable social proposition for Britain. As birth not worth has become more a determinant of life chances, higher social mobility – reducing the extent to which a person’s class or income is dependent on the class or income of their parents – has become the new holy grail of public policy. These are developments I regard as most welcome.

Last month my Commission issued our first annual state of the nation report to Parliament. In it we acknowledge that these are challenging times in which to make progress. Britain faces a triple squeeze: on economic growth, family incomes and public spending. In these circumstances it would have been all too easy for Government to abandon the aim of ending child poverty by 2020 and to avoid the long hard haul of making progress on social mobility. We believe the UK Government deserves credit for sticking to these commitments and making new ones. The test we apply, however, is not about good intentions. We take those as read. It is about whether the right actions are being taken.

There is much to welcome in what Government, employers, schools and universities are doing. We see considerable effort and a raft of initiatives underway. The question is whether the scale and depth of activity is enough to combat the headwinds that Britain faces if we are to move forward to become a low poverty, high mobility society. The conclusion we reach is that it is currently not. We conclude that the statutory goal of ending child poverty by 2020 will in all likelihood be missed by a considerable margin, perhaps by as many as 3 million children. We conclude too that the economic recovery, of which we have seen further evidence in today’s jobs figures, is unlikely to halt the trend of the last decade, where the top part of society prospers and the bottom part stagnates. If that happens social inequality will widen and the rungs of the social ladder will grow further apart. Poverty will rise. At best, mobility will stall. At worst, it will reverse.

To avert this we believe that policy-makers need to come to terms with a new truth that emerges from the mass of evidence contained in our Report. Although entrenched poverty has to be a priority - and requires a specific policy agenda - transient poverty, growing insecurity and stalling mobility are far more widespread than politicians, employers and educators have so far recognised.

Too often – in political discourse and media coverage - these issues are treated as marginal when in fact they are mainstream. Poverty touches almost half of Britain’s citizens at some point over a nine-year period. The nature of poverty has changed. Today child poverty is overwhelmingly a problem facing working families, not the workless or the work-shy. Two-thirds of Britain’s poor children are now in families where an adult works. In three-quarters of those households someone already works full-time. The principal problem seems to be that those working parents simply do not earn enough to escape poverty. If we are to successfully tackle poverty and increase mobility we will have to do much more, as a nation to help the working poor of Britain.

There is a growing cohort of low and middle-income families squeezed between falling earnings and rising house prices, university fees and youth unemployment, who fear their children will be worse off than they have been. The proportion of 25-34 year olds owning their own homes has fallen from around 60% to 40% in just a decade. Too many able children from average income and middle class families – let alone low-income families – are losing out in the race for the top jobs. A society where opportunities are frozen rather than fluid hurts more than those at the very bottom end. It hurts the people President Clinton once famously called the ‘forgotten middle class’.

There is a glass ceiling in British society – and more and more people are hitting it. Whether it is law or medicine or journalism or politics the upper echelons of Britain are dominated by a social elite. One third of MPs, half of senior doctors and over two thirds of high court judges all hail from the private schools that educate just 7% of our country’s children. The data is so stark, the story so consistent, that it has all the hallmarks of social engineering. Sir John Major is right to be shocked. Elitism is entrenched.

Where Sir John is wrong is to argue this is the consequence of the actions of any one government. Deep-rooted inequality and flatlining mobility have been decades in the making. Some say it is an impossible task to undo them. I do not succumb to that pessimism. There is no natural order that makes our society like it is. Of course there is no single lever that on its own can make a nation more socially mobile. No single organisation can make it happen either. All sorts of things make a difference. Family networks and parenting styles. Careers services and school standards. Career development opportunities and university admission procedures. But the key is employability and education.

