Breadline Britain: the unwholesome effects of low pay

21 Jan 15
It’s emerging as a key election issue, yet the proportion of Britons in low-paid work has changed little in 20 years. So what can be done to tackle the barriers to improving poor pay, in both the private and public sectors?

By Conor D’Arcy and Adam Corlett | 21 January 2015

It’s emerging as a key election issue, yet the proportion of Britons in low-paid work has changed little in 20 years. So what can be done to tackle the barriers to improving poor pay, in both the private and public sectors?

Deptford High Street Alamy

Low pay is rising up the political agenda. A non-runner in terms of public concern in 2005, a recent YouGov survey found that two-thirds of respondents now believe low pay should be one of the top issues at the general election in May.

It wasn’t so long ago that there was fierce and powerful opposition to the existence of the National Minimum Wage; today we see a pre-election arms race between the parties on who will push it higher in the next parliament. And yet, the proportion of people in low-paid work in Britain has barely changed in 20 years. Does the issue really merit the attention it has been receiving?

With more than one in five employees across Britain defined as low-paid – earning less than two-thirds of the median hourly wage, equivalent to £7.69 in the latest figures – it is perhaps more surprising that the issue has taken so long to become politically salient. After all, we have one of the highest proportions of low-paid workers in the developed world, topped only by the US and a handful of others. The stability of the headline rate also conceals considerable shifts in Britain’s low-paid workforce; the odds of being low-paid have increased in recent decades for younger workers and men, and have fallen for the over-60s and women, although the latter do still make up the majority of low earners.

The increasing prominence of low pay as an issue ties in with the broader – though linked – debate on living standards. In recent decades, the welcome growth in the number of second earners and in-work support such as Tax Credits have helped to buoy the incomes of low- and middle-income families. But these approaches have natural limits.

In the long run, improved living standards for these families depend on real wage growth and a route out of low pay.

The six-year pay squeeze, during which earnings have fallen back to where they were in the early 2000s, has put the spotlight on low incomes. But this isn’t just a product of recession: for many people, earnings were stagnating before the downturn. There is no guarantee that recovery will bring strong real wage growth for all.

Of course, we expect those at the start of their working lives to be paid less than more experienced colleagues. Some will move quickly out of low pay as they age. But for too many, low-paid work is less a stepping stone and more a permanent base to which they always return.

Just one in four workers who were on low pay a decade ago have escaped and moved onto higher wages. The majority appear to move out of low pay at some point but fail to make sustained progress. Persistent low pay isn’t just an issue for individuals and households. Weak wage growth and the concentration of job creation in low-paying sectors over the last year contributed to a shortfall in income tax revenues despite record employment. It also puts pressure on social security spending – from Tax Credits to Housing Benefit.

Low pay also goes hand in glove with low productivity – one of the biggest macroeconomic worries of recent years. This relationship works both ways. Low productivity means employers can only afford to pay low wages, but cheap labour also makes firms less likely to invest in new capital. The flipside may look good in headline employment terms but it means lower productivity, lower growth and lower pay in the long run.

The UK performs badly and has a large productivity gap against most other advanced economies. The CBI estimates that boosting productivity to US levels in the lowest productivity (and pay) sectors – including retail and administration – would boost GDP by 9% and increase real earnings growth for those workers by 2.4% a year, transforming their fortunes.

We know what has happened to low pay over the last few decades. But what is the outlook for the next few years? Given the turmoil since the financial crisis, and the mixed picture for low pay before then, it is hard to know what a return to ‘normality’ would look like or how likely that is. Falling unemployment should start to put some upward pressure on wages, as should further above-inflation increases in the Minimum Wage, which will be used as a benchmark for pay settlements further up the income scale. However, long-term increases in labour market participation, due to longer working lives and welfare reform among other factors, may also hold back the earnings of low-paid workers.

The future shape and size of Britain’s low-paid workforce will also depend on the sectoral mix of the economy. In recent years, the low-paying hotel and restaurant sector has taken an ever larger share of jobs, while the public sector, with its better pay and skills progression, has shrunk. Shifts such as these sit within a broader worry about the ‘hollowing out’ of the labour market – a loss of middle-ranking skilled jobs along with a rise in lower- and higher-skill occupations.

