A policy mix for equitable sustainable development in the UK: the effects of gender equality, wages, wealth concentration and fiscal policy

Our results summarised in this policy brief show that in order to solve the UK’s inequality, ecological sustainability and productivity problems, investing in care and green economy and taxing wealth to fund this investment offers a viable policy package. We present a policy mix of social and physical public investment, increasing wages of women and men with closing the gender gaps via upward convergence, and progressive income and wealth taxation. In particular we analyse the effects of a 1%-point increase in public social spending in education, childcare, health and social care, which we refer to as 'purple social infrastructure', and physical investment as a ratio to GDP, a 2% increase in female hourly wage rate, a 1% increase in male wage rate, a 1%-point increase in the tax rate on wealth, a 1%-point increase in the tax rate on profit income, and a 1%-point decrease in the tax rate on wage income. As a result of this policy, we estimate that in the medium-run, GDP increases by 10.9%, women’s employment increases by 9.6%, men’s employment increases by 5.8%, and public debt/GDP decreases by 10.3%-point. The positive impact of a 1%-point increase in public social investment in education, childcare, health and social care on both output (by 2.7% in the medium-run) and employment is substantial, and despite a strong positive effect on productivity, employment of both women and men increase (by 3.2% and 0.4% in the medium-run). A 1%-point increase in public social investment increases productivity (output per hour) in the rest of the economy by 3.3% percent, which provides supporting evidence that this spending functions as infrastructure investment, as it has long term benefits for the society as a whole, and it improves gender equality by socializing the unpaid invisible domestic labour of women. The increase in productivity is substantially higher in the case of public “purple” social infrastructure investment (3.3%) compared to the case of public physical infrastructure investment (0.5%). An upward convergence in wages, i.e. increasing wages of both men and women with closing gender pay gap leads to higher GDP in both the short and the medium-run. In that sense, output in the UK is both wage-led and gender equality-led, and hence equality-led. Labour market policies such as an increase in the minimum wage or collective bargaining coverage, while at the same time enforcing equal pay legislation and aiming at higher rates of increases in occupations at the bottom end of the pay scale, where women constitute a large share of the workforce, are expected to have a positive effect on GDP. In the medium-run higher wages also lead to higher productivity. However as the effect on productivity is stronger than on output, employment may fall in the medium run, unless there is a further demand stimulus. Hence, achieving both higher wages and gender equality and employment for both men and women requires a further stimulus to demand, and an adequate mix of public investment in social and physical infrastructure can achieve equality, ecological sustainability and productivity at once. A policy mix of only upward convergence in wages and public social infrastructure investment, i.e. higher more teachers, nurses, social care workers and pay higher hourly wage rates, has a strong positive impact on output and women’s employment, but men’s employment decreases in the medium-run due to strong productivity gains. Public debt/GDP falls as an outcome of this policy mix. A policy mix of upward convergence in wages and public investment in both social and physical infrastructure leads to a higher increase in output, and employment of both men and women increase both in the short and the medium-run. However, public debt/GDP increases marginally in the medium-run in this policy mix, and an increase in tax rates is required to improve public debt/GDP. But increasing public spending funds about half of itself by generating higher output and tax revenues. It is also worth emphasizing that private investment increases both in the short and medium-run, despite the partial negative effect of higher government borrowing thanks to the positive demand and productivity effects. An increase in the progressivity of income taxation in the form of increasing tax rate on capital income and decreasing tax rate on labour income increases output, private investment, men’s and women’s employment, and decreases public debt/GDP in both the short and the medium-run. An increase in the tax rate on wealth decreases wealth concentration, and has a positive and very strong impact on output, private investment, employment and the budget balance. The results indicate that taxation of wealth is a particularly effective policy to fund purple and green public investment; e.g. inheritance tax may be a suitable tool for funding long term elderly care.