Magazine article Public Finance

Low Pay-Off?

Magazine article Public Finance

Low Pay-Off?

Article excerpt

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. …

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