Many have speculated that new technologies could lead to an even more polarised labour market. It is too early to say whether this potentially scary outlook, in which many workers cannot compete with new technology, will come true.

This concern is not new – it has been repeated periodically for hundreds of years. Technology will certainly play a key role in determining the outlook for low pay. A more positive outlook would see this change creating a virtuous cycle of productivity and wage gains that all workers would benefit from.

Sluggish pay growth and a failure to tackle low pay will affect the UK’s economic prospects. The Office for Budget Responsibility’s projection is that the recovery will be consumption-led. But in the absence of strong wage growth this can only be achieved through higher debt, particularly as still-tighter welfare cuts are introduced in the pursuit of deficit reduction. Indeed, the OBR is predicting that the household debt-to-income ratio will grow far beyond its pre-crisis peak. It is questionable whether this scenario is feasible – let alone desirable. Clearly if we want to have consumption-led growth without record levels of debt we will have to improve the position of Britain’s lowest earners.

There are considerable barriers to combating low pay. Many of these are global and beyond the control of governments. But we shouldn’t be fatalistic. Other countries are similarly exposed to the challenge, yet record much lower levels of low pay: fewer than one in 10 full-time employees are low paid in New Zealand, Finland and Belgium, for example.

The success of the Minimum Wage in reducing the prevalence of extremely low pay over the last 16 years highlights the positive role that public policy can play.

Raising productivity – particularly at the bottom – would clearly make the biggest difference to boosting pay. And there are ways governments can promote this, including improving our education system and better linking it to the labour market. But for decades governments of all stripes have promised such reforms. Indeed, the focus on long-term productivity can be an all too convenient distraction from the good that could be done in the short- to medium-term.

A more straightforward and immediate starting point would be a stronger wage floor through a higher Minimum Wage – a popular policy that all political parties now favour. But we also need to acknowledge the limitations of the Minimum Wage, which can only ever be one component in a strategy to reduce low pay.

The Living Wage campaign has contributed to increased awareness of, and dissatisfaction with, low pay and its coverage has grown year on year. Getting more employers from low-paying sectors on board is an essential next step.

While some sectors can easily absorb a higher wage floor, we shouldn’t ignore the difficulties others such as hospitality, retail and social care would face. We need further investigation into the particular barriers and possibilities in these ‘problem’ industries. Employer-led institutional mechanisms in these sectors could help to support workforce and skill development – getting productivity moving again, as well as pay progression.

This would be aided by expanding the role of the Low Pay Commission to make it a watchdog on low pay, as recommended by its former chair, Sir George Bain, in a review into the future of the Minimum Wage. This enhanced remit would give it the teeth to lead movement towards a target of reduced low pay, marshalling a cross-governmental plan.

Low-paid workers need a voice and bargaining power that is stronger but appropriate for a flexible, service-dominated, open economy – and one with high levels of self-employment: now more than 4.5 million workers. In the United States, unions are adapting to the decline in collective bargaining power. Bodies such as the Service Employees International Union in the US and Canada, while engaging in traditional tactics such as co-ordinating wildcat walkouts and strikes, have also moved into new terrain supporting local ballots on higher minimum wages. Will we see similar experimentation with new approaches by unions in the UK?

Low pay is with us to stay. The closest thing that we have to a silver bullet for tackling it – a fresh productivity jump – is easier said than done and a revolution in skills has proved elusive in recent decades. But there is plenty that employers and governments can do to reduce low pay and tackle its ‘stickiness’.

Of course, some of these reforms will carry a price tag. There is an open question around whether society is prepared to pay more – through public procurement and directly in the form of higher prices – to boost pay at the bottom. But there are wider economic and social benefits associated with such moves, and the business case needs disseminating.

The debate around low pay is moving fast. We need public policy to catch up so that in 20 years’ time we are not still debating why one in five workers in Britain isn’t paid a decent wage.

Conor D’Arcy is policy analyst and Adam Corlett is economic analyst at the Resolution Foundation, a think-tank working to improve the living standards of Britons on low to middle incomes

Proportion of British workers on low pay by age-group


Did you enjoy this article?