Britain is beset by the toxic combination of 15 years of low growth and four decades of high inequality. Gavin Kelly and Hannah Slaughter of the Resolution Foundation argue that “predistribution” needs to be at the heart of a new economic strategy that brings about better-paid, and better quality, work.

After fifteen years of stagnation, it’s clear that stronger economic growth is needed to raise living standards across Britain. But growth alone can increase inequality, leaving some workers and their families falling even farther behind – a dire prospect since the UK is already the most unequal large economy in Europe. A plan for truly shared prosperity must therefore tackle the twin challenges of low growth and high inequality. The final report of our Economy 2030 Inquiry, Ending Stagnation, sets out a plausible path to prosperity that can be widely shared across Britain.

This new economic strategy will require both redistribution and “predistribution”. The former is a familiar economic lever that levels household incomes via benefits and taxation. Predistribution is its lesser-known cousin: it concerns changing what happens in the labour market or wider market economy to reduce inequalities in labour income before tax or benefits kick in. It is useful, in part, because it puts more pressure on firms – and less pressure on the state – to reduce inequality. Predistribution is, of course, hardly a new concept but it still doesn’t get the attention it merits – perhaps not surprisingly after a decade of cuts to the welfare state.

Minimum standards have been lifted since the turn of the century

There are some recent successes when it comes to predistribution in the UK that we can build on going forward. The introduction of the National Minimum Wage (NMW) in 1999, and its subsequent rebranding as the National Living Wage (NLW) in 2016, has transformed the labour market – delivering sizable pay gains, year-on-year, to millions of low-paid workers and significantly reducing pay gaps.

As Figure 1 shows, the minimum wage (the red line) has grown by more than 50 per cent since its introduction (from £3.60 to £8.21 per hour in 20 years). The fact that real pay growth for lower earners (the lilac line) was much faster than growth for higher earners (dark and pale blue lines) over this period implies that the NMW boosted hourly wage growth for the lowest earners even at a time of weak wage growth generally. The significant fall in hourly wage equality over the last quarter of a century is largely due to the NMW.

Figure 1: Growth of UK real hourly earnings (1999=1) by point in the hourly pay distribution

The UK’s minimum wage has been a great success of predistribution policy – gradually transforming from the simple outlawing of scandalously low pay rates upon introduction (it was worth just 46 per cent of median pay in 1999) to more aggressively closing the gap between the UK’s lowest earners and the middle (it is set to hit 66 per cent of median pay this spring). What’s more, this has all been achieved without driving up unemployment.

What more needs to be done to raise standards at work?

Going forward, steady, but judicious, advances in the wage floor should be maintained if the UK wants to continue its journey towards having one of the highest minimum wages in the world. Besides this, several other changes are required if we are to build on this initial success.

First and foremost, we need stronger enforcement of current labour standards – our rights are only meaningful if they are enforced. And as things stand, too many people are slipping through the cracks. In 2022, 334,000 employees received less than the minimum wage, some 900,000 workers reported they saw no paid holiday and a staggering 1.8 million workers said they didn’t receive a payslip – all legal entitlements. The first step is rethinking the resources we dedicate to policing labour market rights: currently, the UK has just 0.29 labour market inspectors per 10,000 workers, less than a third of the 1 per 10,000 benchmark set by the International Labour Organisation. We also need to move to a Single Enforcement body able to issue meaningful fines.

Once we’ve ensured our existing standards are being enforced, there’s more to be done on raising wider standards at work. Hourly pay has improved but low and highly volatile weekly pay remains a persistent challenge: it is weekly earnings, after all, that matter most for living standards. Lower weekly earnings can either be caused by employers providing low guaranteed hours, or employees only wanting to work the absolute minimum number of hours they need to survive, due to the low quality of their work. The first problem can in part be addressed by a legal right to a contract with minimum hours, where this reflects a worker’s usual work pattern. The latter challenge is more multi-faceted, and requires a range of solutions to improve the quality of work: for example, employers should be required to provide two weeks’ advance notice of shifts, with compensation for any late changes.

On top of these contractual amendments, there are wider steps that can be taken to improve work. Unions clearly play a role in this, and we should, for instance, remove restrictions preventing unions from entering workplaces, as well as antiquated bans on online voting. In problem sectors with the most challenging labour standard issues (and typically low levels of union membership) we need to develop new approaches. We propose Good Work Agreements (GWAs) – a binding mechanism for bringing together workers and employers to address workplace issues in their industry and agree minimum sectoral standards – starting in social care. We can learn from similar approaches in countries like Ireland and New Zealand, as well as our own past. There is also a desperate need for measures that boost workforce skills (particularly intermediate level qualifications) and support more people into decent employment (for instance, those with health-limiting conditions).

Alongside all of this, legislation to increase worker voice within firms, for example by placing workers on boards of larger firms, have proven in other countries to deliver better work without compromising on levels of employment or productivity.

What could predistribution do for British incomes?

Taken together, these measures should help reduce instances of low weekly pay, and tilt our labour market towards a more equitable pay distribution. According to analysis conducted as part of the Economy 2030 Inquiry, this so-called pre-distribution agenda would mean that any economic growth we could secure would be more widely shared than would otherwise be the case.

Figure 2 shows the extent of the progressive tilt we could achieve. The pink bars show how an ambitious strategy for boosting economic growth might, on its own, feed through into household incomes. The green bars combine this higher growth agenda with a predistribution agenda (like the one outlined above). In this instance, household incomes in the middle benefit most from bottom-heavy wage growth, while poorer households tend to gain more from higher employment.

Figure 2: Real change in net equivalised working-age household income (after housing costs) between 2024-25 and 2039-40, by income vigintile

This predistribution agenda needs to be complemented by a redistribution agenda, which would give an additional significant boost to those on the lowest incomes (represented by the lower bars to the left of Figure 2) – and result in a progressive pattern of income growth overall. That is because higher productivity and better-quality jobs, by themselves, won’t deliver higher living standards for everyone – not least the 10 million families who draw less than half of their household incomes from the labour market. Major shifts in our social security policy are therefore also required; a forthcoming post will focus on the role that a redistribution strategy could play.

What is clear is that work remains to be done to create a fairer labour market. Britain has been an unequal country for such a long time that resignation has become the default position for far too many people. The assumption for some is that neither the political resolve nor the state capacity exists to change all of this. But this, we argue, is lazy fatalism posing as sagely insight. Low-quality work does not need to be a pervasive feature of the British jobs model. By building on many of our existing successes and strengths, the policy changes outlined above offer realistic and achievable steps towards a fairer labour market.

All articles posted on this blog give the views of the author(s). They do not represent the position of LSE Inequalities, nor of the London School of Economics and Political Science.

Image credits: People Images (copyright).

This post is based off the findings of the final report of the Resolution Foundation’s Economy 2030 Inquiry, Ending Stagnation.