Sunday, January 13, 2019
Record numbers in work, so why is poverty going up?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

What are we worried about? Ipsos-Mori, the pollster, asks a sample of people every month what are the most important issues facing Britain. Its latest poll, released a few days ago, showed that the top two concerns, Brexit and the National Health Service, were as you might expect.

More surprising, perhaps, was the third biggest public concern; poverty and inequality, named by 21% of people, the highest in the more than two decades it has featured in the survey. It was ahead of the economy, unemployment and immigration, public concern over which has dropped to its lowest level since 2002 even though net migration, at 273,000 in the latest 12 months (mostly from outside the European Union), is not that far below all-time highs.

That people are worried about poverty and inequality reflects well on them, even though the usual response from somebody like me would be that it too does not correlate well with the facts. All the reliable evidence on inequality, for example, shows that while it did rise a lot in the 1980s, it has not done so since, and if anything has come down a little since the financial crisis.

As for poverty, sometimes you have to feel sorry for government ministers, though this is not a popular view at the moment. Once it was quite straightforward. Any government would give its eye teeth for the situation Britain has at the moment, of a record level of employment, a near-record employment rate (the proportion of working-age people in jobs) and the unemployment rate hovering around its lowest since the mid-1970s.

When that government is also presiding over significant increases in the national living wage, what used to be the minimum wage, which rose by 4.4% last year and is due to rise by nearly 5% this year, you might think that it had all bases covered. Last year’s increase directly and indirectly boosted the pay of 5m workers.

So why the heightened concern? Some of it may be seasonal. In winter, and in particular in the run-up to Christmas, people are made more aware of poverty. This newspaper’s Homeless in Britain appeal, in association with Crisis, was an example.

But there is more to it than that. On inequality, even though the big rise occurred a long time ago, people are still entitled to take the view that absolute levels of it are too high, even though those levels are not changing very much. There is, too, a difference between what conventional inequality measures show and the perception that the extremely rich are pulling away from the rest of us.

As it is, even conventional measures show what many people would regard as an unhealthily skewed income distribution. Figures from Her Majesty’s Revenue & Customs (HMRC) show that the top 1% receiver 12.2% of pre-tax incomes (compared with 13.9% in 2009-10); the top 5% 24.4% (compared with 26.4%), the top 10% 33.8% (35.8%) and the top 25% 52.9% (55.5%). The richest quarter of the population receive more income before tax than the worst-off 75%.

Inequality concerns are not surprising, even if their rise is a little puzzling.
As for poverty, and this is a point regularly made by the Joseph Rowntree Foundation, the Institute for Fiscal Studies and the Resolution Foundation, we are in an era when a job is no longer any guarantee of prosperity.

The Joseph Rowntree Foundation records that 4m workers are living in poverty, up half a million over the past five years, and that two-thirds of the 4.1m children in poverty are in working households. IFS research shows that 57% of people in poverty are in households where somebody in in paid work, compared with 35% in 1994-5.

How have we come to this? One obvious explanation is that we have been in a period of unusually weak pay growth. Average total pay, in real terms, is still 5% lower than it was at the time of the pre-downturn peak in February 2008, more than a decade ago.

The answer to weak pay growth is stronger productivity, and the latest figures were disappointing, showing a drop in output per hour in the third quarter, for a rise of only 0.2% on a year earlier. It should be noted, however, that pay has underperformed even the lamentable performance of productivity in recent years. Productivity is up by 2.5% since early 2008 but real pay is down by 5%. That said, solving the productivity problem is a key element in reducing poverty.

In theory, the government’s boosts to the minimum wage, including a very significant increase when it was renamed the national living wage by George Osborne, should have bypassed the problem. The paradox of minimum wages, though, is that as a tool for reducing poverty they are blunt and rather ineffective instruments. Many of those on the national living wage live in higher-income households, because the main earner is in a better-paid job.

The other big change has been the interaction of pay and benefits. Tax credits, introduced by Labour under Tony Blair and Gordon Brown, formalised the idea of the government topping up inadequate pay. One of the reasons Labour also introduced the minimum wage was to prevent employers free-riding on tax credits by paying their workers very little and leaving the government to pick up the tab.

But the interaction of pay and the welfare system is not a happy one. In some cases, workers were only prepared to work the minimum number of hours (16) needed to qualify for in-work benefits, even when employers offer them more hours on better pay.

Universal credit is intended to solve many of the problems associated with the current hotch-potch of benefits and tax credits. It abolishes the 16-hour rule. But the further delays in rolling it out, and the very real distress caused to some who have been moved onto it by payment delays, shows that this is at best a work in progress.

Many workers in poverty, reliant on the state for part of their income, often a very significant part, have been subject to for the four-ear cash freeze on most working-age benefits and tax credits which began in 2016. The problems of poverty are, then, genuine, and they are not easy to resolve.

Ministers are not blind to them. While they understandably boast about the success of the job market, and the record employment it has generated, both Theresa May and Philip Hammond have talked about creating an economy that works for everybody.

High levels of poverty, particularly for those in work, show we do not yet have such an economy.