Tagged: social protection

Public employment as a protection from poverty

Working in preparation for the budget, I’ve been looking at some stats from the OECD.  I was interested to find out to what extent  public sector employment could be thought of as a way of protecting the economy, and that led me to the nearest approximation I could find,  “Employment in general government and public corporations“.  The figures don’t show any clear relationship to economic performance, but I wondered if they might show a different kind of effect.  Here is a table tracking the OECD’s listings of public sector employment and child poverty.

Employment in general government and public corporations Poverty among children, %, late 2000s
Norway 29.3 5.5
Denmark 28.7 3.7
Sweden 26.2 7
Finland 22.9 5.2
France 21.9 9.3
Hungary 19.5 7.3
United Kingdom 17.4 13.2
Belgium 17.1 10
Canada 16.5 14.8
Israel 16.5 18.7
Australia 15.6 14
Ireland 14.8 11
United States 14.6 21.6
Italy 14.3 12.2
Czech Republic 12.8 8.8
Spain 12.3 17.2
Portugal 12.1 18.7
Netherlands 12.0 9.6
Austria 11.4 7.2
Turkey 11.0 23.5
New Zealand 9.8 12.2
Germany 9.6 8.3
Chile 9.1 24
Mexico 8.8 25.8
Greece 7.9 13.2
Japan 6.7 14.2

There are reasons not to trust the figures here – is child poverty in the UK only 13.2%? – and simple statistics can mislead, but a correlation of the two columns comes out on Excel at -0.56, which is unusually high for social data. It does look as though public sector employment and job creation in the public sector are key elements protecting people from poverty.

Labour is thinking about contributions again

According to an article in the Daily Telegraph, the Labour Party is considering relating benefits to a claimant’s work history. This is not quite the departure it might sound. The Beveridge scheme was based on flat-rate benefits and contributions, but the realisation in the 1950s that other European schemes provided better benefits than the UK scheme led to a rethink. The Party’s proposals for National Superannuation, in 1957, argued for an earnings-related pension – a proposal which eventually led, by a circuitous route, to SERPS and S2P. There used to be earnings-related supplements for National Insurance unemployment benefits and sickness benefit, which were removed by the Thatcher government.

It’s true that an emphasis on work history can lead to uneven, and sometimes perverse, results. People who have a limited ability to contribute, including women with home responsibility or people with long term disabilities, can lose out. People who work abroad are liable to have lower entitlements. There has always been a concern that earnings-relation leads to greater benefits for better-off claimants. But the best benefit systems in Europe – such as Sweden’s pensions, which have been described as ‘selective by occuptional experience’, or Denmark’s unemployment benefits – are often unequal in these terms. Contributions legitimate benefits; destroying the link, and confining benefits to people on low incomes, has made it difficult to defend them against cuts. Those of us who want benefits to be simpler and more liberal may have to compromise.

Protecting the self-employed

Self-employment covers a range of circumstances – not just independent operation, but freelancing, contract work and the evasion of labour rights by employers. It does reflect a change in the character of the labour market, and that in turn presents challenges for the design of benefits. Figures from the TUC show that the rise in ‘jobs’ is actually a rise in self-employment. The numbers of people in employment fell from 2008 to 2010, but have nearly recovered 2008 levels; the numbers of self employed have increased, and 40% of new jobs since 2010 have been in self-employment.

There are three main ways to provide social protection for people who are self-employed. The first is social insurance. The Beveridge scheme largely excluded the position of self-employed people, but it was designed to respond to part-time, casual and flexible working. Unemployment Benefit used to pay people for days not worked – anyone who earned more than £2 as day lost the benefit for that day. The difficulty of extending that kind of provision to self-employed people is that their time cannot be allocated in that way; it is not practical to treat someone who is marketing, training, ordering supplies or preparing materials as if they were unemployed.

The second is the approach in Tax Credits and Universal Credit, which is to supplement income. Tax Credits have had some odd effects; a tradesman who buys a vehicle and reports a loss can get more benefit than someone with lower takings who could not afford to buy a vehicle. The White Paper argued that “Universal Credit will match more closely the structure of today’s labour market, where part time jobs and flexible working are much more common than they once were.” UC is supposed to match benefits to income on a monthly basis. The Institute of Chartered Accountants thinks this is impractical – self-employed people often don’t know what their net income is, and may not have the resources to work it out. The government has decided that self-employed people will be treated as if they have a full-time minimum wage – which blows a hole in the side of any attempt to match support sensitively to income.

The third option is to try to stabilise income, rather than to respond to it. There are not enough benefits that are paid like Child Benefit at a steady rate, regardless of changes in circumstances. If the government is serious about responding to the demands of a flexible labour market, there need to be more.

