Independent Advisor on Poverty and Inequality: shifting the curve - a report for the First Minister

1. In-Work Poverty

"I can't survive on the minimum wage. I don't earn enough to feed me and my family and have to borrow from other family members at the end of the month."

" DHP [discretionary housing payment] - that's not widely advertised whatsoever, I mean why no, do they no want people to know about it?"

In-work poverty is a serious problem. In 2013/14, half (50%) of working age adults in relative poverty after housing costs were in 'in-work poverty'. That is, they were living in households with at least one adult in employment, and they were still poor. The same was true for more than half (56%) of children in poverty. Employment is regularly hailed as the way for people to get out of poverty. But for increasing numbers of people in Scotland, and the UK more generally, just getting a job has not meant getting out of poverty. This is a depressing picture, but it's one we need to hear about and talk about more.

Solving in-work poverty is not straightforward. There are a range of key factors driving it, as shown in Figure 1.

Figure 1: Factors driving in-work poverty

The narrative in the remainder of this section considers these drivers (the ones in red) and frames recommendations around each of them.

Hourly pay

RECOMMENDATION 1 - Build on Living Wage Accreditation - a focus on larger employers, and on incentives, would be useful

It might seem an obvious point, but low paid workers face a much higher risk of poverty than workers who are not on a low hourly pay. This means that attempts to raise hourly pay - for example, by encouraging employers to pay the Living Wage - are important.

The Scottish Government funds the Poverty Alliance to promote take up of the Living Wage Accreditation Scheme and increase the number of employers across Scotland paying the Living Wage. 439 employers had been accredited at the time of writing, which is really positive progress over a short time.

Stakeholders told me that the Scottish Government should take a more assertive approach to encouraging take up of the Living Wage. Progress in signing up employers has been positive and Scotland seems to do well on the living wage compared to the UK as a whole, with only the South East doing better. And even if the living wage isn't the answer to poverty wages on its own - because of how the tax and benefits system interacts with gross pay - it's clearly an important signal of intent, and research suggests it has a range of knock-on benefits. ^[2] With that in mind, more could be done.

Stakeholders' suggestions included using procurement more effectively to ensure that employers signing up to public sector contracts pay the living wage. Since those discussions, the Scottish Government published (6 October 2015) statutory guidance that requires all public bodies to consider whether it is relevant and proportionate to include a question on fair work practices (such as payment of the Living Wage, and addressing the inappropriate use of zero hours contracts) as part of the procurement process. The outcomes of this new guidance in terms of pay need to be monitored carefully.

More should also be done in particular to encourage more medium- and large-sized employers to pay the living wage. This is likely to be the best way of boosting the numbers of people who get the living wage, and larger organisations often have greater capacity to absorb costs. So it's great that large employers such as the Royal Bank of Scotland and Standard Life are paying the living wage. But what about other large employers? Of the 439 accredited employers in Scotland to date, only 11 are large private sector enterprises. ^[3]

Low pay industries such as retail and hospitality will need to absorb higher increases in their wage bills due to the planned rise in the UK adult minimum wage, to over £9.00 in 2020. Given this, they may well be harder to influence in the interim and may look less favourably on paying the living wage. But this doesn't mean to say that the Scottish Government and its partners shouldn't engage to promote longer term change.

However, low pay sectors are also more likely to have lower profit margins, so it would make sense, at least in the short term, to focus first on low pay in higher profit activities. These employers may respond best to the promise of reputational benefits, and this approach may ultimately have knock-on effects to the rest of the labour market.

RECOMMENDATION 2 - Encourage pay ratio disclosure as a way of tackling pay inequality

Pay ratios are one tool to provide transparency on the extent and scale of pay disparity between the highest and lowest earners in any one organisation. There has been some limited political discussion on this to date - for example via the Hutton Review on Low Pay in the Public Sector (2011). ^[4] Hutton recommended that: 'The [ UK] Government should not cap pay across public services, but should require that from 2011-12 all public service organisations publish their top to median pay multiples each year to allow the public to hold them to account.' In other words, Hutton did not seek to regulate public sector pay, per se, but rather to ensure that particularly large pay gaps had to be considered and explained. Following Hutton, most but not all public bodies in the UK are now required to report on pay ratios.

