"People are poorer in real terms today than they were before the global financial recession"
The UK’s unemployment rate is currently at one of the lowest levels in 45 years.
The return to levels of employment last seen in the 1970s should mean booming wages according to conventional macroeconomic theory like the Philips Curve that estimates low unemployment drives wage growth, and with it, inflation. Yet, people are poorer in real terms today than they were before the global financial recession. Wage growth is the weakest since just after the Napoleonic war which has puzzled policy makers.
So, what has happened since the financial recession?
It is true that globalisation and the systematic weakening of unions has meant the power of balance has shifted in the last few decades and workers no longer enjoy the bargaining power they once did, but the real driver is ‘’involuntary part-time work’’. People working part time only because they cannot get a full-time job. According to the ONS, 50% of those working part-time prefer and want full-time work.
Recent trends in the world of work have meant greater involuntary part-time employment which appears to have weakened wage growth, as shown by Blanchflower & Bell. This is driven in part by the rise of the ‘gig economy’. A report by the Department for Business, Energy & Industrial Strategy (BEIS) shows almost 90% of Britain’s gig economy workers earn less than £10,000 per year. This compares with the poverty level of income, which is defined as households that have less than 60% of contemporary median income.
In-work poverty has effectively replaced unemployment. The unemployed now barely exist, in their place are millions of people working jobs with no minimum wage, no sick pay, no pensions, not even maximum or minimum working hours. The supply-and-demand model of labour markets is fundamentally broken. In the gig economy, you cannot negotiate pay as there is always somebody else who needs more hours and is willing to obtain it at the going rate. This is bad for the economy, causes inequality and marginalises workers. It is also particularly unsettling because work no longer leads to prosperity for many people in the country. You cannot climb the career ladder working on a zero-hour contract. It follows that a minimum income level becomes one of the most important policy issues in this context.
The future of the gig economy
This new way of working is not going away anytime soon, in fact it is set to increase. Recent research shows the gig economy has more than doubled in size over the past 3 years and now accounts for 4.7 million workers.
Our traditional benefits infrastructure was not designed to meet the needs of these individual gig workers. In addition, gig workers get shut out of the financial system because traditional lenders struggle to assess their volatile incomes and the associated risks. As a result, Citizens Advice has found that UK households on volatile income, i.e. zero-hour contracts, are 5 times more likely to have to turn to higher cost credit. If the new ways of working are to have a positive impact on the economy and workers, there are many policy issues that need to be addressed. Technology and AI can and should play a role in identifying and designing solutions to achieve financial inclusion of gig workers.
The new tech disruption will be focused on gig economy workers
There is a vacuum for a suite of financial products designed for gig economy workers as well as the traditional self-employed freelancers, to help them with budgeting, saving, retirement planning, tax returns and loan products designed for intermittent but predictable income.
There are many start-ups already focused on financial inclusion, from providing insurance on an hourly basis to income smoothing. Open Banking APIs can connect workers’ bank accounts and credit cards with tools that monitor spending habits and facilitate regular savings. Artificial intelligence algorithms can, through predictive analytics and machine learning, be utilised to guide workers to clearly understand their spending and to automate regular contributions to a savings and pensions account through the use of behavioural economics and personal finance.
Nevertheless, the gig economy faces challenges today that technology alone cannot fix. Any innovation needs to go hand in hand with strengthened labour rights, through regulation and better policy making, to reflect the changes in our workforce and to ensure financial inclusion of all.
Sahra works for the Royal Bank of Scotland in Consumer Finance, with a focus on lending products and innovation.