Predistribution

Author Paul Gregg

Predistribution is a manufactured word which featured heavily in a recent speech by Ed Miliband to a Policy Network organised conference around tackling Britain’s current economic woes and longer term challenges. It was coined by Jacob Hacker a professor of political sciences at Yale and is a play on redistribution but seeks to emphasise the role of government and wider decision making in reducing inequality at source.

Economists make a distinction when discussing income inequality between inequality in the primary (or private) distribution of work, wages and occupational pensions, and inequality observed after the secondary redistribution effects of taxes and benefits. Predistribution is thus concerned with the potential for influencing the primary distribution of incomes so as to reduce the need for heavy intervention in terms of higher taxes and benefits. It is thus analogous to prevention strategies in say public health that seek to reduce smoking and improve diets so as to reduce the need for costly health interventions later.

It is perhaps not fully appreciated that the large rise in inequality in the UK in the 1980s and early 90s was not primarily driven by reductions in higher tax rates or restricting benefits to grow in line with prices rather than earnings which had been the previous norm. Rather it was driven by a growing polarisation of work into dual earner and no earner families, with some 20% of working age families having no earner by 1995 up from around 8% in the mid-1970s. This was combined with rapid divergence in wages between high and low waged earners, such that real wages for typical workers (those in the middle of the wage distribution or median) rose by 23% between 1979 and 1995, but for those near the bottom (10^th percentile), the rise was just 12% and near the top (90^th percentile) wages grew by an impressive 40%. For the very highest paid, the 1% of the population with the highest earnings, the growth was considerably faster still. In contrast the growing access to second stage occupational pensions over and above the state pension saw pension incomes grow rapidly and one of the poorest groups in society caught up somewhat with other families.

What surprised many economists over Labour’s period in office was that the return to near full-employment did not see a significant reversal of the wage inequality built up in the 1980s and 90s. In addition the boost in the numbers of graduates and reduction in the numbers leaving school with few qualifications only halted the growth in the wage gap between better and less educated rather than reversing the previous trend. So in Labours term of office overall inequality edged up despite major redistributional efforts under tax credits and the Pension Credit. This was primarily after 2002 when wages stagnated for ordinary workers and the share of national income going to workers, rather than in profits and self-employed incomes, started to fall quite sharply combined with continuing rapid increases in earnings among top earners.

Also in this period efforts to reduce child poverty were hampered by the fact that low earning males had wage growth not only below the higher paid but also lower paid women. This meant that having a second earner became increasingly important and single earner couples, where the sole earner is usually the father, saw increased poverty rates despite tax credits. This was combined with a continued growth in lone parenthood and so resdistributional efforts were partly baulked by continuing adverse trends in the primary distribution of work and wages.

Of course, as with many buzz words or phrases the underlying concept is not new. Governments of all colours have pursued policies to achieve such ends before. The National Minimum Wage to reduce wage inequality, welfare to work policies to reduce the number of working age families with no earner and support for widespread occupational pension schemes all seek to increase incomes for key groups so as to reduce the need for secondary top ups by government.

The current political narrative plays along the lines that the high current deficits and large overall debt level means that the room for progressives to act through spending is likely to be severely constrained. Hence reducing inequality in primary distribution both reduces the need to act through redistribution but also frees up resources to address other goals. The politics also suggests a sense that the Blair-Brown era of being relaxed about the rich getting richer but to use the proceeds of growth to address poverty through redistribution has passed.

Predistribution, however, opens up a new set of policy tools but also a key constraint. The policy tools over and above tax and benefits are legal regulation, such as minimum wages, and public campaigns or consumer actions around fairness such as the living wage or fair trade campaigns.

There is also the use of broader public spending to achieve social goals such as the use of conditions attached to public procurement or focusing schools on reducing the extent low educational achievement.

Finally, there is the use of competition policy to reduce prices of goods and services that affect the poor more such as rents, energy and food or framing effects such as opt out rather than opt in pensions such as NEST to raise self-protection against low incomes in old age.

The key constraint is that they are indirect effects, and indirect interventions often lack the power to overturn the deeper processes already at work. Will a Living Wage campaign backed by public sector procurement achieve the scale to overturn the steady rise in wage inequality in the UK? Will shareholder activism combined with rules around binding votes for remuneration packages of top executives halt the rise in pay unrelated to firm performance?

