Reasons to be cautious (and a bit cheerful) about low pay

The significant decline in the proportion of workers on low pay is good news, but we should be cautious about interpreting what it means for the British economy. Only transformative action on multiple fronts will address the economic insecurity faced by Britons.

A report published this week by the Resolution Foundation found that the proportion of workers on low pay has nosedived to its lowest levels since 1980. This has provided the government with a well-needed good news story, amid never-ending Brexit-related gloom.

Government of course has every reason to be happy: the drop in workers on low pay has been driven by the National Living Wage, which was in effect a higher minimum wage (albeit restricted to workers aged 25 and over) that was introduced in 2016. The current Chancellor wants to end low pay altogether, while the Shadow Chancellor wants a ‘real Living Wage’ of around £10 an hour.

As the Resolution Foundation notes, the degree of political consensus on the issue reflects the fact that the minimum wage – and the way that it is set - is one of the most successful policies of the last few decades. It also sets Britain apart as a global leader. Not only does it have one of the most ambitious minimum wages in the world (and it is set to get even more ambitious), but it has achieved this over the years without negatively affecting employment levels.

In other words, Britain has faced down the biggest argument against higher minimum wages, as the world watches on – and learns. The progressive movements against low pay across the US and other countries will surely benefit from this. Indeed, as Britain stumbles through Brexit it may be precisely this sort of leadership that’s desperately needed to create an image of a progressive, forward-looking Britain, rather than one resigned to becoming a low-pay tax haven. Experts of course advise caution in the careful calibration of the minimum wage, but there are real grounds to be optimistic.

Nevertheless, there are also reasons to be cautious about what exactly the lower (proportional) numbers of workers on low pay actually means for the economy and British families. The Chancellor will no doubt present the figures as a vindication of the government’s handling of the economy and its social and economic policy agenda. Yet the figures have been released only a week after a report by the UN special rapporteur on extreme poverty said that government policies, including welfare reforms and austerity, have led to the “systematic immiseration” of large sections of the UK population.  The UK of course also has a serious issue with in-work poverty. In explaining this apparent contradiction, there are a few reasons to be cautious about how we interpret what declining low pay tells us about Britain.

1. Low pay levels are not the same thing as living standards

Pay levels simply describe the hourly earnings of workers. They do not give us a complete picture of the annual income that individuals get from work – which can be affected by, for example, inconsistent hours and under-employment. My cousin, who works for G4S on a zero hours contract, may earn more per hour but his income is severely restricted by the casual nature of the work he does. In addition to this, the hourly earnings of workers don’t tell us much about how their families fare. To do this we need to look at the disposable incomes of households – including after social transfers from government. This is a key point: the benefits of the National Living Wage have been more than offset by the severe austerity imposed by central government. Organisations such as the Resolution Foundation and the Institute for Fiscal Studies have done great work showing how this has contributed to the scale Britain’s living standards crisis, which the former says could lead to inequality levels not seen since the 1980s. This also helps to explain why in-work poverty is as high as it is in the UK.

2. Low pay levels don’t tell you about people’s experience of work

Hourly earnings only give you a partial picture of how people experience work, the quality and security of the work that they do, and their prospects for progressing and earning more. People like my cousin (mentioned above) may now have higher hourly pay, but they have very little control over the hours they can work, the sort of work that they do (and the discretion they have to do it), the support they can receive from unions, the training they can access and how secure they feel in their work and their wider lives. Research by the RSA has shown the degree of economic insecurity (both objective and subjective) experienced by large sections of the workforce and their families, including but not restricted to those in the gig economy. The Taylor Review criticised the “one-sided flexibility” (favouring employers) that characterises the British labour market, which has considerably weakened worker power.

The weakening of worker power has occurred alongside a weakening of the dignity and rights of those that require benefits, either due to unemployment or low pay. As our recent report on Basic Income highlighted, welfare reforms and cuts since 2010 have put severe pressure on families, tipping many of them into poverty and ill-health, or forcing them into low value work. Workers whose families fall on hard times or don’t earn enough are therefore often being met by an increasingly cold welfare system that makes matters worse. Indeed, many parts of Britain have a high proportion of people that cycle in and out of poverty and in between insecure, low value jobs and a punitive welfare system. 

Unlike many other advanced economies, Britons that could most benefit from training and skills support are also the least likely to receive it. The decline of participation in adult learning and the severe cuts to Further Education have made this even worse. At the same time, we have a culture of capitalism – facilitated by national policy – that prioritises short-term profit maximisation, often through cutting costs instead of investing in human capital. Bank of England governor Mark Carney has described this as “market fundamentalism”. This means many people are stuck in lower pay with few opportunities for progression. There is a danger that we move towards an economy with a high wage floor but a very low glass ceiling.

3. Low pay should be part of a wider set of reforms to transform the British economy and governance

This all suggests that as important as the decline in low pay is, British families will continue to experience economic insecurity unless we take more transformative action on multiple fronts. Ongoing work by the RSA provides a blueprint for what’s possible. Whether it’s pushing ahead with inclusive growth and devolution, tackling the housing crisis, promoting lifelong learning and adult skills, developing models for new forms of social security such as UBI, supporting community wealth building, regional banks and employee ownership, or devising a new social contract for work, a new type of economy and society is possible – and achievable.