Britain is unique within Northern Europe in having a workforce with an
exceptionally large group of very low skilled workers. That as much as
anything is responsible for the substantial increase in poverty and
worklessness over the past 25 years, according to Professor Stephen
Nickell, writing in the March 2004 issue of the Economic Journal.
So while New Deals and the tax and benefit system can alleviate poverty and
worklessness in the short term, a long-term solution demands that young
people in the bottom half of the ability range get a much better education than
they currently do.
Just over 20% of people in Britain (and 30% of children) are poor, that is,
living in a household whose income is below 60% of that of the average
household. These proportions are substantially higher than 25 years ago. Not
surprisingly, poverty is closely related to worklessness. Two thirds of adults
and three quarters of children who live in workless households are poor, and
make up over a half of all poverty. The rest of poverty is in working
households where those at work do not earn enough either because they
cannot work enough hours or because they are low paid.
So why is poverty so much higher than in 1979?
There are two basic reasons: more workless households and a substantial
rise in the dispersion of pay, so that average pay has gone up relative to the
pay of those at the bottom end.
Looking first at worklessness, the proportion of working age men who work
has fallen and the proportion of working age women who work has risen. But,
by and large, the men who ceased working have been concentrated in
households where they were the only worker whereas the women who started
working were in households where someone else was already working.
Underlying the fall in the employment of working age men has been the
substantial weakening of the labour market for low skilled workers, driven
essentially by technology changes. So job opportunities and pay rates
available for low skilled workers have declined substantially since 1979
relative to pay and opportunities for high skilled workers. As well as
generating increasing worklessness among the low skilled, this change has
also produced a substantial fall in their pay relative to the high skilled. This, of
course, has increased pay dispersion.
So why did these changes not take place in the rest of Northern Europe, at
least to anything like the same extent? One particular reason is that Britain is
unique within Northern Europe in having a workforce with an exceptionally
large group of very low skill workers. For example, over 20% of the population
of working age in Britain are close to illiterate, a number that is less than 10%
in other North European countries.
So as the demand for low skilled workers continues to fall relative to the
demand for the highly skilled, this ‘long tail’ in the distribution of skills in Britain
ensures that poverty and worklessness are going to rise more rapidly than in
countries without such a long tail.
What can be done?
In order to reduce poverty, people in poverty must either earn more, work
more or receive higher transfers. In the long run, the best way of ensuring that
people can earn more is to ensure that they have the skills that command
high pay. In the present context, this means that young people in the bottom
half of the ability range must receive an education that is much better than the
one they currently receive.
In the meantime, however, the obvious short-run method of raising pre-tax
earnings is to pass laws to prevent low pay. The obvious problem with this is
the danger that this will cut the employment of the low skilled, hence raising
poverty from another direction.
An additional strategy is to use the tax system to provide additional benefits to
those on low pay and to use the Employment Service to help people into jobs.
This mixture of tax credits and New Deals is currently moving ahead and it
has contributed to some reduction in child poverty. But it needs to be pushed
much further to have a substantial impact. And given the long tail of the skill
distribution, it will be very expensive.
Finally, of course, for households that do not have the work option, eliminating
poverty can only be done by raising benefits up to the poverty line and
indexing them to average wages. There are two issues here. First, who in
society is expected to work and who is allowed to receive benefits without
looking for a job? This topic arouses great passions but a great deal more
could be done to smooth the path of older, lone parent and disabled benefit
recipients into satisfactory employment.
Second, it is clear that generating a significant reduction in poverty will be
very expensive. North European countries with very low poverty levels collect
at least 10 percentage points of GDP more in taxes than the UK and they
have the advantages of much shorter tails in their skill distributions and higher
overall employment rates. So while it is feasible to move further in that
direction, it seems unlikely that we will get very far without a significant
improvement in skills at the bottom end.
ENDS
Notes for Editors: ‘Poverty and Worklessness in Britain’ by Stephen Nickell,
his Presidential Address to the Royal Economic Society, is published in the
March 2004 issue of the Economic Journal. Nickell is a Member of the Bank
of England Monetary Policy Committee and Professor at the London School
of Economics.
For Further Information: contact RES Media Consultant Romesh Vaitilingam
on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com); or
Stephen Nickell via email: Stephen.Nickell@bankofengland.co.uk