just deserts? poverty and income inequality: can workplace democracy make a difference? from the poor law to welfare to work the poor law to welfare from By David Coats 2012 THE SMITH INSTITUTE just deserts? poverty and income inequality: can workplace democracy make a difference? By David Coats Published by The Smith Institute This report represents the views of the author and not those of the Smith Institute. © The Smith Institute July 2013 THE SMITH INSTITUTE Contents Foreword 3 Executive summary 6 Terms of reference 12 Introduction 16 Chapter 1: Poverty and inequality – the case for workplace democracy 30 Chapter 2: Workers on the board – corporate governance 46 Chapter 3: Works councils 70 Chapter 4: Trade unions and collective bargaining 86 Chapter 5: Co-operatives, employee ownership and mutuals 98 Chapter 6: Employee share ownership, ‘shared capitalism’ and individual 114 employee involvement Chapter 7: Other institutions of pre-distribution 122 Chapter 8: Conclusions and recommendations 138 Annex 1: An index of pre-distribution institutions across the OECD region 156 Annex 2: Inequality across the OECD region, 1970s to late 2000s 162 Annex 3: Poverty across the OECD region, 1970s to late 2000s 168 Annex 4: Recommendations of the Ownership Commission 174 Annex 5: The Bullock recommendations 180 2 THE SMITH INSTITUTE Foreword Paul Hackett, Director of the Smith Institute, and Richard Rawes, Chair of the Webb Memorial Trust This most timely report provides an important analysis of deep-rooted problems in the UK’s labour market. It presents an insightful critique of how workplace democracy, in its different forms, can help tackle the rising levels of in-work poverty and income inequality. Having reviewed the case for workforce involvement, the report offers a compelling argument for change and makes a number of practical recommendations to government, employers, employees and their representatives. Workplace democracy is not a panacea for the problems of low pay and poverty, but – as the evidence gathered in this report demonstrates – it can make a significant contribution to solving the problem. Indeed, as the report shows, the institutions and policies to support workplace democracy and tackle low pay that are commonplace in western Europe (and were once present in the UK) are now notable for their absence. The report does not argue for a return to the corporatist policies of the past or pretend that remedying the power imbalance in the workplace will be easy or free of conflict. Rather, it calls for more “inclusive” labour market policies, with stronger measures to promote workplace democracy (such as corporate governance reform), fair wages in the public-sector supply chain and skill- building programmes for the unemployed. Furthermore, the policies for tackling low pay and in-work poverty are presented as an integrated package and considered as part of the agenda for a more efficient and responsible form of capitalism. Much of the narrative in this report is influenced by the work of Beatrice and Sydney Webb, who were pioneers in exploring the links between the activities of trade unions and the incidence of poverty. Although the world has changed dramatically since their time, the arguments for social partnership and fairness at work remain just as valid today. We would like to thank David Coats, the report’s author, for his sterling work, as well as John Monks and the other members of the advisory committee for all their patience and advice. We also offer a special thanks to all the interviewees and experts who contributed to the project. Finally, we hope that the report will appeal to a wide audience and begin the process of persuading those not yet persuaded that promoting workplace democracy and social partnership are essential if the UK is to become a fairer and more prosperous society. 3 THE SMITH INSTITUTE 4 THE SMITH INSTITUTE Executive summary 5 THE SMITH INSTITUTE Executive summary Workplace democracy and the structure of the UK’s labour market • Profound structural weaknesses in the UK labour market have led to rising income inequality, the growth of in-work poverty and stagnant wages. • Living standards for those with incomes below the median have been squeezed since 2004. A major reason for this is low wage growth. Rising in-work poverty is responsible for increases in the payment of tax credits and in-work benefits to low-paid workers. • The UK also has low levels of employee participation and low rates of unionisation in the private sector. Forms of workplace democracy (from worker representation at board level to trade unions, collective bargaining, and “fair- wages” policies) either have never existed in the UK or have diminished in importance. • The evidence presented in this report demonstrates the relationship between workplace democracy and incomes. It shows how the erosion of institutions in the labour market that seek to achieve a fairer initial distribution of incomes (instruments of “pre-distribution”) have contributed to the rising tide of low pay, in-work poverty and income