Policy Press, 2013, 1 4473 0894 2, hbk, xii + 169 pp, £65, 1 4473 0893 5, pbk, xii + 169 pp, £21.99
This collection of essays tackles a major issue: the declining living standards of households on low to middle incomes (defined as households in income deciles 2 to 5). Both causes and partial solutions are explored. One major cause of declining living standards is the failure to maintain the value of national minimum wages, but another is the gravitation of the proceeds of economic growth towards households in the upper earning deciles, leaving lower earners struggling to afford mortgages, social care, and, in the US, health care. Partial solutions might be focused training, in-work benefits, more affordable housing, higher national minimum wages, employers paying a ‘living wage’, and jobs of better quality ( – the UK has a better record than the US here, particularly in relation to employment rights for agency and part-time workers). The authors suggest that attending to the politics of the situation is essential, and that an important direction of travel might be asset-based welfare provision such as child trust funds, although some of the current attempts at incentivising asset accumulation tend to privilege the already wealthy.
The volume’s concluding chapter finds the US experience to be worse than the UK’s, and warns the UK to avoid policies that have led the US towards ever greater inequality. A particular lesson to take to heart is that the welfare state, and particularly free health care, has protected lower and middle earners in the UK from some of the worst effects of the economic downturn suffered in the United States: so if the UK wishes to avoid the plummeting living standards of the US then maintaining a strong welfare state is essential.
However, as Lane Kenworthy explains, some elements of the welfare state might be more of a problem than a solution. Tax Credits (and Universal Credit) weaken employment incentives, particularly for second earners, ‘and may in fact make things worse for many families’ (p.40). Daniel Gitterman contributes a detailed study of the United States’ Earned Income Tax Credit, in the course of which he makes a few comparisons with the UK’s Tax Credits. He might have added that the US Tax Credits are close to being genuine (annual) tax credits, whereas the UK’s ‘Tax Credits’ are in fact means-tested benefits, with all the problems usually consequent upon means-testing. In their introduction, the editors write that households with net incomes in the second, third, fourth and fifth income deciles are ‘not heavily reliant on means-tested benefits’ (p.xi). This might be true in the US, but it is not true in the UK, where a high proportion of earners in the second and third income deciles will be heavily reliant on means-tested ‘Tax Credits’.
The book covers a lot of ground, in terms of both diagnosis and prescription. However, diagnosis of the employment disincentives imposed by means-tested Tax Credits is not followed up with any prescription for reform. A benefits system based more on universal benefits would not impose anything like the same level of employment disincentives as the UK’s current system. Child Benefit gets a mention (on p.95: a reference unfortunately not indexed), but only as part of an argument that higher out-of-work benefits reduce employment incentives: a highly misleading suggestion, because Child Benefit is paid at the same rate to households both in and out of employment, and so in no way contributes to employment disincentives. It is the deduction rates related to means-tested benefits that cause such disincentives, not unconditional benefits such as Child Benefit.
The declining living standards faced by households with below median incomes are not likely to see much improvement in the near future, and the volume under review will be a valuable tool as policy-makers consider the reforms that might improve living standards for households in income deciles two to five. Policy makers might also wish to consider the possibility that this section of the population would benefit substantially from the implementation of a Citizen’s Income.