Against the backdrop of the welfare reform bill the Smith Institute calls for a major rethink of how to tackle poverty and inequality.

Its new 135 page report From the poor law to welfare to work – what have we learnt from a century of anti-poverty policies (published today) concludes that without action on jobs and pay, poverty and inequality will continue to rise in the UK.

The Institute’s study shows that efforts by all governments since 1980 (including New Labour) to reduce poverty and improve social mobility were undermined by low pay and deregulation of the labour market.

The report argues that social policy and labour market policy must be reconnected.

It also states full employment is a pre-requisite for the successful implementation of anti-poverty policies. It says anti-poverty policies are most effective when they work in parallel with actions to increase pay of those on low incomes.

Without empowering the workforce to ensure a fairer distribution of market incomes, governments will continue to pick up the tab and employers’ will continue to rely on low pay.

All political parties agree that the resources available for combating poverty will be limited in the immediate future.

The report recognises this reality, emphasises that social security remains essential, but argues that the focus of policy must shift to securing a fairer distribution of labour market incomes before the intervention of the tax and benefit system.

Amongst the measures proposed are:

More transparency in executive pay with an explicit obligation to publish the details of all directors pay packages in the annual reports of listed companies. In addition, the annual report should record the ratio of high pay to low pay, the distribution of pay across different levels of earnings and the number of workers in receipt of the National Minimum Wage.

Ensuring that the National Minimum Wage is effectively enforced and is fixed at the highest possible level before any negative employment effects appear.

The inclusion of labour clauses in public contracts, potentially building on the notion of the "living wage". The UK should also re-ratify the relevant convention of the International Labour Organisation.

Rebuilding the power of trade unions or other organisations representing workers so that wages rise in line with productivity and a check is imposed on excessive executive pay.

The development, in partnership with employers, of a major new national programme focused on raising skill levels, boosting productivity and improving the overall quality of employment at the bottom of the labour market.

The reports states that Thatcherism transformed the world of work through the erosion of employment protection rights, tight restrictions on trade unions, the abolition of wage floors (like the Fair Wages Resolution and wages councils), lower taxes for the better off, a deliberate effort to shift the balance of power at work in favour of employers and abandoning the commitment to full employment.

The Smith Institute states that apart from the significant achievement of the National Minimum Wage, New Labour left much of the post-Thatcher settlement intact and sought to tackle poverty principally through the tax and benefit system.

Some progress was made in reducing child poverty in particular, but in-work poverty continued to rise and income inequality remained at a very high level. The report concludes that state acting alone will always struggle to halt and reverse these trends.

Civil society institutions, especially those that operate in the labour market, have a critical role to play.

Paul Hackett, director of the Smith Institute, said: “This report shows that in order to reduce poverty and inequality we need to rebalance the power relationship in the workplace. The policy focus should be more on low pay, than high pay; and more on job creation than labour market deregulation. We need a new social contract which provides sustainable jobs and fair pay."

David Coats, research fellow at the Smith Institute and principal author of the report, said: "There is an emerging consensus that high levels of poverty and inequality are a cause of economic instability.

"If governments want to build a sustainable model of economic growth then they need to continue their redistributive efforts and ensure that there are effective labour market institutions that deliver decent pay, high productivity and fairness in the workplace. Tackling unemployment by getting the economy growing again must be the top priority."

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