To move this agenda on further, the Scottish Government could now make public body pay ratio information available annually in one place, so that it can be subject to public scrutiny. Ideally, the declared ratio would also include contract staff, to encourage organisations to contract with employers who pay the Living Wage. ^[5] The Scottish Government could also extend the requirement to report to all public bodies, although how local authorities report will need careful consideration bearing in mind the variety of staff employed.

The consequences for the private sector of widening gaps between senior management and workers' pay across the company hierarchy also merit further discussion. High income inequality damages economic growth, according to a number of experts, including the OECD, and has negative consequences for well-being and the cohesiveness of societies. This, in other words, is in everyone's interests to get right.

Number of hours worked by household members

Poverty among working families is not always the result of low hourly pay. Less than half of UK adults in working poverty live in households where at least one earner was paid below the living wage ^[6] . Work intensity (the number of hours worked by household members) and household characteristics (such as whether there are dependent children) are the more important drivers in these cases. This has strong implications for designing anti-poverty policies. Any measure that targets only individual low-wage workers is likely to miss many of the working poor.

As table 1 shows, households only working part-time have high rates of poverty. Couple households where one person is working full-time but the other isn't in paid employment also have relatively higher rates of poverty. This is especially true when couples have dependent children. Among couples with one adult in full time employment and one not in employment, 21% of those with dependent children are in poverty, compared to 10% of those without dependent children. Households where all are in full-time employment, or a mix of full and part-time employment, have much lower rates of poverty, irrespective of whether they have dependent children or not.

Table 1 - Rates of relative poverty after housing costs, by family type and economic status, 2013/14 ^[7]

Employment status	Family type	% in poverty
Part-time employment only	Couple with dependent children	47%
	Single parent	15%
	Couple without dependent children	29%
	Single adult	26%
One in full time, one not in employment	Couple with dependent children	21%
	Couple without dependent children	10%
One in full time, one in part time employment	Couple with dependent children	7%
	Couple without dependent children	*
All in full time employment	Couple with dependent children	4%
	Single parent	10%
	Couple without dependent children	*
	Single adult	8%

Source: Family Resources Survey ( FRS), DWP

Note: * indicates cells where sample sizes are too small to provide robust estimates

The following recommendations focus on helping families to balance work and caring responsibilities, as a route to tackling in-work poverty.

RECOMMENDATION 3 - Ensure childcare commitments focus on quality to improve outcomes for children, and consider providing a limited number of free hours of childcare for primary school aged children

A lack of affordable, good-quality, and flexible childcare is a barrier for many parents who would like to work, or would like to work more hours. The Scottish Government increased the entitlement to free early learning and childcare ( ELC) from 475 to 600 hours per year through the Children & Young People Act 2014, including extending this offer to vulnerable 2 year olds, and has pledged to increase this entitlement to 1140 hours per year by the end of the next Parliament - equivalent to around 30 hours per week if delivered during term time.

Research evidence on the role of publicly-funded ELC in promoting parental (and, in particular, maternal) employment is still developing. There appears to be a consensus that a more complex set of factors than childcare costs alone are at play, which condition women's roles and opportunities. Nevertheless, it's encouraging that, as ELC in Scotland has expanded, levels of female employment have risen. In April-June 2015, Scotland had the second highest female employment rate (70.6%) amongst the EU 28 countries (Sweden had the highest female employment rate at 74.0%) ^[8] .

But if the ELC is of poor quality, it won't deliver the school readiness goals that help ensure the next generation have the educational attainment necessary for higher skilled and better paid jobs. So investment in quality of ELC as well as affordability is crucial. International evidence confirms that low quality ELC disproportionately affects poor children's development. And the evidence also highlights the key role of practitioner qualifications and training in ensuring high quality.

