Rachel Reeves

Member of Parliament for Leeds West

Labour's plan to make work pay

Speech to Bloomberg, 4 February 2015




Let me thank Constantin and Bloomberg for hosting this event. And thanks to all of you for coming.

I want to talk today about the importance of building an economy that rewards hard work.

Why this is critical not only to enabling working people to earn their way to higher living standards;

But also to controlling welfare spending and public borrowing.

The current Conservative-led government has overspent on benefits and tax credits by tens of billions of pounds and failed to balance the books within the single parliament they promised.

This failure is a result of their fundamental failure to make work pay driving the up in-work benefit bill as well as undermining tax and national insurance revenues.

Most worryingly, the current government has no plans to turn this around in the next parliament.

But I haven’t come here today to be negative or pessimistic.

The message I bring is one of ambition and hope.

I want to talk about Labour’s plan to make work pay.

That means challenging low pay and insecurity, while helping businesses create more of the secure, well-paid and productive jobs we need.

And I want to talk about the role of a Labour Department for Work and Pensions in supporting our plan to make work pay, turning our social security system into a springboard to more secure, well paid, high-skilled work so that it reinforces the action we will be taking across government to support investment and productivity throughout our economy.

In real terms British workers are now paid, on average, over £1,600 a year less than they were in 2010. And the number earning less than a living wage has rocketed from 3.4 million in 2009 to 4.9 million according to the latest available figures.

Even as growth has returned to our economy, these trends show little sign of abating.

Analysis of the latest figures I commissioned from the House of Commons library show that although industries classed as “low paying” by the Low Pay Commission made up a third of employee jobs in June 2010 they have accounted for more than half of net employment growth since then.

And three fifths of those who moved from unemployment into work in the last year earn less than the living wage.

And figures from the Resolution Foundation show that the majority are likely to be stuck on low pay for years on end with only 1 in 4 people definitively escaping low pay even after ten years.

Meanwhile on the Office for Budget Responsibility’s best projections it will be 2018 before average wages regain the ground they have lost since 2010.

The government’s failure to make work pay has meant they have struggled to keep social security spending under control.

Last week the IFS confirmed that for all David Cameron and George Osborne’s rhetoric social security spending will be no lower next year than it was when David Cameron took office.

This is despite measures such as the “bedroom tax” which takes Housing Benefit from disabled people with nowhere to move to, as well as reductions and restrictions to tax credits, that had a huge impact on the incomes of millions of working families.

The IFS cited “weak wage growth and rising private rents” as key factors “pushing up spending”.

So the past five years have demonstrated conclusively that you can’t control social security spending if you don’t tackle the underlying economic causes of rising benefit bills.

New House of Commons Library analysis I am publishing today shows  that the number of working people receiving Housing Benefit has gone up by two thirds since May 2010 and is now paid to around a million people today.

As a result the Department for Work and Pensions has spent £1.8bn more than it budgeted for on housing benefit for people in work - twice the amount they have saved in housing benefit from people moving into work.

And this year, according to the latest figures from the Office for Budget Responsibility, the government is spending £0.9 billion more than planned on tax credits despite cutting entitlements. Yet another sign of their failure to make work pay.

Added to the sums written off or wasted as a result of their mismanagement of key projects from Universal Credit to the introduction of Personal Independence Payments it confirms that for all their rhetoric and unfair divisive policies, it is the Tories who are the party of uncontrolled welfare spending.

And along with the waste of talent from entrenched unemployment and underemployment, and the waste of time caused by the delays and disarray of their key reform programmes, this is a record of Tory Welfare Waste for which our country will be paying the price for years to come.

And beyond these social security costs, there are other major costs to the Exchequer in lost revenues as a result of the wage stagnation we have seen, with National Insurance Contributions falling short of expectations by £25.5 billion over the life of this parliament and income tax receipts falling short by a shocking £66 billion.

So the Tories’ failure to make work pay, and their failure to deliver their promises on the deficit, are two sides of the same coin.

And it is absolutely clear that our country cannot afford to go on like this.

