Guest post: The precariat needs a basic income | FT Alphaville

Guest post: The precariat needs a basic income

By Dr. Guy Standing, professor of development studies at the School of Oriental and African Studies and author of The Precariat: The New Dangerous Class, in which he argues that society must share the rental income gained by finance and capital investment in the global economy.

All over Europe, the precariat has grown sharply since 2008, although this emerging class, which has education but only intermittent, unstable labour, has been growing since the beginning of globalisation. The precariat faces chronic uncertainty, about what to do, about what incomes to expect, about state benefits that might be their due, about their relationships, their homes and about the occupations they can realistically expect.

Many are bewildered by lack of control over their time, suffering from what should be called a precariatised mind, not knowing what to do to give themselves a chance of a dignified life. Worst of all, they are learning that a large class of people habituated to a life of unstable labour is wanted by the globalised market system.

The precariat is not part of the squeezed middle, and accordingly has faced an increasingly hostile social protection system. Across Europe, not just in the UK, the old Beveridge and Bismarckian variants of the welfare state have been dismantled. In their place has been erected a mish-mash of means-tested, behaviour-tested social assistance, with a growing tendency to force young unemployed into workfare schemes, which are helping to depress real wages.

There is the rub. Globalisation began what should be called the Great Convergence, creating a globalising labour market in which wages in emerging market economies slowly converge with wages in rich economies, generating a steady drop in real wages across Europe.

Technological change has helped, by making production more scattered and mobile. But the drop in wages in the lower end of the labour markets of the UK and elsewhere, including Germany, reflects the cruel economic logic stemming from the trebling of global labour supply since the 1980s. Making it more painful is the fact that productivity is rising rapidly in those emerging market economies.

A feature of the globalising labour market is that the old link between productivity and wages stopped in the 1980s. Up to then, a graph of productivity growth and wages showed the two lines moving together. Since then the curves have diverged, leading to economists referring to the opening jaws of the snake – the wage curve has been flat or declining, the productivity growth curve has been accelerating northwards.

(Chart courtesy of the Economic Policy Institute.)

Governments have acted like Canute, trying to hold back the waves of downward pressure on real wages, through cheap credit, labour subsidies and the scam of the era, tax credits. But, to mix metaphors, the Faustian bargain this represented, by allowing an orgy of consumption, ended with a bang in 2008.

Since then, poverty, inequality and economic uncertainty have all risen remorselessly. Even if economic growth picks up, that will continue until governments change their thinking quite dramatically. Regrettably, there is not much intellectual courage around in our political establishment.

The current great white hope is the living wage. It is a good idea being oversold. In the UK, Ed Miliband has promised to introduce fiscal subsidies for “employers” (probably not including small firms) if they pay new employees the hourly living wage, which is higher than the statutory minimum wage. It sounds attractive to non-economists and politicians. Let me be a spoil-sport and be one of the first to predict it will lumber in for the first round, connect with a few hits and then prove a costly way of generating little benefit to a tiny fraction of the precariat.

Why? First, there are always huge deadweight effects with such subsidies. In other words, many of the tax rebates will go to employers who would have paid that wage anyhow. So, for every job actually created the fiscal cost will rise.

Second, there will be huge substitution effects. Employers will displace some employees with new hires who will entitle them to the tax rebate. That will hardly be fair. But again it will raise the effective cost of each extra job funded by the scheme.

Third, a wage subsidy lowers the dynamic efficiency effects of a normal wage rise. If, for example, labour costs rise as a result of a wage rise induced by bargaining, an employer will be under pressure to raise productivity. If the wage rise is financed by a subsidy, there is no such pressure. It is called the soft budget constraint.

Fourth, increasingly labour is being externalised, so that more and more workers are labouring from a distance, making it harder to ascertain what hours are being worked and what are being remunerated. Already, many workers are paid part-time but expected to labour many more hours. So, if an employer wants to put someone on the living wage, he can simply shorten the contractual hours.

Being entrepreneurial, employers will always stretch the rules. It is possible that the living wage will prove regressive, expensively worsening inequality in the lower rungs of the labour market. One hopes not, but it will not strengthen the bargaining position of the precariat one iota.

Living wage advocates should not misread this. We should favour the campaign. But it should not be oversold or financed by subsidies to employers, to capital. This was the folly of New Labour and its tax credits. It is the inequality that should be the primary target for reforms.

This leads to an option that should tick the boxes of progressives, once they accept that labour subsidies, tax credits and workfare are an ugly concoction that worsens inequalities.

Progressives and disillusioned social democrats should reflect on the thought that each type of economy has a distinctive system of distribution. Twentieth-century welfare state capitalism was historically unique, in that national income was split between wages and profits, labour and capital.

With globalisation, the share going to labour has withered everywhere, in countries as diverse as China, India, the UK, USA and Norway. In the future, the only way those relying on labour could raise their living standards will be by sharing the rental income gained by finance and capital investment in the global economy. We must imagine a new system of distribution, in which the whole of society receives a share of the rental income currently being taken wholly by financial capital.

This could be done by establishing a universal floor of basic security, through provision of a basic income for all resident citizens, or all legalised residents. It could start at a modest level, as it was in Alaska when it set up its Permanent Fund in 1976. It could be built up as subsidies to the rich and to large corporations were phased out.

It could have a fixed component set to rise as national income per capita rose, set by an independent committee, analogous to the current monetary committee. And it could have a second component, perhaps 20 per cent of the total, which could be adjusted counter-cyclically so as to make it a macro-economic stabiliser. It could even be labelled an Economic Stabilisation Credit (ESC), to give it legitimation.

Moves in this direction could be made by phasing out the array of regressive subsidies that never reach the precariat. It could also be partially funded by a Sovereign Wealth Fund, as now exist in over 60 countries. The Norwegians set one up with their North Sea oil, whereas Britain’s oil has ended up largely owned by Chinese state capital. But however funded, nobody should be allowed to deceive us by saying it is unaffordable. Soon it may be essential. Remember the billions given out to the failed banks?

Among the many benefits of moving towards an individual, unconditional basic income, or an ESC, would be that it would provide the precariat with an increased incentive to labour, whereas today millions of people face the opposite, confronted by poverty traps and precarity traps, as discussed in my recent books.

In the UK, the main poverty trap facing the precariat is a marginal tax rate of over 80 per cent, according to the government’s own estimates. If we are to believe Ian Duncan Smith, it might fall to 65 per cent if the ill-fated universal credit is ever implemented successfully. Meanwhile, the government eagerly cuts the tax rate for the rich to below 40 per cent, claiming that anything higher would be a disincentive to work and invest. And they wish to cut corporation tax to 20 per cent.

With a basic income, there would be no poverty trap. All earned income could be taxed at the standard rate, after tax allowances are taken into account. Today, the precariat has no incentive to take low-paying jobs of the type that will proliferate. So Duncan Smith resorts to coercion instead, with heavy-handed sanctions against the precariat, denied any due process. It is a shoddy way to treat people, and all of our major political parties support it.

There are other reasons, ethical and instrumental, for supporting a move towards a basic income. Psychologists (e.g., Frohlich and Oppenheimer, 1992) have shown that people with basic security work harder, are more productive, and are more altruistic and tolerant. They also have more confidence, which means they will be more likely to bargain for decent wages and working conditions, and join organisations that wish to do so. And people with basic security do more work that is not labour, such as caring for relatives and their communities. In having more control over their time, they can be more rational and plan their lives better. Progressives should wake up.

Anybody who thinks this might be a valuable move should sign the European Citizens’ Initiative . With enough signatures, the EU Commission will be obliged to examine its feasibility.