inequality. What do we mean by workplace democracy? This report explores the following institutions of workplace democracy: • worker representation at board level; • works councils on the continental European model; • trade unions and collective bargaining; • co-operatives and mutuals; • employee share ownership and “shared capitalism”; • individual employee involvement; and • other policies that influence the initial distribution of incomes (like minimum wages, labour clauses in public contracts and “auxiliary” legislation to promote collective bargaining). Policy recommendations After discussing the different models of workplace democracy and their effects 6 THE SMITH INSTITUTE on in-work poverty and income inequality, the report makes the following recommendations: Workers on the board • A Corporate Governance Commission must be established as a matter of urgency after the 2015 general election to make recommendations for the reform of company law, with the specific aim of establishing a stakeholder model of governance in the UK, either using the existing unitary board structure or the two-tier structure that is well established in Germany. The commission should be required to complete its work within 18 months so that legislation can reach the statute book before the 2020 general election. • Swifter action should be taken in the field of executive pay and remuneration in listed companies, with new requirements imposed on corporations to achieve a higher level of transparency by publishing the following in their annual reports: • the ratio of the pay of the highest earner to that of the lowest earners in the organisation; • the number and percentage of employees paid at the national minimum wage; • the number and percentage of employees paid less than the living wage; and • the distribution of pay across the whole workforce, broken down by grade, gender and pay level. • Board-level representation can be effective only if there is a robust structure for employee participation at all levels of the organisation. Works councils, collective bargaining and workers on the board are mutually reinforcing processes. Extending worker participation in strategic decision making must go hand in hand with an effort to rebuild institutions for participation in the workplace (see chapter 6). Reform of the Information and Consultation of Employees Regulations • Major reform of the Information and Consultation of Employees Regulations 2004 (ICE) (which allow employees to establish structures through which they must be informed and consulted by their employer) could help promote workplace democracy and potentially begin to reduce the incidence of low pay. There 7 THE SMITH INSTITUTE is some evidence from Germany to show that works councils act as a limited sword-of-justice. • Significant reforms will be needed if the ICE Regulations are to be an effective vehicle for the extension of workplace democracy. Among the changes that should be considered are: • Trade unions should have rights to initiate the process of information and consultation (I&C), leading to the election of workers’ representatives by the whole workforce, whether they are trade union members or not. • The trigger requirement that 10% of the workforce must support the request for information and consultation should be repealed and replaced by a requirement that there be some organised expression of the desire for representation. The German works council system offers an instructive example; the request for a works council can be activated with the support of five employees. • The “default” provisions of the 2004 regulations should become the minimum standard for all I&C arrangements. Consideration should be given to implementing a more extensive range of rights to information and consultation, learning from good practice elsewhere in the EU. • The provisions on pre-existing agreements should be amended so that only an agreement consistent with the default provisions can be sufficient to deflect a further request for I&C. • It should not be possible for direct participation to be a substitute for the representative participation envisaged by the EU directive on information and consultation. Trade unions and collective bargaining • Of all the institutions of workplace democracy, the evidence for a positive impact on reducing in-work poverty and income inequality is most robustly established in relation to trade unions and collective bargaining. • There is strong evidence to show that trade unions have an egalitarian effect and worker voice institutions can be good for business too. The unions’ sword- of-justice effect in the UK has been blunted as a result of falling trade union membership. There is evidence that the union wage premium (the pay advantage for organised over unorganised workers) is decreasing too. 8 THE SMITH INSTITUTE • Trade union membership has been under pressure throughout the developed world no matter what the dispensation of public policy. The report argues that repealing the anti-union laws would make little difference to the prospects for union growth.