The UK minimum wage and Universal Credit: more austerity or new foundations for economic security?

The following are my comments in response to a (good) debate on recent social policy changes in the UK on the website of their Social Policy Association. Social policy experts there are grappling with how to respond to the British Government’s budget which raised minimum wages and cut tax credits for low paid workers while continuing the roll-out of the new income support payment called Universal Credit. What are we to make of this ambitious re-shaping of income protection of low paid and jobless workers in the UK? There are lessons here for us in Australia and (as I argue) some lessons from Australian policy experience for the UK.
Here are the links for websites of the Australian Social Policy Association and British Social Policy Association. People with an interest in social policy ideas and debate should think about joining!

The continued roll-out of the Universal Credit, the so-called ‘living wage’,  and the Conservative Government’s shift away from the working tax credits introduced by Labour together represent a major restructure of income support for low paid and jobless workers in the UK.
A key short-term goal of these changes, announced by the UK Government’s 2015 Budget, is to cut the ‘welfare’ and tax credit budget. As part of a wider ‘austerity’ strategy to restore the Budget to surplus, they have attracted widespread criticism for reducing overall levels of public support for people at risk of poverty. From the standpoint of people’s living standards today, this criticism is justified.
While the short term impacts are negative, two elements of the new policy – Universal Credit and a higher minimum wage, are potential building blocks for a decent social minimum (income). I would add a third: supplements for additional living costs (see below).
The UK seems to be moving closer to Australia’s system of minimum income protection, with a higher minimum wage and a social assistance system that supplements part time work. The strategy seems to be to shift the costs of a decent minimum income for a single adult employed full time back to employers, while re-structuring public income support to support those in low paid part time jobs (and retaining additional public support for families with children).
I can’t speak from a UK perspective but it strikes me that if well designed and adequate this could provide a robust framework to protect people from poverty in a world where returns from work are less certain than in the past.
A minimum wage
The starting point is a minimum wage sufficient to achieve a decent living standard, well above poverty levels, for a single adult with no children and low housing costs. In the absence of in-work benefits for all workers regardless of family status (which can be costly, put downward pressure on wages, and generate high effective tax rates as they are phased out) this must be well above income support levels to preserve work incentives. This is consistent with the idea of a ‘living wage’ – which Australia comes closer to achieving with a minimum of approx. $30,000 p.a.
Progressive increases in the minimum wage in the UK (and here) do not appear to have dented employment growth. One reason for this in Australia is the high incidence of part time employment (so that employers can use low skilled labour more productively). One downside is the potential for growth in contingent (casual) work, the incidence of which is also high in Australia.
A social minimum
Next comes the social minimum – income support payments for adults out of paid work. This should be adequate to prevent poverty for a single adult and couple, respectively. Ideally, maximum rates of payment would be based purely on need and not distance from employment (in Australia ‘pensions’ are $170 per week higher than ‘allowances’ on the grounds that people with disabilities, parents of young children and carers were ‘unable to work’. As they discovered that many more people were ‘able to work’, successive Governments have saved money at the expense of people with disabilities and sole parents by shifting them from pension to allowance payments.
In this regard the new payment structure in the UK – Universal Credit – is an advance on our system. This payment, which is being slowly rolled out to replace a multitude of working-age income support payments, is the new income support ‘floor’ for jobless households in the UK. It will also replace the ‘Working Tax Credit’ for low-paid full time workers. Australia is still stuck with a complex and antiquated income support system that divides people (mostly artificially) into ‘pensions’ for people ‘unable to work’ and ‘allowances’ for those ‘able to work’.
Of course, there’s an argument to be had over the adequacy of the Universal Credit. Together with minimum wages, it should be high enough to shield people from poverty (which it’s not). Other UK benefit ‘reforms’, including changes to disability benefits and arbitrary ‘caps’ on maximum payments for families, have overshadowed the Universal Credit and attracted justified criticism. But these changes are separate from the Universal Credit.
The social minimum has another purpose: to supplement part time work, especially when combined with care. The income test for Universal Credit facilitates this is in a way that the previous system did not: it pushed people directly to full time employment.
In Australia, for the abovementioned reasons about half of all low skilled jobs are part time. If these are subsidised by part payment of income support, it’s possible for people to avoid poverty while engaging in other activities (e.g. training, care, transitions to retirement) to further their life goals. Of course the low paid end of the labour market is not pretty in any country, and there’s a risk people will become stuck. But properly paid part time work is better than badly paid fulltime work (minimum wage earners in Australia work about three days a week for the same money a US worker gets for five days work). The long-term solution to the churn between benefits and low pay is investment in education and training and encouragement of employers to provide ‘intermediate jobs’ above entry level positions.
The income test taper for Newstart Allowance in Australia is similar to Universal Credit (60%). For payments for parents and carers, it is more generous (40% or 50%).
We need to move beyond the old idea that ‘work’ and ‘welfare’ are separated by a chinese wall (whether this takes the form of the old male ‘breadwinner model’ or use of tax credits in lieu of benefits to supplement low pay because payments made through the tax system are considered more ‘respectable’).
Supplements for additional living costs
Payments for additional costs above the social minimum – children, rent, disabilities, caring, sole parenthood – are needed to prevent poverty where these costs are incurred. Ideally, these would also act as wage supplements for full time low paid workers.
The Family Tax Benefit in Australia is separate from income support payments for adults, and a single income family on the minimum wage receives the same amount as a family out of paid work. This reduces in-work poverty and strengthens work incentives.
It is also fairer than those earned income tax credits which offer more support for families in low paid work than those who haven’t been fortunate enough to find any (e.g. in the US, New Zealand, and the previous UK system). The Family Tax Benefit provides greater in-work support for families on the fulltime minimum wage than in most other countries. Since it is conditional on family status, it is likely to have less impact on the adequacy of minimum wages than a generic in-work payment or tax credit.
On the other hand, at a maximum of $60 per week our Rent Assistance is parsimonious compared with the UK Housing Benefit.
Fit for purpose
Both here and in the UK, these three basic building blocks for a social minimum are needed if we are to adapt to a changing labour market, gender roles, and more diverse pathways to and from paid employment. Labour market regulation and benefits should work together as a system that underpins adequate incomes for all. Neither can do the job on its own, and changes to one inevitably have implications for the other. This vision is hard to see through the fog of austerity, but the outlines of a viable system are there is we look hard enough.

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