Age of Insecurity

29 May 14
It’s no longer just the bottom 20% of society who are anxious about their future. In the new class structure of industrialised countries, where jobs growth is in services, white-collar and professional staff are feeling the heat too

By Patrick Diamond | 29 May 2014 

It’s no longer just the bottom 20% of society who are anxious about their future. In the new class structure of industrialised countries, where jobs growth is in services, white-collar and professional staff are feeling the heat too

Going to work

British society and its public services face some insistent challenges related to the emerging post-industrial economy. We are witnessing a number of key trends in the UK: the transition to a service economy; increasingly flexible labour markets; rising rates of part-time and temporary work; the unfinished gender revolution, as well as a rapidly ageing population.

 These trends, exacerbated by the speed of technological innovation and automation, new economic forces, globalisation and trade liberalisation, mean that lack of opportunity and increasing insecurity are affecting a wider section of society, no longer just the most excluded. 

This growing majority, the ‘new insecure,’ make up roughly 75% of our society – those  who are working or have a retirement income. These are not only blue-collar workers, but also once secure professionals, many of them in the public sector, who are anxious about the future or struggling to sustain their standard of living.

They are in the middle between a tiny elite (the top 5%), who are racing ahead as they enjoy soaring asset prices and returns to wealth, and the bottom 20% who are poor and marginalised, struggling in a vicious cycle of low-wage, irregular work, unemployment and limited welfare access.

This is not just a British problem. The new class structure of industrialised countries, characterised by growing inequality, polarisation and insecurity, is being intensified by structural forces in addition to economic and social change.

More than 75% of employment in the OECD countries is now in services, with job growth occurring in the service-oriented sectors. Future projections of employment patterns from 2010 to 2020 carried out by the US Bureau of Labor Statistics and the European Centre for the Development of Vocational Training, indicate that across the US and Europe, both high- and middle-skill level jobs in services are expected to rise as a share of total employment, with a decline in skilled agriculture and fishery, craft and related trade work, and manufacturing. 

With services being the key to employment, SMEs are now fundamental to our economies. The 20 million SMEs in Europe employ almost 90 million people. More important perhaps is the pace at which SME job growth is occurring. Between 2002 and 2010, net employment in the EU grew by an average of 1.1 million jobs (or 0.9% per year), with 85% of this increase occurring in SMEs. The proportion that these firms have in employment growth far exceeds their 67% share of total employment. 

It is this shift towards the service-driven economy that is particularly significant. As Erik Brynjolffson and Andrew McAfee argue in The Second Machine Age, the impact of automation and the ‘Big Data revolution’ is that highly skilled, human capital-rich jobs are increasingly being performed by new technologies and machines. Although the low skilled are still the most at risk, white-collar and professional occupations are also more affected than ever.

Labour productivity has tended to benefit an ever smaller group at the very top, leading to a further squeeze on nominal wages. As technology is replacing human workers, an increasing share of GDP is flowing to capital at the expense of labour. However, technological advance alone cannot be blamed for rising inequality.

The growth of trade in the globalised liberal economy has been putting downward pressure on wages. In many countries (the Nordics being an exception), collective bargaining structures traditionally responsible for protecting middle-income jobs and living standards have been eroded. With emerging market economies growing in prominence, workers in industrialised states are facing an acute threat. This is especially the case as significant re-industrialisation in Europe is limited both by high energy costs and the attempt to restrict climate change by restraining carbon production rather than consumption. 

Together, technological change and increasingly liberalised markets mean that there has been a significant shift in the type of workers exposed to international economic forces.  Whereas two to three decades ago, blue-collar and lower-skilled jobs were most at risk due to global competition, today it is middle-class professionals who are under threat. Sectors such as finance, law, media and business have become exposed to international competition, leading to heightened job insecurity. 

Due to these shifts, wage inequalities are accelerating, affecting the relative positioning of middle-income households. In the UK, median income growth since the mid-2000s has fallen to zero. Median household incomes in Germany between 2000 and 2010 have been consistently behind GDP growth. In Japan, median incomes have declined by 1% a year on average since 1995, according to Global Counsel. This distributional shift away from the middle is arguably structural rather than cyclical.

In addition to these structural forces, the unfinished gender revolution and the pressures of ageing societies have also strained the welfare state. Although there have been overall advances in gender equality, women continue to encounter pay penalties and inequalities in labour market outcomes. Women earn around 16% less on average than men in the EU, this being the case despite women outperforming men at school and university levels. Further, only 59% of working-age women (20-64 years old) are active in the European labour market, compared to 70% of men.

It is clear that the entire labour market is not being used to its full potential, undermining economic growth and productivity and perpetuating family insecurity with care costs for both childcare and the elderly rising. Maintaining an active workforce is also imperative to help cover the expected rise in pension and healthcare costs (from 10.2 to 12.6% of GDP and from 6.7 to 8.2% by 2060 respectively). These new social risks, i.e. skills-based, gender, and intergenerational inequalities, need to be recognised to ensure economic growth and the long-term viability of the welfare state. 

At the same time, our tax systems have become less redistributive and progressive in many welfare states. Post-war taxation and welfare regimes in Northern Europe were widely supported by middle-income groups, not just the poor, as it was recognised that collective social provision equally protected their relative position in the distribution of earnings. Over the past couple of decades, these institutions have been gradually eroding and it is now clear that those on middle-incomes are losing their stake in social security. In the context of the key trends outlined above, it is the middle 75% who are the ‘new insecure’ and who need collectivised social security to be assured, especially in their old age.

In light of these economic and social challenges, we need a bold predistributive strategy that seeks to promote the growing majority of the ‘new insecure,’ while helping those from low- and middle-income households overcome their structural disadvantage. Rather than focusing on post hoc redistribution that seeks to address inequality after the fact, a predistributive approach focuses on altering the underlying distribution of market outcomes to counter inequality at the source. 

A predistributive strategy includes a number of key measures. Macroeconomic reform is needed to correct sectoral and distributional imbalances. Tax reforms are required to make taxation regimes more progressive, such as taxing assets and issuing tax credits to support incomes and childcare costs of hard-pressed middle-class families in addition to the lowest earners. Education and skills policy reform to address the technology and automation challenge, particularly investment in early years’ intervention and education is arguably the best approach for narrowing cognitive gaps between children from low-and high-income households.

 Incentives through tax breaks and subsidised loans for further and higher education alongside a personal learning account encouraging individuals to invest in their own human capital could help develop a new culture of active education in an era where ‘jobs for life’ are in decline.

Furthermore, measures to democratise human capital and asset ownership, more effective labour market protection to prevent polarisation and inequality, such as statutory minimum wages and sectoral intervention in low-wage sectors of the economy, and structural reforms to improve the quality of public services should be implemented to ensure effectiveness and cost-efficiency.

 Finally, championing gender equality and investment in infrastructure and SME formation are necessary for reducing inequality, making the best use of the entire active labour market, and ensuring sustainable economic growth. A predistributive strategy that moves beyond traditional redistribution is required to tackle the problems facing the ‘new insecure’ – a growing majority of our society. The state’s role is not just to meet people’s needs directly, but to equip them to meet their own.

Patrick Diamond is research director at Policy Network and lecturer in public policy, Queen Mary University of London

This feature was first published in the June edition of Public Finance magazine


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