What works?

In-work poverty is a growing and worrying problem in the UK. There are almost four million workers in poverty, a rise of more than half a million compared with five years ago. More than half of all people in poverty now live in a working family. For children in poverty, this rises to nearly two-thirds.

The government’s mantra, that work is the best route out of poverty, is no longer true. To tackle in-work poverty, we need an agenda that takes in decent pay, secure work, progression opportunities for those on low incomes, adequate social security, and affordable child care and housing costs.

This does not mean there is no role for in-work benefits. These can play an essential part in improving the living standards of people who need to work shorter hours, including single parents, disabled workers and those with caring responsibilities, and can help meet the extra costs faced by those with children or disabilities. But financial in-work support should be concentrated in areas where the government want to subsidise low working hours, and not used to top up low wages due to failures in labour market policy.

What has been happening in the labour market?

The UK’s record levels of employment are often repeated as a success story, but something is seriously wrong in the labour market if work is not reducing poverty.

Insecure work is now a daily reality for 3.7 million UK workers, as recent TUC analysis has shown. This includes agency, casual, and seasonal work, those on zero-hours contracts and the low-paid, self-employed. A pay penalty is associated with these forms of work, with workers often experiencing low pay and economic hardship.

There has also been a sustained reduction in real pay – that is pay once inflation has been taken into account. Over the past decade, workers have suffered the most severe wage squeeze in two centuries. While real wages have just started to grow, there is considerable ground to make up before real pay returns to the level it was at before the recession hit.

Low pay is a widespread problem with around one in five employees (totalling five million workers in the UK) earning less than two-thirds of median earnings.

Lack of progression is commonplace among those who are low paid. Only one in six low-paid employees move out of low pay over the course of a decade.

It’s these labour market conditions that determine the demand for in-work benefits. Without government action to deliver good quality jobs with decent pay for everyone, being in work will simply not solve being in poverty.

Government action should start with an increase in the minimum wage. We want the minimum wage to rise to £10 as quickly as possible. The success of minimum wages in raising living standards without damage shows how successful the strategy has been.

And evidence shows the benefit of unions in the workplace. Unions should be given freedom to enter every workplace to help drive up pay and conditions.

The role of social security in making work pay

While raising pay is critical to solving in-work poverty, there will always be some people in the labour market who need to work shorter hours because of caring responsibilities or perhaps a disability. This is where social security can play a vital role in ensuring that those working shorter hours with decent pay have a good standard of living.

A good social security system will also incentivise working additional hours for those who want to. Universal credit was sold as making work pay. The design of it, however, fails to do this. We believe that universal credit is fundamentally flawed and should be scrapped.

The design of universal credit has reduced incentives to work, with less generous work allowances, and a relatively high taper rate of 63 per cent. Earlier designs suggested an even lower taper rate of 55 per cent. To make matters worse, second earners in a household receive no work allowance, so all their initial earnings are immediately subject to the taper, and they therefore keep just 37p in the pound of their pay. The second earner is more likely to be a woman, so this disproportionately hits them.

Work allowances play a crucial role in increasing income and hours for those in work, demonstrating they need to be used effectively to reduce in-work poverty. Any new social security system should recognise that targeting increases in the work allowance to those who are more responsive to them encourages greater take-up of hours.

Increasing the value of work allowances enables families in in-work poverty to keep more of their income than reducing the taper rate in universal credit.

Single parents and second earners in couples with children are more responsive to work allowances. Currently a renting single parent on the national living wage with one child on universal credit exhausts the work allowance at eight hours.

The benefits freeze also needs to be lifted immediately as millions of families in receipt of in-work benefits are facing cuts to their incomes and this is resulting in financial hardship.

Rising housing and childcare costs

In-work benefits are not only topping up low wages, but they are also having to meet extra costs, most prominently housing and childcare. The costs of which are rising steeply.

The solution to in-work poverty must focus on meeting these extra costs too.

It is clear that rising housing costs both cause and worsen poverty. There is a lack of affordable housing in the UK, as well as a shortage in social housing that means many more people on low incomes are having to live in more expensive, privately rented accommodation. Renters are paying considerably more for their homes than 20 years ago. Relative to the general price level, the average (median) private rent paid in the mid-2010s was 53 per cent higher than that in the mid-1990s in London and 29 per cent higher in the rest of Britain.

Those on lower incomes spend more on housing as a proportion of their income. Any rise in rental costs or changes to housing benefit eligibility will impact this group harder. Housing costs for families with children have grown much faster for those at the bottom than for those who are better off. Without some intervention in the housing market, the need for financial support for those in work will only increase.

Housing benefit now meets less of private rental housing costs, as eligible rents have fallen below actual rents, and the gap between the amount received for housing and rent has grown too. This has resulted in further financial struggle.

Childcare is also a big issue for working parents. While there has been some progress in recent years expanding the supply of free childcare, there is still a long way to go before this is universal. It should not be the role of the social security system to meet the costs of what should be a free service.

We need a new system

There will always be a role for social security in helping to tackle in-work poverty. But we need to understand better what that role is. Social security can help people who need to work shorter hours to meet the costs of living. But it should not be used to top up poverty pay, or as an excuse not to deal with poor employer practices like zero-hours contracts.

When it comes to meeting the costs of living, we need an approach that starts with public services. Social security cannot solve the problems of high housing or childcare costs, and the reliance on social security to plug these gaps has been a key part of the misleading accusations that the social security budget is out of control.

A new system to tackle in-work poverty needs to start by addressing these problems – allowing social security to play a more limited, but still a vital role.

This blog is part of our Poverty and social security: where next? series. Read more about the project here.