Social mobility speeded up in the 1950s thanks to a big change in the labour market. The shift from a manufacturing to a services economy drove demand for new skills and opened up new opportunities for professional and white-collar employment. More room at the top enabled millions of women and men to step up as a consequence. Social mobility has slowed down in the decades since primarily because of another big change in the labour market: the move to a more technologically-based knowledge economy. Since the 1970s technological change has been skills-biased. People with higher skills have seen large increases in productivity and pay while those with low skills have experienced reduced demand for labour and lower average earnings.
This is not a peculiarly UK phenomenon. It is a trend that afflicts the developed world. The polarization into what the Work Foundation calls “lovely jobs” and “lousy jobs” first saw wages at the bottom end of the labour market become disconnected from GDP growth in countries like America and Canada. More recently the same has happened in Australia and Britain. Now it is happening in Germany and France and, to a lesser extent, even the Nordic countries. In most developed countries there has been a declining share of economic growth going to labour (and a higher share to capital) at the same time as there has been growing wage inequality. In the UK, the share of national income going to wages of workers in the bottom half of the earnings distribution decreased by a quarter between 1979 and 2009.
Over recent decades, increases in zero hour contracts and self-employment, the decline of collective bargaining and strong trades unions, the collapse of internal careers ladders - in part a consequence of increased outsourcing and specialisation within firms – and the replacement of jobs with technology have all impacted opportunities for low paid workers to progress. Work just published by the Resolution Foundation finds there are 320,000 workers, overwhelmingly women, who have been trapped at the minimum wage pay level for five years or more and 140,000 for 10 years or more. But it is not just workers at the bottom who are being affected. These same forces are hollowing out the middle of the labour market and it is likely that as the cost of computing power continues to fall technology will replace many more middle-class jobs that rely on repetitive and routine tasks. Or at least make them less valuable in the labour market. In other words, the earnings squeeze already felt by people at the bottom could increasingly spread to those in the middle.
Across the developed world, we are witnessing a profound change in the labour market. This change is being experienced as a cost of living crisis by many families in our country. As their wages stagnate, prices - of energy, food, housing - roar ahead. Living standards are falling. Public anger is rising. And politicians are scrambling to keep up. It is welcome that the cost of living issue is now high on the political agenda. The problem is that the answers that the political parties are reaching for – whether caps on gas bills or more competition in the energy market – can, at best, provide only short-term respite. What is lacking – across the political spectrum - is a long-term answer about how the gap between earnings and prices can be closed. With inflation and interest rates across the developed world at record lows the cost of living crisis is as much a problem of falling earnings as it is of rising prices.

Without corrective action the risk is that the UK’s economic recovery, though welcome, merely perpetuates a decade-long decline in real earnings. Even at the height of the boom in the 2000s earnings were stagnating. The changes we are seeing in the labour market and the experiences of the last decade suggest that the old assumption of a tide of economic growth causing all boats to rise may no longer hold. Economic growth has become decoupled from earnings growth. That has profound consequences for our prospects of Britain becoming more mobile and more fair. A recovery that sees national wealth rise might be an economic success but if earnings fall it will be a social failure.

Just as the UK government has focused on reducing the country’s financial deficit it now needs to redouble its efforts to reduce our country’s fairness deficit. All parts of society have had to shoulder the pain of fiscal consolidation. In turn all parts of society should share fairly in the proceeds of renewed economic growth. It should be a new and explicit objective of government policy to re-forge the link that has been broken between economic growth, average earnings and social fairness. That will require new thinking and some new approaches.

For decades the public policy focus has been on moving people from welfare into work. With 2.5 million people still unemployed and appallingly high levels of youth unemployment renewed effort is still needed there. A job remains the best safeguard against being poor. But it is not a cure for poverty. Today the UK has one of the highest rates of low pay in the developed world. Five million workers, mainly women, earn less than the Living Wage. Outside of London, it is £7.65 an hour, hardly a King’s ransom. These are the people that heed the urgings of politicians of all hues to do the right thing, to stand on their own two feet, to strive not shirk. They simply do not earn enough to escape poverty. The working poor are the forgotten people of Britain. They desperately need a new deal. Of course, many more children in working families would be in poverty were it not for the State supporting their incomes. The cost of tax credits for families who are in work was almost £20 billion in 2011-12. My Commission estimates that the cost of Housing Benefit for families who are in work could be as high as £3 billion. During the late 1990s and early 2000s, public spending through higher tax credits effectively subsidized stagnating earnings and propped up living standards. In fact government-funded tax credits were the only substantial source of real income growth for low- to middle-income households between 2003 and 2008. Austerity removes that prop. Quite simply, the taxpayer alone can no longer afford to shoulder the burden of bridging the gap between earnings and prices.

Across the political spectrum more and more questions are being asked about a system in which half of families with children have their incomes supplemented by the State even though they are in work to compensate for employers – many of whom are making large profits – simply not paying their staff enough to live on. We concluded in our Report last month that the time is right for Government to devise new ways to share the burden of bridging the gap between earnings and prices with employers in a way that is consistent with growing levels of employment.

Clearly, there are tensions and trade-offs that will need to be made. That is why we argue government, employers and trades unions should collaborate on a new low pay strategy for Britain. The Resolution Foundation has done excellent work mapping out some of the areas where progress is needed. Key elements could include raising the national minimum wage which today is worth £1,000 less in real terms than in 2008; considering the merits of a sector-based approach to raising minimum pay levels as they do in Australia; reducing the direct and indirect taxes that low paid workers face in order to boost their net incomes; and encouraging and incentivising more employers to pay the Living Wage. As a first step Government could deploy more muscular transparency to promote higher wages: it could change the law to require firms to publish pay ratios as well as the number of staff earning below particular hourly pay benchmarks. And it could change how Job Centre Plus and Work Programme providers are incentivised so that they are rewarded for the earnings people they help receive not just the jobs they are found.
These are short-term steps. The long-term solution to how Britain can overcome its low pay problem is likely to lie in improving skills so that Britain has many more high quality jobs that will allow us to compete successfully in the expanding global markets for high-value goods and services. That will require employers to more consciously invest in skills, training and career development for their workforces. Outside of the workplace my Commission believes there are four other key steps we need to take if all parts of society are to share fairly in the proceeds of economic growth.