The number of working people reliant on Housing Benefit to keep a roof over their head is already set to increase by another 110,000 between now and 2020 so that it will have more than doubled over the decade, at a cost of over £14bn.

And according to new analysis we are publishing today from the House of Commons library, five more years of Tory failure to make work pay, with wages falling short of expectations to the same extent in the next parliament as they have in this, we’ll face another £9 billion in social security spending on top of that already projected. A £337 bill for every household in the country.

So for the sake of getting welfare spending and public sector borrowing under control, as well as building a fairer society and a stronger economy, making work pay must be a national priority.

I know that the best of British businesses take this seriously too.

Just a few weeks ago in Davos, John Cridland of the CBI repeated the call he has made for employees to benefit from the growth we are now seeing - for the sake of maintaining popular support for business and the market economy, as well as securing a sustainable, balanced recovery.

A particular sign of hope, and cause for celebration, are the fast-growing number of companies, working with trade unions and community campaigners, to commit to paying their workers a living wage over a thousand at the last count, twice as many as a year previously including 21 FTSE 100 companies, a jump from four last year.

The Living Wage Foundation estimate that 34,327 workers have directly benefited as a result, while employers report business benefits such as improved morale and productivity, reduced recruitment and retention costs,

and enhanced reputations with consumers.

But I know that making this commitment is hard for some businesses and that many employers who don’t yet feel able to take this step are nevertheless doing their best to deliver decent pay rises, improvements to wider reward packages, and commitments to support progression, because they know that doing their best for their workforce isn’t just the right thing to do, it also makes sound business sense.

We in the Labour Party believe that government has to play its part too.

We simply cannot afford to sit back and watch from the sidelines.

So for the remainder of my time today I want to outline some key planks of Labour’s plan to make work pay: challenging low pay and insecurity, while creating the conditions for businesses to employ more people in the high quality, high skilled jobs we need to see more of.

First, in response to the report that Ed Miliband and I commissioned from Alan Buckle, former deputy chairman of KPMG, we have set out plans to raise the National Minimum Wage to £8 an hour before the end of the next Parliament.

A rise of £1.50 an hour for Britain’s lowest paid workers worth £60 a week, or £3,000 a year for a full time worker on the minimum wage.

The experience of the early years of the National Minimum Wage, as well as international evidence, is clear that as long as care is taken, ambitious minimum wages need not be at the expense of employment.

On the contrary by making work pay they can encourage labour supply and can help to boost productivity by stimulating the development of better business models. And preventing employers who invest for the future being undercut by those focused on short term cost-cutting.

But we know that this ambition is one we need to work together with employers and employees to deliver, not simply impose from the top down.

So we will preserve the independent partnership model of the Low Pay Commission and expand its remit and its powers, so it can help to develop strategies to raise productivity and pay in key sectors.

Second, a Labour government will also promote the living wage, learning and applying what we can from the Labour councils who, I am proud to say, have led the way in adopting the living wage and extending it through their supply chains and into local economies.

But to encourage and support more businesses to make this commitment, we will share the savings that accrue to the Treasury as a result of reduced in-work benefit spending.

Under our “Make Work Pay” contracts, every firm that signs up to paying the Living Wage at the start of the new Parliament will benefit from a 12-month tax rebate of up to £1,000 – and an average of £445 – for every low paid worker who get a pay rise, which will help firms invest in the equipment or training that can make it work for them.

This will be fully funded from the increased tax and National Insurance revenue received by the Treasury - with the taxpayer still gaining from savings in lower tax credits and benefit payments.

A good deal for workers, a good deal for employers, and a good deal for the taxpayer too.

Third, we will challenge the under-employment and insecurity that holds back too many workers’ ability to earn their way to better living standards.

We will strengthen the regulation of zero hours contracts, which as well as making it harder for many people to earn a steady income are associated with low levels of training and opportunities for career progression.

And we will challenge poor employment practices in other ways too:

- by closing loopholes in Agency Worker regulations

- by cracking down on false self-employment – even as we support all those who genuinely want to make a go of it themselves

- and outlawing the exploitative use of migrant workers to undercut wages and working conditions.

