Blog: Making the UK a great place to work

Impact Fellow Raj Patel on the discussion from Insights 2017 on how should we tackle low pay and insecure work.

The issue of low pay, defined as below two-thirds of the median wage threshold, has been a longstanding feature of the UK economy and only recently moved to the forefront of public debate. And although insecure work is not new either, it has been expanding into industries and occupations where it was not previously common. At the same time policy makers are grappling with the longer-term implications of the ‘gig’ economy.

Understanding Society hosted a major debate on making the UK a good place to work. This blog sets out the main points of contention and potential policy levers for improving low pay and work quality. The overall purpose of the event was to launch the annual Insights Report [link], present top-line findings on the dynamics of low pay and work and discuss their policy implications. The points presented are interpreted from a wide ranging discussion.

Presentations from Professor Susan Harkness, Associate Director of Policy, Understanding Society, and Conor D’Arcy from the Resolution Foundation, were followed by a lively panel debate chaired by Vicky Pryce, Centre for Economic and Business Research (CEBR), with contributions from John Earls, Unite the Union, Professor Paul Gregg, University of Bath and Matthew Oakley, WPI Economics and Social Metrics Commission.

The National Living Wage (as opposed to the ‘real’ living wage), the Taylor Review of Modern Working Practices, Industrial Strategy White Paper and roll-out of Universal Credit all raise questions about how these will or could impact on those at the bottom-end of the labour market. Positively, the tightening of the labour market is beginning to reduce some types of insecure work. According to the Office for National Statistics (ONS), the number of people employed on zero hour contracts has fallen for the first time since 2011.

The problems of low pay and low income are distinct, with very different drivers. Policy instruments, such as Tax Credits and the government’s National Living Wage (NLW) also perform different functions. Much of the debate about low paid work tends to focus on relative earnings, but absolute wages, i.e. bringing the floor up, is also important. And even if the incidence of low pay falls its impact on poverty is likely to be limited: the number of earners in the household, the number of hours they work, the number of dependents and the families’ needs all matter – and policy has yet to figure out how to address this.

The good news is that policy interventions such as the government’s National Living Wage can make a difference although the potential impact should be kept in perspective. According to the Resolution Foundation, the full introduction of the NLW by 2020 will only move the UK from being relatively high on the OECD low pay league table to being a middle ranking country.

Headline findings from Understanding Society

The full findings can be read in Insights 2017. Four key points reveal a number of substantive and interesting findings:

  • Poor progression: On the question of whether low pay is a stepping stone or a dead-end, analysis shows that of the low-paid, the 64% who dip in and out of low pay dominate the numbers that escape (25%) or who are consistently trapped in low pay (12%). For the vast majority of workers low pay isn’t a spring board to progression.
  • Working hours: Inequalities in total hours account for circa. 40% of earnings inequality in the UK. Those with the lowest wages are becoming increasingly constrained in their hours of work, with worrying implications for earnings inequality.
  • Localities matter: Compared to unemployment, being in low-paid work reduces the chance of unemployment one year on…but the ‘pay-off’ depends on where one lives. A national increase in the minimum wage would have different effects in different labour markets. One likelihood is that it could reduce the level of low paid employment in areas with high unemployment and undermine the springboard effect of low pay.
  • Self-employed: volunteers or reluctant workers? Self-employment is more of a choice rather than a push factor where local labour markets are strong. Here the rise in self-employment provides new opportunities for those who may not otherwise work – with business start-up schemes more likely to benefit relatively prosperous areas.

What can be done? Policy issues and levers

A range of policy issues and levers were debated, including alternative ideas for tackling low pay and insecure work. Perspectives varied according to what the contributors and delegates saw as the causes and symptoms of low pay and insecure work. An interesting point of discussion was whether low pay and insecure work should primarily be tackled through labour market policy or whether emphasis should be placed on productivity, education and skills and housing mobility? How should short and long-term measures be balanced? Paul Gregg pointed to the need to look at productivity, minimum employment standards, young people’s pay and conditions and the role of over-time premium. John Earls argued that the trade unions were operating in a policy vacuum as there was no policy and institutional framework for addressing low pay and insecure work which acknowledged the role of collective bargaining in the process. The focus should be on the real causes of low pay and poor work rather than simply trying to move income around between the state and employers. According to Matthew Oakley, this pointed to productivity, education and skills and the housing market as the main policy levers.

Productivity and corporate investment

Productivity has stalled post-recession raising a fundamental challenge of how to re-start the traditional conveyor belt which has historically helped improve wages as productivity has risen. Output per hour has increased by 1.3% over the entire post-recession period compared to 2.3% per year prior to 2008 (Resolution Foundation). Corporate investment is incredibility low and pay is no longer responding to increases in inflation such as recent rises caused by the devaluation of sterling. Contrary to the argument that improvements in wages depend on better productivity, the more likely picture is that they are interdependent, with employers currently substituting cheap labour for capital investment rather than increasing the latter to manage a rising wage bill. However, productivity couldn’t simply by addressed by business on its own – the government have a role to play, with the new architecture being put in place through the Industrial Strategy taking centre stage.