First, extending early years’ education. The OECD evidence shows that child poverty is lowest and social mobility is highest where parents can rely on universal, quality and affordable childcare. Early education packs a double punch. It positively impacts children’s development and it enables more parents to work. Having all parents in a household in employment massively reduces the chances of a family being in poverty. Widely available, affordable childcare is the best means of securing income for a family, since it dramatically lifts the maternal employment rate. This is the conclusive evidence from the experience of the Nordic countries. In Scandinavia child poverty rates are less than half of British rates. Year by year we are making progress as a nation to extend and improve early years education but what we lack is a long-term plan for doing so. Government should devise one.

Second, closing the attainment gap between better-off and less well-off children in schools. For a long-time it was widely accepted by governments and publics alike that – when it came to learning - deprivation was destiny. Better off children would naturally excel. Poorer children would naturally fall behind. We now have extensive evidence that such social determinism is plain wrong. Countries as different as Canada, Poland and Singapore have demonstrated a great track record in raising attainment levels across their societies. In our country only 36% of children on free school meals – roughly the poorest sixth in society - get good results at aged 16 compared to 63% of other children. But over the last decade or so educational inequality has narrowed. Progress has been most startling in London where pupils who are entitled to free school meals now have attainment at the age of 16 which is 50 per cent higher than free school meal students elsewhere in the UK. London used to have some of the worst state schools in the country. Today they are among the best. That not did happen by chance. A decade of effort to raise standards and recruit good teachers has paid off. But it is not enough to lift children off the bottom. More needs to be done to get them into the top. So Government should ensure that raising standards and closing attainment gaps are the twin objectives for all teachers and all schools through the standards it sets, the inspection regimes it sanctions, the league tables it publishes and the reward mechanisms it deploys. Critically, it needs to incentivise the best teachers more to teach in the worst schools, including through higher pay.

Third, ensuring fair access to higher education and vocational training. In the most mobile societies students are helped to make the transition to employment, via higher education for the most academically able and via vocational education for those wanting to develop their technical skills. In Britain by contrast we face twin challenges - unequal access to higher education and a low priority being accorded to vocational education. When four private schools and one college send more students to Oxbridge every year than 2,000 state secondaries it is obvious that schools and universities need to do far more to ensure doors are open to a wider pool of talent. Meanwhile public policy, which for decades has prioritised university education over vocational education, desperately needs to devise a long-term plan to address the lower funding and greater complexity that “the other 50%” of young people face. Further education is less generously funded than higher education and has been subject to large cuts. Many FE colleges do sterling work but 1.5 million learners are in provision that is rated less than good. Alison’s excellent report points the way to a more demand-led system, where, for example, colleges are paid according to the outcomes students achieve rather than simply the numbers they recruit. And we look to Government to lead a national effort to end long-term youth unemployment - now at a 20 year high - by providing new job guarantees and by helping half of all employers to provide work experience or apprenticeships.

Fourth, opening more doors to a career in the professions. The upsurge in professional employment in the middle of the last century created an unparalleled wave of social mobility in Britain. It created unprecedented opportunities for millions of women and men to move up and get on. Today, 42% of all employment in the UK is in the professions. That is set to rise to 46% by 2020. The professions will account for over 80% of employment growth in Britain in the next decade. The question is whether the growth in professional employment is creating a new social mobility dividend for our country. The short answer is not yet. At the top, the professions are dominated by a social elite. But it is not much better at the bottom. Last month we published new data about the social profile of doctors. One-third were privately educated. The pattern is similar amongst law students. Action is long overdue here. Take internships. They are a new rung on the professional career ladder. But they tend to go on the basis of who, not what you know. In professions from medicine to journalism most interns are still recruited informally, so favouring those in the know and those with connections. Most internships are also unpaid, so disadvantaging those from less affluent backgrounds who cannot afford to work for free for any length of time. Last month we called on professions from law to medicine, politics to journalism to end the practice of unpaid internships. And we called on our country’s top employers to broaden the range of universities from which they recruit.

These are all challenging proposals. They are a challenge not just to national and local governments. But to employers and professions, councils and communities, schools and universities alike. A far bigger national effort will be needed if progress is to be made on reducing poverty and improving mobility. Economic recovery is not enough. Britain needs a social recovery too. That will require leadership at every level. Government cannot do it alone. But it does have a special role to play in setting the framework for policy and mobilizing the country to action. Despite the tough climate for doing so I believe that progress can – and must – be made. If Britain is to avoid being a country where all too often birth determines fate we have to do far more to create a level playing field of opportunity. That has to become core business for our nation.

Published 15 November 2013