Furthermore, as with all preventative strategies you will need to be changing the outcomes of a much larger group than just those who would have need for treatment after the event and this can often mean the costs are higher than for waiting for events to unfold. For example, most of the lowest paid are not poor, as they live in families with other earners. Raising pay levels for all the low paid thus involves far more resources being shifted than the amounts involved in tax credits targeted to address poverty.

The case for a focus on Predistribution thus rests on three factors. First, there is a capacity to shift far larger amounts of economic resources than can be moved by redistribution in the tax and benefit system and hence this makes up for poorer targeting. Second that shifting these resources comes with at least little or no economic loss from reduced economic efficiency and third that the political space for action here is substantially greater than for tax and benefit redistribution.

In terms of specific policies, there are a number of obvious policy areas but whether they are of sufficient scale to address the forces driving rising inequality is unlikely. Reducing long-term unemployment, and especially for young people, is an obvious win as time and again it has been shown how unemployment damages future earnings and employment years after a person first returns to work. Expanding the coverage of occupational pensions through NEST type schemes backed with restrictions on management fees chargeable by fund managers to make them better value to low wage savers offer hope of reducing inequality in old age. Limiting the higher prices charged by energy firms for payment systems other than direct debits, such as Charge Keys. Living wage campaigns backed by more extensive use of public procurement conditions in contacts etc. All of these offer attractive attempts to shift inequality in work and wages, but appear limited in scale or ambition.

More challenging would be boosting employment, but in particular getting these extra jobs focused on groups that the last recovery barely reached such as people in the most deprived areas, the least educated, the disabled and the over 50s. The potential wins here are large but the key to getting employment up for older and disabled workers must be in firms offering flexibility that suits workers. As with mothers, right to return after illness and right to request part-time working are likely to be central to boosting employment but run counter to the current drive for further labour market deregulation. Likewise with training, the current high job turnover in low wage sectors discourages both firms and workers from training, pushing towards long-term and investment focused employment contracts is likely to be central to Predistribution strategy but runs against the current employment regulation model in the UK. Focusing school resources on reducing Britain’s long tail of underachievement risks alienating middle class parents but again tackling low attainment must be central to a Predistribution strategy. Thus a Predistribution strategy could represent a profound challenge to the neo-liberal economic model that has operated in the UK and US over the last 30 or a limited rationale to avoid tough choices about redistribution in tough times.

Is it worth going to university? Part II

Matt Dickson

The debate around the costs and benefits of attending university is, at present, very narrowly focused on expected earnings over the working lifetime (see my previous blog-post for example). However this debate needs to be broadened out. The returns to education in general and university in particular may be far wider than the private financial returns that are the focus of so much of the economics literature.

For a start, to compare earnings we are conditioning on the individual being in a job – and while graduates earn more when employed, they are also more likely to be in a job, which has never been more important given current labour market conditions. Recent figures from National Statistics show that in the third quarter of 2010,  unemployment amongst 21-24 year olds with a degree was lower (11.6%) than for the same age group without a degree (14.6%) and far lower than the unemployment rate of 18-20 year olds (27.0%).

The range of job opportunities available to graduates is also larger (not many job adverts specify that not having a degree is a requirement), moreover as a graduate you are more likely to be in a job that you actually enjoy doing, and that offers opportunities for self-accomplishment and social interaction – which are all important for mental health, happiness and general “well being” outcomes. Oreopoulos and Salvanes (2011) show for US data that amongst individuals with similar family backgrounds, those with more education are more likely to report being happy with life and be in a job that they enjoy and that gives them a sense of achievement. This is the case even after taking into account the fact that more education increases income which itself may increase happiness and related outcomes. The largest increases in each measure are associated with the difference between those who do and do not attend university.

Though this US evidence is only suggestive – it could be that people who go to university have unobserved characteristics that mean that they would always be happier regardless of whether or not they went to university – the fact that the relationships exists even taking into account a wide range of background characteristics and income makes a strong case that higher education positively impacts these health and well-being outcomes. Moreover, other evidence from the US (Stowasser, Heiss, McFadden and Winter, 2011) and the UK (Oreopoulos, 2007) shows that increasing education has a positive causal impact on physical and mental health.

Aside from these effects on the likelihood of being in a job and enjoying that job there are other considerable non-pecuniary benefits of going to university. A university education can impact major life outcomes such as location, marriage/relationships and child-bearing. It can also enhance key personal skills, characteristics and preferences – for example critical thinking, decisiveness, communication, confidence, self esteem, self awareness, risk attitude and future orientation – that are not easily captured by qualifications.