Labour’s ambivalence

The Labour Party intends to oppose the government’s proposal to cut the real value of benefits, and argues that long-term unemployed people should be offered jobs. This might look like a defence of the benefit system, but Labour is not offering one yet – they know that benefits are unpopular, and their support for the principles is halfhearted at best. Ed Balls is not proposing job creation so much as he is proposing compulsion. He says:

  • “it must pay more to be in work than live on benefits, both for the individual and the Exchequer”;
  • “we must get tough on the scourge of long-term unemployment by matching rights with responsibilities”;
  • “any welfare reforms must be fair to those who are in work or genuinely want to work.”

The first principle has been part of the litany of British politics since the days of the Poor Law. The argument that everyone who is unemployed, wherever they are and whatever their circumstances, must get less than everyone in work, comes from the principle of ‘less eligibility’. The complaint that people are “better off on the dole”, typically on £71 a week, is a convenient excuse to cut benefits. It is not for the benefits system to pay less, it is for the labour market to pay more. We need a living wage.

The second point suggests that long-term unemployment is the responsibility of the long term unemployed person. If unemployment was a choice, some people would be staying unemployed indefinitely; they’re not. The numbers of people continuously long-tem unemployed are tiny (I’ve cited the DWP figures previously).

The third point is that benefits have to be fair “to those in work”. That does not mean, of course, that people who are in work should be protected in the circumstances when they fall out of work – which is what would be fair; it means that poor people should suffer for not working. The judgmental language of strivers and shirkers is repugnant, and it should be avoided. Balls condemns, rightly, “divisive, nasty and misleading smears”. A shame, then, that he has also chosen to emphasise that “we must come down hard on the minority who try to cheat the system – whether that’s through benefit fraud, tax evasion, or simply by drawing jobseekers’ allowance while never seeking a job.”

Behind this position, there is another central misconception that blights both Conservative and Labour policies on benefits. Social security is not mainly about employment or work at all. Two thirds of benefits go to people over working age. Most of the rest goes to people who are getting benefits for reasons beyond unemployment – such as disability, housing costs, low wages and child care. And the surprisingly limited element that goes to protect people who are unemployed is, in the vast majority of cases, delivered for a relatively short time. When governments limit the protection extended to people without work, they’re undermining the rights of citizens. It’s about you and me.

Merkel misses the point on welfare

Angela Merkel, in an interview for the Financial Times, suggests that Europe has to spend less on welfare to be competitive. “If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life.” She cites the problem of competition from other countries: “Other models have long since emerged: China, India, Japan, Brazil, and they will be joined by other countries that are working hard and proving to be innovative.”

She’s missing something important. All the countries she’s mentioned are committed to social support as well as economic development. Japan has long established networks of solidarity; China, Brazil and India have all been extending their systems of social protection. So have other countries she doesn’t mention, such as South Africa, Mexico and Indonesia. Developing security, reducing vulnerability and improving welfare is a large part of what prosperity is for.

Freud on risk

Lord Freud, criticising the “dreadful” welfare system, thinks that poor people don’t take enough risks. There’s a basic distinction to make here between risk and vulnerability. Risk is about the chance that something will go wrong; vulnerability is about the harm that happens when it does. Bankers like Lord Freud can take risks, because they can recover from them if they go bad. Poor people can’t take the risks that bankers do because they’re vulnerable when things go wrong. The point of social protection is to make people less vulnerable; the problem with the personalisation and conditionality he advocates is that it’s making them more so.

Freud dismisses the argument that he hasn’t tried to live on a low income himself: “you don’t have to be the corpse”, he says, “to go to a funeral.” Maybe not, but it’s an awkward place to be if you don’t know who you’re burying.

Does social security spending protect the economy?

It was once received wisdom in economic theory that social security had a beneficial effect on the economy, because it increased at times when demand was deficient. This is from a book published in 1960, Richardson’s Economic and Financial Aspects of Social Security (I have it on my bookshelf):
“The two main benefits that fall in prosperity and rise in depression are unemployment insurance and public assistance payments. They put a brake on books and reduce the severity of depressions. … If social security benefits are paid, business will not decline as far as it otherwise would.”

I referred to this argument briefly in a recent interview, and a note from Adrian Sinfield has encouraged me to look at it a little further. A couple of days ago, the IMF conceded that it has got the multipliers wrong – the extent to which changes in government spending stimulate or depress the economy. (The issue is explained on the TUC’s Touchstone website.) The multipliers are probably between 0.9 and 1.7; they were formerly assumed to be 0.5-0.6. If government spending stimulates the economy, it needs to be increased during a depression; cuts lead to economic decline. The multipliers say how big the effects are. And the size of the error means IMF has been underestimating both the benefits of increased spending, and the harm to the economy caused by cuts.

Social security benefits are not, however, quite the same as public spending – treating them as if they were is one of the central confusions of current policy. Most are transfer payments, meaning that someone gets money which otherwise someone else would have had. Transfer payments should be assumed in the first place to be neutral; they stimulate the economy if the people who receive are more likely to spend it than the people who are paying. It’s likely that this condition will be met, because people on very low incomes can’t save, but the effect is not the same as either government spending financed in other ways, or as spending on infrastructure. Spending money on unemployment assistance makes a modest contribution to stabilisation; spending it on public works or job creation stimulates the economy far more.

