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The “high wage, low welfare” economy has all the hallmarks of a Parliament-defining phrase, albeit one that requires you to concentrate (low wages, high welfare being less desirable). And with this being the focus of this year’s Cities Outlook, it’s got me pondering in more detail about wages, welfare and the wider city economy – particularly in the context of the forthcoming National Living Wage on the one hand and benefit cuts on the other.
The relationship between wages and welfare is complex. For example, it makes sense that increasing the employment rate, whether those jobs are well-paid or not, in general does seem to reduce the welfare bill per capita in cities, as our data tool shows:
However, work by the IFS and the Resolution Foundation suggests there may be a limit to this relationship, as in-work welfare payments can encourage individuals to move into the labour market who might not otherwise afford to do so. In other words, some benefits, including child tax credits, will need to stay in order to get the employment rate up and therefore the overall welfare bill down.
Cities Outlook also neatly pierces the notion that high wages automatically lower the welfare bill and vice versa; it is a beguiling but flawed idea. Not only does Cities Outlook identify 19 cities with low wages and low welfare economies; one of its most interesting findings was that the fastest increase in welfare bills was in the highest wage cities, largely as a result of higher housing benefit bills. So while welfare spending decreased in low-wage places like Liverpool and Glasgow between 2010-14, it grew by 4 per cent in cities like Reading, Cambridge and Milton Keynes in the same period, all of which are among the UK’s top ten cities for average wages.
It’s a powerful message that the most successful places, with the fastest growing jobs, are feeling the pressure: there is higher demand for housing, but no increased availability of housing at an affordable price. As a result these cities have more renters, higher rents, and therefore higher housing benefit. That suggests that high wages alone will not reduce the benefit bill if some of the other components of cities’ economies aren’t working, such as the availability of more affordable housing (which keeps housing benefit lower) or better transport links to connect people to jobs (meaning people can live somewhere more affordable).
So are the policies currently on the table going to be sufficient to bring about a higher wage, lower welfare economy? The short answer is that no one can be entirely sure. Policies like the National Living Wage will take us into unknown territory. For example, in higher wage cities, the new Living Wage is likely to have a relatively limited impact on wages – at the Outlook launch event Gavin Kelly suggested just 14 per cent of London workers would be affected – but it may reduce housing benefits if (and only if) it is enough to afford local rents, otherwise the benefits bill will continue to rise. In low-wage cities it will certainly help with wages, but with the possibility that over 30 per cent of Sheffield’s workforce could be affected, questions need to be asked about the impact on the employment rate in some low-wage cities. If employment goes down, benefits are likely to go up despite the higher wages.
One policy that has a clear link between both wages and welfare is skills; higher skills boost employment rates and wages and reduce welfare spending. Outlook showed that the places with the highest numbers of skilled people tend to have the highest wages and the lowest welfare bills; conversely the cities with low wages and high welfare spending tend to be much lower skilled. This suggests that one of the most important policies for a Government seeking to create a “high wage, low welfare” economy will be investment in skills, from early years right through to those already in the labour market.
However, Outlook reminds us that no single policy intervention is likely to work; this is about improving the whole of city economies, from skills and schools to broadband and buses. It also means prioritising policy according to cities’ needs – while all cities need better transport, the lesson from this year’s report is that housing should be a particular focus in high-wage cities, whereas education and skills must be improved in the lowest wage cities.
All of which means that in the years ahead, the debate on welfare and wages must link up with the debate on housing, infrastructure, skills, innovation and education, so that the Government can deliver on its ambition and UK city economies, and their residents, can achieve their potential.
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