A review that I contributed to on behalf of the Sutton Trust recommended that all staff working with funded two year olds be qualified to at least A-level standard and have support from a graduate practitioner, with improved pay to reflect improved qualifications. The recent review carried out by Professor Siraj on the Scottish childcare workforce also emphasised the importance of staff qualifications. Nursery managers in Scotland are required to have a childcare degree, and the Scottish Government has committed that, by 2018, every nursery in the most deprived areas will have an additional qualified teacher or childcare graduate.

However, while steps are already in hand to put higher qualified staff in poorer areas, more needs to be done to ensure early years practitioners are trained to the same standard as teachers of children in school, and pay and conditions differentials are ironed out. An added bonus of improving pay and conditions generally in the early years workforce will be the additional income for a largely female workforce on traditionally low wages.

Balancing the dual aims of providing high quality ELC that's also affordable and flexible enough for working parents on low incomes can be challenging. The Scottish Government is aiming to improve the flexibility of the free ELC it provides, to better suit parents' working patterns - for example, by providing the option of taking their available hours as full day sessions as well as half days, and of spreading the hours over the summer holidays as well as term time. For example, this could mean a child attending 2 long days per week, rather than five half days. While this flexibility helps part time working, inconsistent hours of childcare may reduce the school readiness benefits of attending childcare. While there is no evidence to confirm this risk, the evidence on the positive effects of early education and care has been measured mainly in children attending regular part day sessions four or five days a week.

One option is to provide each child with regular group-based care ( e.g. four or five half days in a nursery) combined with wrap-around domestic-based care ( e.g. provided by a childminder) as required. Children would get their experience of social groups, regular school routines and a learning curriculum in their nursery setting, and childminders would be supported to deliver the key elements of the home learning environment. So it's timely that the Scottish Government has announced plans to develop a new standard of best practice for childminders, including a new training and induction programme they'll be expected to complete prior to registration.

The Scottish Government should consider a programme of pilots to test a variety of ELC delivery models, in preparation for the expansion to 1140 hours free ELC entitlement. One specific model would be that of blended childcare provision, to assess if it's feasible and affordable (and subsequently, if it is, to evaluate the impact on child outcomes). It would require a provider, ideally a children's centre or childminder agency, to match children with childminders willing to have two or three children in the morning and two or three in the afternoon. It would also require some flexibility on ratios at hand-over time, or longer half day sessions in group care. The childminders ideally would be salaried, and parents would pay one agency for all the care their child received over and above their allowance of free hours of childcare. This model would be particularly appropriate for two year olds eligible for the free fifteen hours, but also good for older pre-school children.

Many parents find childcare for school aged children is as much, or more, of a challenge as care for under 5s. The Scottish Government could ask one or two local authorities to pilot a comprehensive out of school hours service from school buildings. The service need not be delivered by school staff, but could be subcontracted to a social enterprise or voluntary organisation. Having use of the building and sharing cleaning and heating costs would reduce the price of the service to parents. Out of hours school-based childcare should be less expensive to deliver: the qualifications of staff are less critical than in early years settings, as children will be spending most of their day with qualified teachers; and staff/child ratios are less stringent than those for younger children. As part of these local pilots, the Scottish Government may consider offering some free childcare to school aged children. Lone parents in particular are more likely to seek employment as children enter school.

RECOMMENDATION 4 - Make family flexible working more explicit within the Business Pledge, and consider whether approaches such as the Timewise programme could promote flexible working in Scotland

The importance of family-friendly working in tackling in-work poverty has been somewhat underplayed in the political narrative to date, and employers, particularly in the private sector, can definitely do more. It's not only good for their employees; the evidence increasingly shows it's good for them too ^[9] .