Asia’s next revolution

The Economist devotes this week’s cover, and its main leader, to a story about the expansion of social protection in Asia. One of the main unsung tales of the last ten years has been the massive development of social protection in developing economies like South Africa, Mexico, India, Indonesia, China and Brazil – Barrientos and Hulme call it a “quiet revolution”. The Economist article focuses mainly on health care, and Asia has come late to the party. The Economist is probably right to argue that “every country that can afford to build a welfare state will come under mounting pressure to do so.” But then, I would say that: I have argued the case in The Welfare State (Sage, 2000) and some other papers.

The Economist’s leader does, however, make a common mistake. They write: “Europe’s welfare states began as basic safety nets. But over time they turned into cushions.” They didn’t begin that way, and they haven’t finished that way either. The origins of many welfare states lie in the development of solidarity and the mutuals; the state became involved much later. See Peter Baldwin’s book, The politics of social solidarity, Cambridge University Press 1990. The extension of health care, which they focus on, is essential to the maintenance of any modern labour force.

It was the English Poor Law that began as a safety net. The accusations that the British system had become excessively generous can be dated back to the criticisms of the monasteries before the Reformation, but it became a regular part of complaints about welfare from the mid-18th century onwards; it continued in the accusations that workhouses had become ‘pauper places’; and it continues now in the assertion, contrary to all the evidence, of generations who have ‘never worked’. The system is neither generous at an individual level, nor collectively unaffordable. There is extensive evidence of the relationship of welfare to economic performance: there isn’t one. See A B Atkinson, 1995, The welfare state and economic performance, in Incomes and the welfare state, Cambridge University Press, and the entry on my website.

Widowed Parent's Allowance: closing down national insurance

There are so many dimensions to the benefits system that it is easy for smaller parts to be overlooked, but the Government is leaving no stone unturned. The payments made for widows and widowers are no longer quite the same as they were after the Beveridge report, but they are one of the last vestiges of an insurance system where people paid contributions to protect themselves against certain contingencies and were protected by the principle of insurance. Last month, the government issued a consultation paper proposing a reform of bereavement benefits. The consultation paper comments that these benefits tend to have been overlooked when other benefits have been reformed, and aims to bring it into line. In this case, the particular target is the Widowed Parent’s Allowance, which is payable as an insurance benefit, regardless of other income or earnings. The numbers claiming it have been falling – with only 99,000 claimants, all bereavement payments come to about 40% of what they were ten years ago. The consultation paper complains that the existence of WPA can lead to long-term dependency. “The ongoing nature of payments under Widowed Parent’s Allowance, which can continue for up to 20 years in extreme cases, without any encouragement to maintain contact with the labour market, risks creating welfare dependency.” The argument seems to be that an insurance based pension might encourage a select group of people to withdraw from the labour market – but if that is so, why are these criteria not applied to occupational pensions? What it comes down to is simple enough: this government does not believe that the state should provide insurance, and is not content to have benefits which are designed on that basis.

The consultation is open until March 12th.

Financial socialism

There may not be much to chuckle about in the current financial crisis, but complaints in the US about “financial socialism” (e.g. in Forbes magazine) offer Europeans some wry amusement. The US has never really understood what socialism is about; it seems to be some kind of infection, where exposure to a mild but toxic measure, like a publicly funded library or a school, turns people into brainwashed automata. Socialism, in most of Europe, refers to forms of social organisation for collective benefit. Socialists like Robert Owen, R H Tawney or Richard Titmuss stood for principled, moral intervention in social and economic organisation. (I have been puzzled by the number of commentators – like Matthew Paris in the Times – who seem to think that this has something to do with Marxism. Marxism had no time for principled idealism, or for collective groups working together to improve things, or for the idea that governments should intervene to make economies work better. The socialist parties in most European countries had very little to do with Marx – marxist parties in Europe were “communist”, not “socialist”.) The Parti Socialiste Europeen, the largest bloc in the European Parliament, is committed to “principles of freedom, equality, solidarity, democracy, respect of Human Rights and Fundamental Freedoms, and respect for the Rule of Law.” In respect of financial markets, equality, solidarity and social justice implies much more than regulation for greater stability. Whatever one makes of the Paulson plan, “socialist” is not a word that springs to mind.

There is a different word for pragmatic intervention intended to achieve order and stability: that word is “conservatism”. The standard view in conservative thought was powerfully expressed by Edmund Burke (incidentally, as much a supporter of the American revolution as he was a critic of the French one). “Government”, Burke wrote, “is a contrivance of human wisdom to provide for human wants.” The idea that government should take action as needed to regulate, balance and protect people is fundamentally conservative, and it has been a cornerstone of the “christian democracy” of central Europe for sixty years.