A welfare state of hope, not despair

Anxiety about the welfare state runs deep. It touches chords that tell us what kind of society we are, because the way we treat the poor, the old, the sick and the workless defines us for posterity. Are we caring and kind? Or are we gullible and easily defrauded by the feckless? Are we creating a dependency culture that saps the will to work?

In a few days the annual thick book of dry statistics will emerge from the Department of Social Security. After a quick gasp at the colossal sum we spend, it will probably attract little attention. But there will be one particular set of figures of special interest to the cognoscenti - a huge rise in one category of claimants that ought to have Peter Lilley smiling, not scowling.

The number of people claiming family credit has doubled since 1990 and now stands at 660,000.

Family credit is the only part of the whole panoply of benefits that represents hope, rather than despair - for it is the ladder out of social security and into work. It is the top-up paid to low-earning families with children to ensure that if they work even at a very low-paid job, they will (almost) always be better off than if they stay on income support. Nearly half of all claimants are single mothers going out to work for the first time.

But the benefit also causes anxiety. Does this huge growth in take-up of family credit mean the state is increasingly subsidising starvation wages? If employers know that the state will pick up the difference, doesn't it drive wages ever downwards?

The area with most family credit claimants is our new "Tiger Bay" economy in Cardiff, where even manufacturers from Seoul are moving factories in because the wages are lower in South Wales. Will family credit end up subsidising a globalised market in low pay?

No one knows what, if any, effect family credit has had on wages so far. One piece of recent research suggests that most employers have absolutely no idea what family credit is or how it works - so they are not deliberately trying to employ family men and women who would qualify. This is hardly surprising since the arcane intricacies of the social security system are a closed book to all but those who either claim or process claims and the few academics and journalists who have an interest in it.

Eyes glaze over, pages turn rapidly when talk turns to benefit policies. Very few politicians bother to get their minds round them - most simply pass on difficult social security questions from constituents with bored incomprehension. (This near-universal ignorance, however, does not stop people from having passionately held views on the subject.)

Later this month the Government is to embark on the biggest social security experiment ever.

For the next three years in some areas, family credit, currently only available to those with children, will be offered to anyone between the ages of 16 and 64 to see if more people can be lifted off income support and back into work with a similar wage subsidy called employment top-up (ETU). The pilot experiment in 12 key areas will cover 10 per cent of the population. In four areas there will be a higher rate, in four a slightly lower rate and in four there will be no ETU at all, as a control.

Some pounds 3m is being spent on a close study, led by Alan Marsh of the Policy Studies Institute. It will examine the effect on claimants and on the labour market. It will be an amazingly complex analysis that should tell us how to create the right incentives to get people back to work - without creating the wrong incentives for employers to drop wages. There will be a big advertising campaign in those areas where the new benefit will be offered.

Places chosen include inner cities, urban sprawls, rural areas and seaside towns, distinct travel-to-work zones, so that jobs and wages can be studied to see the effect of extending this low-pay subsidy to everyone. This is a sociologist's dream project and it is the way policies should be tested before they are universally applied - a rarity indeed.

What would a good result be? First, that a lot of people now out of work will find it worth their while to get a job. Second, that a huge new raft of jobs will be created as a direct result. They may be low paid but if they are genuinely new jobs then everyone will have gained - the claimant helped out of dependency, the employer hiring a new hand cheaply and the taxpayer for the money saved by getting someone off income support on to the much cheaper earnings top-up. One question will be the "dead weight" cost - how many people currently earning low wages will qualify for a subsidy that will be pure loss to the DSS budget? Will those who go out to work outnumber those already in work making new claims?

But it also raises the spectre of a vast new army of low-paid workers, stuck for ever on a growing state subsidy. Will wages plummet? Why should the state subsidise cheapskate marginal employers? If the advertising campaign to attract the unemployed works, it will presumably attract the attention of employers, too - telling the canny ones in capital letters that they can afford to depress their wages.

This is the best argument yet for the need for a minimum wage. Howard Davies, deputy governor of the Bank of England, has himself said that if there is any evidence of employers making use of the earnings top-up to feather their own nests, then a minimum wage would be an essential back-stop.

This week in Blackpool the TUC is thrashing out the minimum wage policy with Labour - the unions want it fixed at pounds 4.26 an hour, Labour wants to start at pounds 3.50. The lower sum would still anchor wages at a level that makes earnings top-up less liable to abuse. After all, three million people earn less than pounds 3.50 an hour, most of them women - 72 per cent of waitresses, 36 per cent of textile workers.

The new earnings top-up is the best hope we have of getting more of the unemployed back to work - in the hope that low-paid jobs will lead to better paid jobs later. But the tax-payer needs the guarantee that employers must pay a basic minimum.

This pilot scheme is likely to prove that point. For the first time we shall have hard evidence to prove that a minimum wage is part of the armoury of putting people back to work, not, as the right claims, a mechanism for destroying jobs.