Young People’s income … and education and skills

Young people are performing worse than previous generations, and although their pay is still rising, it is doing so less rapidly then the past. According to Professor Paul Gregg, the peak cohort was born in 1978! Young people are better educated than ever before but it is no longer the case that these cohorts are better paid than previous cohorts. This means critically reviewing the role of education, apprenticeships and skills, particularly the preparation of young people for the world of work, and examining how licensing arrangement (see below) could benefit young people.

Minimum standards and licensing arrangements

“Minimum standards and licensing arrangements” can be thought of as setting a floor – such as the minimum wage and qualification entry requirements for different occupations. They set minimum expectations in the labour market. While countries such as Australia and USA have licensing arrangements in place, they generally raise pay levels at the entry level of the labour market by reducing competition so do have other consequences.

The Taylor Review, which proposed higher minimum wage rates for those on zero hours contracts and multiplier rates for casual worker, is an area worth visiting more widely. Overtime pay has largely disappeared from the labour market except for some occupations. Pay and conditions for working anti-social hours, at weekends and in evenings should be factored in.

Industrial Strategy Sector Deals

Even a large rise in the statutory minimum wage will not dramatically change the living standards of those receiving it – this depends on pay progression. In this context, the development of an Industrial Strategy was broadly welcomed by all if wasn’t restricted to “leading-edge” and growth sectors. Growing sectors can help improve the conditions of those poorly paid in the sector but it is sectors such as retail, hospitality and care that account for disproportionate numbers of people on low pay and insecure work.

Sector Councils already exist in the UK but the Industrial Strategy Green Paper proposed “Sector Deals” as a new UK wide concept to transform and upgrade sectors. Under this approach, instead of government prioritising sectors (and being accused of ‘picking winners’), sectors will be asked to come together and set out their ambitions for tackling barriers to growth and productivity. However, Industrial Strategy Green Paper did not envisage a role for them in this area. The Government could change this by ensuring that the benefits of Sector Deals are more evenly spread out amongst workers in those sectors. This could be by enabling them to negotiate “minimum wage plus” agreements and ensuring worker representation on sector bodies.

Localities and opportunities

Growth and productivity varies dramatically across the country and as Understanding Society evidence is showing, the nature of local labour markets play a critical role in the dynamics of low pay and progression. Rising minimum wages, whether it is the real Living Wage or NLW are a double-edged sword: they can pull people towards a new equilibrium and risk reducing pay progression in places with depressed wage levels – such as Wales, the North East of England and ‘one wage towns’. City deals and devolution may offer a mechanism to strengthen skills provision in such localities but it remains unclear whether skills problems are currently being addressed at a sufficiently local level to make any difference.

Evidence also shows that moving jobs is associated with improvements in low pay (provided people are not simply moving horizontally) but government employment support tends to be focused on those out of work rather than those in work. Much needed investment in local transport infrastructure could aid mobility. Access to affordable childcare is a significant structural barrier, and for older workers, health and disability factors dampen prospects as does the discrimination they face due to age. A more structured process of adaptation in the workplace could be beneficial for those with health problems.

The poor functioning of the housing market was seen as a long-term constraint. Housing mobility to areas of growth could be a route to progression but equally there was wide spread acknowledgement that in most cases this was an unrealistic expectation for people on low pay for a wide variety of reasons, including local social and community networks and support. For couples, mobility over distance is also associated with one partner usually sacrificing or downgrading their career and this usually tends to impact on women much more than men.

Universal Credit and Job Centre Plus

Does Universal Credit and Job Centre Plus have a role to play given they were designed on the principle of “work first”, with in-work conditionality as an add-on? The general answer was “no”, not as currently set-up. Skepticism was expressed about whether Universal Credit, in seeking to change the incentive system to work (by lowering the marginal rate of taxation), could provide a spring-board to better pay for those in work. One perspective was that people living on the margins are more likely to want to move from part-time work to full-time work rather than marginally increasingly their labour supply in response to small changes in the marginal rate of tax.

International migration

The impact of large-scale immigration on jobs and wages continues to be a contentious issue and complicated to measure. UK evidence suggests that immigration has a small impact on average wages of existing workers but more significant effects along the wage distribution: low-wage workers lose while medium and high-paid workers gain. The effects of international migration depend on two different factors: where workers have migrated from and the size and composition of the local labour market they have migrated to. For example, if migration is from Spain or Portugal, it is likely that as those economies pick-up people will start returning to their countries of origin. Where local labour markets are relatively dynamic migration can be economically absorbed with immigration contributing to growth as it is not a zero-sum game. Many northern towns have benefited from the influx of higher levels of skills but if they start losing these people it could make it harder to improve growth and productivity.

Related research and policy links