From the TUC

Predistribution has to be about more than skills

12 Sep 2012, by Guest in Economics

Over the past week, following Ed Miliband’s speech to Policy Network’ Quest for Growth event, there has been much discussion of the concept of pre-distribution.

My own contribution was limited to an attempt to define the word in one tweet:

“Predistribution = intervening in how the market works to change distributional outcomes before they occur, rather than fix them afterwards”

Simply put the idea is that rather than using the taxation and benefits system to ‘correct’ the inequalities thrown up by the market system, the State should intervene in how the market operates to correct this problems before they arise.

Of course, as Richard has previously argued, there will always be a need for redistribution through the tax and benefit system (something Ed Miliband accepted in his speech). But predistribution remains an interesting idea and a good one.

The idea that work should pay a decent wage and that the rewards from growth should be shared more equally will not be especially controversial to most readers of this blog.

Taking the idea of predistribution seriously would mean addressing one of the major flaws of the UK economy before the 2008 crash – the stagnation of median wages in the five or so years from 2003 and related accumulation of household debt.

But other than a new buzzword, how are has the agenda progressed?

Last night at the Resolution Foundation, US pollster and political strategist Stan Greenberg spoke about his new book ‘It’s the Middles Class, Stupid!’ (middle class used in the American sense of the term, which is roughly equivalent to the British ‘hard-working families’).

Barack Obama, as Stan argued, is now firmly on this territory of the ‘squeezed middle’/predistribution/correcting long-term problems in the economy. His convention speech last week included the following:

And by 2008 we had seen nearly a decade in which families struggled with costs that kept rising but paychecks that didn’t, folks racking up more and more debt just to make the mortgage or pay tuition, put gas in the car or food on the table. And when the house of cards collapsed in the Great Recession, millions of innocent Americans lost their jobs, their homes, their life savings, a tragedy from which we’re still fighting to recover.

One difference between British and American politics is that whilst Obama might be able to get away with identifying a problem and talking it up without offering much in the way of policy solutions, it is unlikely that a British politician could do the same.

Pointing out that too many of the rewards from growth in the years before the crash went to those at the top is one thing, suggesting ways to address this is quite another.

And this is the problem with the predistribution agenda as it stands. It is ofcourse early days yet and there is more time to flesh out some detail but  Miliband’s speech, in as much as it offered solutions to the predistribution problem, concentrated on skills and human capital:

Predistribution is about saying:
We cannot allow ourselves to be stuck with permanently being a low-wage economy.

It is neither just, nor does it enable us to pay our way in the world.

Our aim must be to transform our economy so it is a much higher skill, higher wage economy.

Think about somebody working in a call centre, a supermarket, or in an old peoples’ home.

Redistribution offers a top-up to their wages.

Predistribution seeks to offer them more:
Higher skills.
With higher wages.
An economy that works for working people.

This prompted Chris Dillow to ask:

Is Ed Miliband stuck in a 1990s timewarp? I ask because his idea that predistribution entails “a much higher skill, higher wage economy” seems too wedded to New Labour’s excessive emphasis upon human capital as a force for inequality.

To an extent, I can see where Chris is coming from. To quote the 1997 Labour manifesto:

There is no future for Britain as a low wage economy: we cannot compete on wages with countries paying a tenth or a hundredth of British wages.

We need to win on higher quality, skill, innovation and reliability. With Labour, British and inward investors will find this country an attractive and profitable place to do business.

Not especially different from last week’s speech.

The problem is of course that simply giving people higher skills and hoping these lead to higher wage jobs doesn’t necessarily work.

The following chart, from Resolution’s James Plunkett, quite clearly demonstrates that increasing skills (and hence productivity) is not going to be a panacea to the problems of low wages.

So, whilst no one is going to argue that increasing skill levels, improving human capital formation and boosting productivity are not good and worthy aims, I remain to be convinced that this will lead to the wage growth (in the middle and below) that we need to see.

To do that requires other solutions. The most obvious (as argued last week by Tim Page and Paul Hackett in two excellent posts) is extending collective bargaining and generally ‘boosting the bargaining power of workers’.

Another would be the James Meade/John Rawls agenda (as outlined by Martin O’Neill today) of not only seeking to boost wages but as widening asset ownership.

Talk of boosting the minimum wage/supporting a living wage is welcome, but is unlikely to do a great deal for median earners.

I’ve argued that ‘rebalancing the economy’ (sectorally, regionally and by rebalancing the rewards from growth) can’t be achieved by just the traditional levers of monetary and fiscal policy. Nor can an adequate ‘predistribution’ of income be achieved just through skills policy.

I think predistribution is a very interesting and worthy agenda, but to truly succeed it will have to be ambitious.

2 Responses to Predistribution has to be about more than skills

  1. theuxbridgegraduate
    Sep 12th 2012, 7:49 pm

    There is one contribution that the tax system can make towards pre-distribution.

    Limiting the amount of remuneration that can be deducted for corporation tax purposes to £50k should exert downward pressure of top pay. Limiting tax deductibility of top salaries this way will transfer some of the cost of excessive remuneration from society to shareholders. This is because corporation tax system effectively subsidises excessive top pay by allowing it to be deductible for tax purposes.

    The shareholders will then have a choice. They can continue with their current remuneration policies, which they will do if they believe the policies are good value for money, or they can act to reduce excessive remuneration. The former will increase the corporation tax liability, which falls ultimately on shareholders, but without hitting top pay. If the latter course is taken then shareholders will be able to drive up their company’s post-tax income, from which dividends are paid, by driving down top pay towards the £50k threshold.

    I accept this policy may be just one piece of a jigsaw and not a complete solution. But by altering shareholder calculus through the tax system does have the merit of being a market solution that encourages shareholders to be more active in curbing excessive pay. Hence it is pre-distributive.

  2. James McLaren
    Sep 13th 2012, 2:07 pm

    The problem is of course that simply giving people higher skills and hoping these lead to higher wage jobs doesn’t necessarily work.

    Quite so. Part of the problem is undoubtedly that people with skills and/or bright ideas who don’t have money are unable to turn them into jobs, and are also these days unsurprisingly reluctant to bet the family home on being able to start something going. We need a major overhaul of finance in this country to change this, combined with proper strategic thinking about the best ways forward for British industry.