Lessons from America

Published on Incomes and Inequality

In the three months I’ve been working on low income households in the US, a wry smile and an emphatic “no” is the almost universal response I get to my question “does the US have any lessons for the UK?”

It is certainly true that American safety nets, where they exist at all, are more ragged than Britain’s. And antipathy towards ‘welfare’ is even more pronounced here than the ‘benefit scrounger’ tropes of the British media.

And yet this week, the tax cut deal that Obama and the Republicans have tentatively reached should give UK progressives cause for thought. Where June’s Emergency Budget and October’s Spending Review reduce and remove supports for low and modest income families, Obama’s deal reinforces and extends these supports. The contrast in policy direction could not be clearer. For example:

  • Obama has expanded the Earned Income Tax Credit (which was itself the inspiration for our own Working Tax Credit system) in order to maintain the more generous payments first included in the 2009 Recovery Act. In contrast, the UK government has cut the WTC budget by £747 million in 2011-12.
  • This week’s deal also expands the American Opportunity Tax Credit, which helps low income students to afford college. Leaving aside the controversial impact of recent tuition fees reforms, the decision to scrap the Education Maintenance Allowance risks reducing the chances poorer students have of reaching higher education in the first place.
  • The Republicans have also agreed to an extension of the refundable Child Tax Credit – a vital support to working families, given childcare alone comprises around 15 per cent of low-income budgets in the US. In the UK, the above-indexation increase of the Child Tax Credit is more than cancelled out by the £270 million cut to the childcare element of the WTC.

While the Obama deal has directed billions of dollars into low-earners’ budgets, UK cuts could leave working families up to £1500 a year worse off, as the latest RF audit shows:

One explanation for such contrasting approaches could be that low and modest income households in Britain and America face different challenges. But this is not what the evidence suggests, on three important counts:

  • Wages: in both countries, wages in the middle of the income distribution are declining – by 5.4 per cent in the UK between 2009 and 2010, and by 4.2 per cent since 2008 in the US. This drop in wages preceded the recession, accelerated during the downturn, and is now being compounded by recent and projected rises in the cost of living.
  • Hours: households experience low income partly because of low pay, but also because individuals are not working enough hours. Here we see that involuntary part-time and temporary work is on the rise. For the first time in a decade,UK underemployment is a bigger issue than overemployment this year, and now affects 10 per cent of the workforce. The latest US employment data shows that nine million people – an increase of just under a million since June this year, and two-thirds the number of unemployed Americans – are working part-time when they would like more hours. Underemployment on both sides of the Atlantic is concentrated in low skilled, low wage sectors and occupations where workers are most likely to need more hours to avoid poverty.
  • Job security: there is no single measure for job security in either country and the data is much more contentious here than it is on hours and wages. But there are some strong indications that job insecurity is rising, and that these changes are concentrated at the lower end of the labour market, particularly in construction, food and retail sectors. For example in the UK, while overall job tenure looks steady, it has dropped 20 per cent for male manual workers, and temps are one of the fastest-growing occupations over the last decade. In the US, ‘precarious’ employment accounted for 9.1 per cent of all jobs in 2005.

This week’s potential deal shows just how aware the White House is of the need to tackle the problems faced by low earning households. Democrats involved in the deal have been at pains to emphasise that these measures were non-negotiable, and it will not be a surprise if these messages form the basis of Obama’s 2010 re-election campaign.

It was Harvard political scientist Theda Skocpol who identified a ‘missing middle’ in American public policy in 2001, saying

“American social policy debates these days are notable for concentrating on the elderly versus the young… saying little about the needs of vast numbers of working parents who are truly at the epicentre of the changing realities of US society and economic life.”

Skocpol’s argument has clear echoes in Cabinet minister David Willetts’ latest book, which similarly argues for the importance of supporting working age households. The difference is that while the Democrats are taking heed of the current vulnerabilities of this ‘missing middle’ and putting them at the centre of their two-year strategy, this group remains overlooked and poorly understood in the UK.