All these measures to make work pay, challenging poor employment practices and boosting wages from the bottom up, are about supporting and reinforcing what the best employers already do.

And these measures are a critical part of our wider plan to build a high pay, high skill economy, based on rising productivity.

This will be a cross-government effort to get our country earning its way to rising living standards for all and a better future for the next generation:

- revolutionising vocational education and training;

- backing small businesses and the growth industries of the future;

- securing investment in ideas, innovation and infrastructure;

- extending accessible and affordable childcare for parents who want to work;

- reforming banking and energy markets so they work for the whole economy;

- devolving power and money to city and county regions to grow their economies;

- and, importantly, keeping in Britain in Europe, where our key export markets lie.

A particularly pertinent part of this plan, given what I have been saying about Housing Benefit, is our commitment to get another 200,000 homes built each year by 2020 so that as a country we are investing in bricks and mortar instead of subsidising people’s rent.

But let me also say a little bit more about the critical role that I believe a reformed social security system has to play in supporting our plan to make work pay.

Like every decent person in the UK we in the Labour Party believe that social security should be a safety net for those who fall on hard times, and a system for sharing the risks of ill health, and the costs of caring for children, or providing for retirement.

But we have also always believed that our social security system has an integral role to play in a well-functioning labour market - supporting flexibility and mobility, and the development of a more productive workforce.

The introduction of tax credits by the last Labour government was an invaluable step in this direction - supporting people to enter and progress in work, by ensuring work always pays.

The integration of in-work and out-of-work support under Universal Credit has the potential to build on this which is why we have consistently supported the principle behind the reform, and why it is such a wasted opportunity as well as a waste of money that after five years of false starts, and over half a billion pounds spent, the current government has made so little progress in delivering it.

So I hope we can rescue this project in the next Parliament while ensuring value-for-money for taxpayers.

But we need to do more to turn our system of social security into a springboard to opportunity and greater productivity, equipping people to do the higher skilled jobs our businesses need to fill, and putting them on the path to real careers offering rising real earnings, that will reduce their reliance on benefits, and contribute to our country’s prosperity.

Currently, our social security system leaves too many people who could be working stuck on benefits for years on end, or going back and forth between low paid, insecure work and back to the Jobcentre again, without addressing the root causes of their failure to hold down a job or progress in work.

Any aspiration to full employment in the twenty-first century must mean eliminating long-term unemployment, limiting the time anyone can spend on Jobseekers Allowance. It must mean bringing the employment rates of young people, disabled people, older workers and single parents up to levels that are comparable with competitor economies.

And it must mean ensuring that we make full use of the talent and ambition of all our people - developing their skills and harnessing their contribution to the full so we are maximising the productive potential of our country.

Here is how we will deliver this. First, we will introduce a compulsory jobs guarantee which means anyone on unemployment benefits for two years or one year, if they are under twenty-five, will be guaranteed the offer of paid job, supported with training that they will be expected to take up, or lose their benefits.

This limit on the time anyone can spend on unemployment benefit without working is essential not only because every day someone spends out of work is a waste in itself but because the “scarring” effects of extended unemployment on motivation and skills can depress future employability and earning potential for the rest of someone’s life.

So the compulsory jobs guarantee is not just an intervention to end long-term unemployment today it’s an investment in our workforce that we know will contribute to higher wages, lower unemployment, and higher economic output for years into the future.

Second, to reduce the number of people who even reach the stage of qualifying for this guarantee, we will reform the government’s failing Work Programme giving a greater role to combined authorities and Local Enterprise Partnerships so it is more responsive to the needs of local businesses.

Third, we will deliver a dedicated, more tailored service for disabled people whose employment rate is still 30 per cent lower than people without disabilities so they have a better chance of fulfilling their potential and we ensure our economy doesn’t miss out on the huge value that we know they could be contributing.

