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Social Security and the Growth of the Precariat

30/05/2013

Development Pathways

JustKidding320x163Guy Standing makes a lot of sense in a recent article he wrote for The Guardian. He argues that successive British governments have created a precariat, a growing sector of the population with minimal job security and inadequate access to social benefits. A growing commitment by government to means-test social security benefits – largely driven by New Labour under Blair and Brown – has been a key factor in driving this increasing insecurity.

Tax credits are an interesting example of how poorly designed social security can create perverse incentives. They were introduced by the Labour party as a new form of social security, enabling millions of employees on low wages to receive reductions in the income tax they paid. Yet, tax incentives had the perverse incentive of driving down wages. British employers know that they can pay low wages since government will step in to pay tax credits and subsidise the incomes of the poor.

So, while there have been increasing complaints from the UK’s politicians about the “dependency” of the poor on social security benefits, characterising millions of hard-working people as “skivers” – see link – in reality a dependency culture has been generated among employers. Businesses know that they can pay lower wages – and, therefore, increase their profits – because government will step in to subsidise, through tax credits, their wage bill. This further reduces tax revenue – since, with lower wages, revenue from income tax falls – while increasing the social security budget. With this type of political leadership, it is no wonder the UKs economy is in a mess.

Standing calls for a new model of social protection, which provides everyone with the right to social security and a modest basic income. Such an inclusive approach to social protection will strengthen the social contract, build social cohesion and drive down poverty and insecurity. Relying on means-testing is not the answer. We’ve shown elsewhere – see link – that even though New Labour increased the UK’s spending on tackling child poverty, by focusing resources on the poor they reduced the effectiveness of their spending, by encouraging women, in particular, to remain outside the labour market (they could only get the benefits by remaining poor). In contrast, the countries of northern Europe have been much more inclusive in their approach to tackling child poverty and and, as a result, have had much greater success with similar budgets to the UK.

Inclusive social protection should not be reserved for developed countries. It can also be the model for developing countries. If countries were willing to invest only 3% of GDP, it would be possible to establish a minimum income for the majority of families, providing them with an effective platform for engaging more productively in the labour market. A country like South Africa is showing the way with its system of old age pensions, child grants and disability benefits, ensuring that almost all poor households receive some kind of income support, at relatively low cost to the state. And, as a result, more people are entering into the labour market. 

The meanness of the means-testers needs to be challenged. Minimal levels of redistribution – aligned to more effective tax systems – can deliver inclusive benefits for all. As Standing argues, countries with growing precariats desperately need new forms of social contract that are built on a commitment to inclusive social protection and a minimum income for all. 

 

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