Is a low-paid job a stepping stone to better pay?

Dr Alexander Plum, Dr Gundi Knies

When it comes to future employment and earning prospects, is having a low-paid job always better than no job? And what role does the local unemployment level play?

The low-wage sector has increased to a significant extent in many economies in recent decades, including the UK – and at the same time, we’ve seen growing criticism of it. Low-wage jobs are often deemed ‘bad’ jobs, because they are more likely to be part-time, and not permanent (by involving short-term contracts, for example). They also typically don’t include any specific training, which lowers the chances of picking up transferable skills – which is essential for future wage progression.

This all suggests that low-paid work might not help people to find better paid jobs in the future, as it doesn’t increase their human capital (the economic value of their experience and skills). But picking up a low-paid job might make sense for someone who’s unemployed, as it might stop the process of human capital depreciation caused by unemployment. It may also be a signal to employers that one is willing to work, and therefore lower one’s risk of becoming unemployed in the future. Taking on low-paid work, then, could make it easier to get a better-paid job in the future than staying unemployed, and thus act as a stepping stone.

Looking at the labour market dynamics of low paid employment, existing research shows that low-paid workers tend to work more locally than those who are more highly paid. Our research looks at how low-paid employment affects people’s career paths after accounting for the local labour market conditions.

Using the data

This research matched data from the first five waves of Understanding Society with official statistics for small geographical areas (known as LSOAs – Lower Layer Super Output Areas) in England, providing local unemployment rates to show how much competition those unemployed and those working in the low-wage sector might face.

Understanding Society is well suited to this analysis, because it interviews a large number of individuals and has a rich set of labour market related information. It also has enough respondents in different kinds of area (metropolitan, urban and rural) to provide enough statistical power to allow us to examine how the local area influences individual lives and labour market trajectories. And it’s structured in a way which allows us to link the data from the Study with external data on local labour markets.

What we found

In places where the local unemployment rate is high and therefore competition on vacant jobs fierce, low-paid work has a strong stepping stone effect – reducing the risk of future unemployment, and increasing the chances of moving into higher-paid work. This indicates that showing one’s willingness to work by taking on low-paid employment might be especially relevant in this type of area.

By contrast, in neighbourhoods with low unemployment (and the chance of entering a new job better), the stepping stone effect is negligible for the short-term unemployed who take up low-paid work – but it’s larger for the long-term unemployed and increases considerably as local unemployment rises. So, when unemployment (and therefore competition for jobs locally) is high, we find empirical evidence that low pay helps to improve people’s labour market prospects compared to being unemployed.

The findings support the idea that human capital deteriorates during unemployment, and that the chance of finding a job decreases the longer the unemployment lasts – a process that can be stopped by picking up a low-paid job.

Other factors

There may be other factors involved in some neighbourhoods – economically attractive areas tend to see investment, house-building, and people moving in; aspects that also help people exiting unemployment. However, our findings are robust to various specifications.

It’s also worth mentioning that we focused on men aged from 25 to 55 (often referred to as the prime age), and other studies have shown that low pay is especially prevalent for young and female workers. So future research should look at whether these findings also hold for these groups.

Policy implications

In the specific population and period covered, there clearly were some groups for whom low pay work has paid off. However, being on low pay often means living with financial constraints. Qualitative research with people in deprived neighbourhoods has shown that low wages typically don’t pay enough to maintain a family, and costs associated with the job (such as commuting) put enormous pressure on workers who have to make ends meet.

There is also research on low pay in New Zealand using administrative tax records (PDF), which shows that low-paid work itself does not seem to have a substantial effect on a person’s earnings and progression – though they might move up the pay scale, the progression is rather negligible. For that, people need jobs where they can develop skills, raise their productivity and get promoted.

Given all of this, the trend towards short- and fixed-term and zero-hour contracts means that incentives to take up low-paid work are falling for exactly the people who – according to our work – were most likely to benefit. Policies that increase the attractiveness of these types of work by improving job security, limiting the use of zero-hours contracts, and offering support for skills improvement and career advancement, however, could tackle this.

Authors

Dr Alexander Plum

Alexander Plum is a Senior Research Fellow at the New Zealand Work Research Institute, Auckland University of Technology

Dr Gundi Knies

Gundi Knies is a Research Fellow at the Institute for Social and Economic Research, University of Essex