Fourth, at an even earlier stage in the process, all new claimants of Jobseekers Allowance will be assessed for basic literacy, numeracy and IT skills and, where there are gaps, required to take necessary training within weeks of signing on.

Making this Basic Skills Test a standard feature of all new JSA claims gives us a mechanism for identifying those at highest risk of persistent low pay and unemployment and acting quickly to put them on a better path.

And fifth, because we know we need to be even more ambitious for the workforce of the future, we will do more to ensure that young people going into the world of work have the skills they need to be productive employees.

So instead of falling back on Jobseekers Allowance which limits the time people can spend improving skills, anyone leaving school without a level 3 qualification - that is A levels or a vocational equivalent - who isn’t in work and can’t be supported by their parents will be eligible for a new Youth Allowance that will require them to get the skills they need to get started on a decent career.

This is a plan to ensure that instead of simply picking up the bills when work doesn’t pay our social security system is playing its part in helping more people into work that does.

By intervening early to tackle skills gaps that limit what people can contribute, and acting promptly to stop the scarring effects of long-term unemployment.

It means the resources we put into social security are supporting and reinforcing what must be a national effort to boost the productivity of our workforce so we can raise living standards for all over the years to come.

Our ambition must be to build an economy in which someone who is willing to put in the hours at work can support themselves and raise a family without having to rely on benefits to cover the rent.

So instead of jobs in low paying industries growing at twice the rate of those in other industries, as we’ve seen under this government, we should be aiming for high paying jobs to be growing at twice the rate of low-paying jobs.

If we continue the trends of the past five years, a million more of the UK’s jobs will be in low paid sectors by 2025.

Labour’s plan, by contrast, is to halve the number of workers on low pay by 2025, while creating a million more jobs in high tech industries.

So the costs of Tory complacency could be great.

But the scale of Labour’s ambition will be greater.

Let me conclude by telling you about two people I have met in the past few weeks.

Dwayne recently left school and found work at a major retail chain.

It seemed to be going well.

But his contract gave him no guarantee of work.

After Christmas the shifts dried up.

For two months he went into work every day and was told he wasn’t needed.

But the exclusivity clause in his contract prevented him from taking shifts anywhere else.

He started struggling for money, and became demotivated.

Luckily Dwayne lived in Dudley, where the Labour council runs an excellent apprenticeship scheme.

Dwayne was taken on and had been there for a year when I met him.

He said he was a changed man - his confidence had returned, and he was excited about the opportunities now open to him.

I am too.

Gemma is a young single mum I met in Hastings last week.

She has been unemployed and looking for work for a number of years.

One of her problems is the cost of childcare.

The after school club costs £7.

That’s hard to stack up on the pay offered by most of the jobs she could apply for.

And the time she’s been out of work has knocked her confidence as well as her family’s finances.

But it was clear to me she had a huge amount to offer.

Under a Labour government, Gemma would be able to take advantage of a more responsive, locally tailored back-to-work services and if she was still on jobseekers allowance after a year she would be offered six months paid work, with training, under our job guarantee scheme.

She’d also be guaranteed wrap around care at her children’s school.

With our plan to raise the minimum wage, she could count on real terms pay rises over the years to come.

And with our plan to boost apprenticeships and employer-led training, she’d get opportunities to progress into higher skilled and more responsible roles.

I want a Labour government because I want to give people like Gemma the chance to work and fulfil their potential.

She deserves that chance.

And our country can’t afford to miss out on the contribution she could be making.

So let me return to the critical decision our country has to make in three months’ time.

The Labour Party has always believed in a fair day’s wage for a hard day’s work.

But the experience of the past five years has demonstrated that this is essential not only to economic and social justice but to controlling welfare spending and dealing with the deficit too.

The current government’s laissez-faire attitude risks leaving too many British workers trapped in a low wage, low skill economy adding billions to in-work benefit bills as well as dragging down tax revenues.

Labour has a more ambitious plan for Britain:

- a plan to help more businesses create and fill more productive, high skilled jobs

- a plan to build an economy which doesn’t leave working families reliant on benefits to cover the rent.

- a Labour plan to make work pay.



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