The Scottish Business Pledge is a voluntary commitment by private and third sector employers to adopt fair and progressive business practices. To make their Business Pledge, an employer has to be paying the Living Wage, already delivering at least two other elements from the following list, and committed to achieving the rest over time:

1. Paying the living wage

2. Committing to an innovation programme

3. Pursuing international business opportunities

4. Not using exploitative zero hours contracts

5. Supporting progressive workplace policies

6. Supporting Invest in Youth

7. Making progress on gender balance and diversity in the workforce and boardroom

8. Playing an active role in the community

9. Paying suppliers promptly

At the time of writing, 186 employers had signed up since the end of May 2015, when the Business Pledge website went live.

The development of the Business Pledge is welcome. But to get employers to think differently - not just about poverty, but also about the range of underlying drivers - it would be useful to make 'Family Friendly' a more explicit priority within the overall package. Elements I'm keen to see highlighted include promoting best practice on parental leave / terms and conditions; supporting employees to access their social security entitlements; being flexible in the face of childcare issues; and having flexible work schedules that fit with local transport constraints.

There are other ideas on flexible working that could benefit employers and employees. Timewise, a social enterprise that provides consultancy and recruitment services to employers, delivers a continuous improvement programme to help local authorities and other employers identify, adopt and share best practice in flexible working. At the end of the programme, employers have a structured improvement plan with clear actions - to drive change in flexible working, flexible hiring and flexible commissioning; and to use learning externally to influence employers to stimulate a more flexible local labour market for residents.

Recent research from the Centre for Economics and Business Research found that flexible working could add £11.5 billion to the UK economy through more productive use of hours ^[10] . Larger corporate businesses working with Timewise to implement and manage workplace flexibility have already seen an estimated £15m in financial benefits per annum through improved productivity, reduced travel and real estate costs and improved staff attraction and retention. It would be useful to consider whether Timewise approaches could be expanded in Scotland to grow the number of family-friendly workplaces.

Income gained and lost through the welfare and tax systems

Hourly pay and number of hours worked are crucial factors in determining whether a household is in poverty or not. But how household incomes are topped up through tax and benefits systems is also crucial.

RECOMMENDATION 5 - Do more to ensure that people claim the benefits they are entitled to

We know that some people who are entitled to benefits don't claim them. For example, although Scotland-level statistics aren't available, we know that at the UK level it's estimated that as many as 45% of those entitled to income-based Job Seeker's Allowance don't claim it. The reasons for this are varied: they may be unaware of the existence of the benefit or their entitlement to it, or they don't know how to apply; the application process may be too complex or time consuming; and social barriers, including a sense of stigma, or a lack of trust in the administering institutions, can also stop people applying.

A range of advice services around benefits are already in place in Scotland, including through Citizen's Advice Scotland, and the Making Advice Work programme run jointly by the Scottish Legal Aid Board and the Money Advice Service. The Scottish Government and its partners should build upon these services to develop a strategic programme of activity. This would be based upon evidence on levels of uptake for the different benefits, the characteristics of those who don't claim but who could, particular barriers to uptake, and what can be done to address these.

RECOMMENDATION 6 - Make effective use of new social security powers but proceed with caution

The UK Government's proposals on removing £12 billion from the welfare system over the course of this UK parliament are obviously worrying on a number of levels. The Scottish Government could seek to mitigate any changes it felt unhappy with - as it has (very positively) with the bedroom tax. Plugging Scotland's share of any £12 billion gap with mitigation will, however, be expensive. It will probably not be possible. And the challenge for a fixed budget is making sure that plugging the gap doesn't mean withdrawing money from services or other support vital to those on low incomes.

The social security benefits being devolved largely provide either universal financial support to people who are not in work or targeted support to specific groups of people ( e.g. pregnant women or carers); disabled people on low incomes may be helped by the transfer of responsibility for certain disability benefits.

The 'new benefits' clause in the Scotland Bill is a wide power which could be exercised in a number of ways. Whatever choices the Scottish Government makes in the future, it should proceed with caution in the exercise of those powers, given the complexity of devolving part of what is a heavily integrated UK benefits system.