In this member post, Jeevun Sandher – a member of the Young Fabian Renewing and Reforming our Economy Policy Commission - reflects on how Labour can build a fairer economy.
Most of us have a vague idea of what the “squeezed middle” is. However, a precise definition seems to elude many in the Labour movement. Understanding precisely who this group is and designing economic policy to promote their interests is the key to building a fairer economy.
To define the “squeezed middle” we could do much worse than to look at the work of the Resolution Foundation, an organisation working to improve the lives of people with low-to-middle incomes. For them, this group constitute about 11 million working adults who tend to earn less than the median income but are above the bottom ten percent in the income distribution.
In short, they are people who are neither too rich nor too poor. They are too wealthy to get substantial state support, but too poor to flourish in an open market economy. Increasing amounts of them are unable to buy homes, and struggle with household bills. More than half have less than one month’s income in savings and face comparatively higher rates of inflation (due to the basket of goods that they buy).
However, the real tragedy for the squeezed middle is that while the economy grew by 11 % between 2003 and 2008, the median wage remained static. At the same time, those on higher wages saw their pay packets increase and executive pay rose exponentially. The squeezed middle saw their living standards reduce at a time when the economy grew and productivity rose, giving the lie to the neo-liberal idea that people are paid their “marginal product” – that the wage chosen by the market is a fair wage.
This problem runs straight to the heart of Labour’s “fairness” strategy. By and large, these are people who work hard, do the right thing, but still struggle to stay afloat in an increasingly precarious economic climate. Meanwhile, CEO’s saw their pay rise dramatically in the decade before the financial crisis and bankers continue to take home multi-million pound bonuses.
The challenge for Labour at the next election is to construct a vision that rewards hard work and shapes a free and fair economy. There is no silver bullet, however. What is needed is a raft of policies to build an economy in which all gain when there is growth.
To begin with, those in the squeezed middle tend to be those with low-to-medium level skills. Any economic strategy must be focused first on investment in education, in order to build up human capital. Given the increasing returns to education we have seen in the past 30 years, this is just common sense.
However, it is important to note that this does not merely mean reducing tuition fees. As a recent IFS study has pointed out, those with similar A-level grades tend to go to university in the same proportion but it is much less likely that the poorest students will get the top A-level grades. Earlier intervention is key (e.g. Sure Start, the pupil premium etc.) to promoting social mobility and building people’s skills.
But this should just be the beginning. For too long Labour has accepted the Thatcherite free market consensus as gospel, and only aimed to tweak it at the edges to help those on low to middle incomes with measures such as tax credits and lower basic tax rates.
It is time to consider and undertake more radical measures. We must design policies which create better corporate governance structures as well as more accountability and transparency surrounding pay in the private sector. Only then can we ensure that all people will share in the proceeds of growth and be paid a fair wage. Hopefully, with these goals in mind we can create a compelling economic vision that helps us win the next election.
Jeevun Sandher is a member of the Young Fabian Reforming and Renewing our Economy Policy Commission.