25 January 2024

Employee-owned businesses can give young people a stake in the future

By Thomas Nurcombe

Britain is in a wealth crisis, where those from less affluent backgrounds are struggling to make ends meet, let alone save for the future. Since 2008, British incomes have remained stagnant and the past two years of economic crises, encapsulated by high inflation and soaring energy costs, have meant that real pay has fallen by 4% for those from the poorest 10% of households. It is no wonder that trust in the economy is at a low point.  

A glaring issue contributing to individual wealth disparities is the lack of savings among those from less privileged backgrounds. Shockingly, a third of the population have less than £1,000 saved. Even 43% of individuals in the middle-income distribution bracket have savings of less than £2,000. The paucity of money in reserve among less affluent households leaves a fifth unable to handle unexpected expenses, such as boiler repairs, in the cold winter months. 

Young people, in particular, face significant hurdles in saving due to paying exorbitant rents, often exceeding 30% of their income. Coupled with high marginal taxes surpassing 55%, long-term financial stability is becoming increasingly unattainable for an entire generation.  

Difficulties in accessing wealth and financial stability fly in the face of Conservative values, and indeed a functioning market economy. We should want the returns from work to provide individuals with the means to put down a house deposit, have more control over monthly outgoings, make investments that reap long-term rewards and enjoy retirement in a secure way.  

Fortunately, a solution exists to empower hard-working individuals to have a greater stake in the economy and enhanced financial security. Employee-owned businesses, which are often overlooked by government, offer numerous benefits both at the individual and national levels, as shown by Bright Blue’s latest report, from greater resilience to restoring trust in our political system. Importantly, in light of the decline in real pay, this democratic model ensures that one’s labour translates into tangible returns. 

Studies from the US indicate that, when 10% of a business is owned by employees, the share of wealth in the hands of the business’ poorest half of employees doubles. Employee-owned businesses in the UK not only pay an average of £3,000 more annually than other kinds of businesses, but are also 22 percentage points more likely to be Living Wage employers. 

Salaries are not the only important factor in raising the security of low-income households. Annual bonuses and shares in the company also boost financial stability.  

Consistently, up until the Covid-19 pandemic, John Lewis staff received between 5% and 18% bonuses annually and, in 2013, the group distributed some £210m among its nearly 80,000 employees. With the average salary at John Lewis being just over £25,000 – which would typically fall into the low-savings category – the sharing of the company’s profits among employees in the form of shares makes it easier for them to save for a rainy day and makes John Lewis’ employees more resilient to economic shocks and unexpected events.  

There are plenty of other examples of employee-owned firms where workers regularly get up to a 20% boost to their annual salaries through share bonuses, and those shares tend to perform well, as employee-owned businesses are typically up to 12% more productive than conventional businesses. Indeed, policies made under the coalition government ensure that many employee-owned businesses can award tax-exempt shares to staff, up to a value of £3,600 per year, allowing many to hold shares – a great way to set aside money for long-term financial goals – without compromising on essential wages at a time they may be needed. And yet, policies for the promotion of democratic businesses have fallen off in recent years. 

Promoting the growth of wealth in a fairer and more equitable manner is crucial. Increasing the prevalence of employee-owned businesses and integrating them more deeply into the economy can bridge the wealth and savings gap by offering opportunities to accumulate shares and greater capital. Fundamentally, employee-owned businesses provide hardworking people with the ability to meet financial obligations and set aside money for the future.  

As the great French sociologist and diplomat, Alexis de Tocqueville noted in Democracy in America, ‘the desire for prosperity is universal… everyone sees very clearly that profit is, if not entirely, at least in part, what prompts them to work.’ Employee ownership ensures that one’s work translates into wealth and a greater stake in the economy. In other words, people get out what they put in. This is what popular capitalism is all about. 

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Thomas Nurcombe is a researcher at Bright Blue

Columns are the author's own opinion and do not necessarily reflect the views of CapX.