Attending university broadens your experience and may make you better at running your own life and managing your time and resources – making you more attractive in the marriage market and benefitting others, such as your children. This broadening of experience and skills and encountering of new people, new environments, new perspectives and opportunities – the “consumption value” of university if you like – cannot easily be monetarised but is all a part of the “return”.

The likelihood is that if you go to university you will earn more over your lifetime than if you elect not to go, and even paying £9,000 per year in tuition fees you will still see a good return on your investment (see previous blog post). However, I would argue that much more important than this narrow earnings focus is the fact that you will also be less likely to be unemployed, more likely to be in a job that you enjoy, have better physical and mental health and gain in many personal skills and characteristics that will improve your outcomes both inside and outside the labour market over the rest of your life.

References

National Statistics: http://www.statistics.gov.uk/cci/nugget.asp?id=1162

Oreopoulos, P. (2007). ‘Do dropouts drop out too soon? Wealth, health and happiness from compulsory schooling’, Journal of Public Economics,Vol. 91, pp. 2213-2229.

Oreopoulos, P. and Salvanes, K. (2011). ‘Priceless: The Nonpecuniary Benefits of Schooling’, Journal of Economic Perspectives, Vol. 25, pp. 159-184.

Stowasser, T., Heiss, F., McFadden, D. and Winter, J. (2011). ‘“Healthy, Wealthy and Wise?” Revisited: An Analysis of the Causal Pathways from Socio-economic Status to Health’, NBER Working Paper, No. 17273.

EMA and good evidence-based policy making

Paul Gregg and Lindsey Macmillan

 

Young people leaving school at age 16 with few or no qualifications face a bleak future. As with high school drop outs in the US, employment rates are low for most of their working lives, as are earnings when they work. So a programme that encourages people from low income families to stay on in school at age 16 would seem to be sensible policy making.

The Educational Maintenance Allowance is a benefit that 16 and 17 year olds from low income families can receive only if they continue in full-time education. To receive it, students are required to regularly attend college or the weekly payment is stopped and there are bonuses for course achievement encouraging completion. Unusually in the UK, EMA was fully trialled with a good study design to give clear answers to how much it changed behaviour. The study carried out by the IFS suggested that among those eligible, those staying on in school increased by 6 to 7 percentage points.

However, from January the government is going to abolish EMA for new starters which will have its main effect next September for new school leavers. The government argues that that 90% of EMA is deadweight and this justifies its abolition based on qualitative evidence that this 90% would have continued in education regardless of the payment. However, just because it changes the behaviour of just 1 in 10 of those eligible, this doesn’t mean it is not cost effective if the benefits to this group are large enough.

The IFS research shows that in areas where EMA was trialled, students as a whole were around 2 percentage points more likely to reach the thresholds for Levels 2 and 3 of the National Qualifications Framework and they also had A Level grades around 4 points higher on average. This was probably because of the attendance requirement and achievement incentives.  The benefits went wider than those who just attended school as a result of EMA. The value of these qualifications in terms of future earnings was greater than the cost of the programme. The IFS argue that even if this increase in participation is relatively small, the longer-term benefits to those affected by the policy in terms of future productivity more than out-weigh the cost of the scheme. Yet this doesn’t include the impact on reduced unemployment, greater well being and even the potential impact on the next generation of having better educated higher earning parents. An interesting piece of research by Leon Fienstein and Ricardo Sabetes  showed that in EMA areas crime generally fell and youth convictions for burglary fell significantly.

So all the evidence is that EMA was a well design policy that improved life chances and had wider ranging benefits. But the greatest paradox is that the government has kept payments for children attending college which go to nearly all children (Child Benefit) whilst slashing the targeted support for the poorest to attend school. Yet all the evidence is clear that it is those from the poorer families for whom the incentive effects are greatest and the longer term value to society is greater.   If the Government wants to save money in this area then reducing Child Benefit for post-16s would achieve the savings without the wider adverse consequences for the life chances of Britain’s poorest children.  As the one of the governments buzz words of the time is responsibility, it is counter-intuitive to dismantle a policy that encourages responsibility for these young adults, who face the biggest opportunity cost of further education, by making a direct payment, conditional on full attendance at school. It is heartening to see so many young people demonstrating against the abolition of EMA and it is important for academics to stand up for good evidence based policy making.