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Making work pay: the story so far

February 11, 2014

Originally posted in the Fabian Review Online, 11th February 2014

The economy is growing, but where are the celebrations? The recentpreliminary GDP figures showed 0.7 per cent growth in the last quarter of 2013, but the response has been muted. Business secretary Vince Cable pre-empted the figures by declaring that “the shape of the recovery has not been all that we might have hoped for”. Why? First, there is little evidence that the economy is rebalancing: James Plunkett from the Resolution Foundation noted that 0.4 per cent of this growth was in business services and finance. Second, as the TUC’s Duncan Weldon commented, there is evidence that the recession has had the effect of boosting low wage, low productivity jobs. We are losing jobs in manufacturing, and gaining them in health; losing them in construction, and gaining them in real estate.

Signs of life in the economy therefore do not mean broad-based growth, much less relief from the longest consecutive fall in real wages since records began. The most common explanation for the decline in wages is the changing nature of the UK economy. The argument goes that traditional industries such as manufacturing have lost comparative advantage against emerging economies, in part because of the cost of wages. These competitive pressures mean we have been painfully shifting towards an economy in which a broad base of service jobs support a small number of truly innovative professions at the top.

This narrative is persuasive but not entirely so. It becomes a bit threadbare now that we have a much better understanding of the experience of low-paid workers. First, we know that low-paid workers in the UK are not competing directly against workers elsewhere. The sectors in which low pay has proliferated – chiefly personal services such as cleaning, catering, and security – are not directly exposed to international competition: a pub on a UK high street is not competing against a Chinese bar. So how about competition in the labour market? Immigration is not the problem here either, because increased migration tends to put downward pressure on wages in those sectors already staffed by migrants. London has the highest proportion of migrants, too, but the lowest proportion of low-paid jobs – so there’s no simple explanation to be found here.

A more convincing version of our standard narrative about pay suggests that technological change has made mid-level, managerial jobs redundant. Low-paid workers can’t progress to better-paid jobs because the career ladder has disappeared, alongside the 9-5 working day and the well-thumbed Rolodex. It’s true that there has been a decline in managerial jobs. In fact, the UK Commission on Employment and Skills argues that not only has the job market become increasingly polarised, the ‘UK appears to be one of the outlier nations that have encountered particularly strong polarising trends’. The significant change, however, appears to be growing inequalities in pay for workers in the same mid-level occupations.

For these reasons, it seems that the relative decline of Western economies and the disruptive effects of technology are not directly to blame. If we know the kinds of jobs that attract low pay, who are likely to take them?

Women are more heavily concentrated in sectors where part-time or flexible employment is common. The jobs market severely punishes women for trying to fit work around other priorities: not only are part-time pay rates generally lower, but there are also fewer opportunities available to those who have had a period of part time work. It is true that in the past decade, the share of low pay is increasing for men and declining for women: but the difference in earningsbetween high- and low-paid women has actually increased.

Young people are also bearing the brunt of a low-pay economy: a quarter of workers under 21 years old earned less than the living wage in 2012, and two-fifths of those between 21-25 years old.  Young people face a double challenge as older workers stay in the job for longer: many are seeking to make up for low wages by asking for more hours. However, employers have tended in the recession to extend the hours of older employees rather than risk hiring new ones.

Now the economy has returned to growth, it’s time for a conversation about pay. The gaps in the usual story of international competition and technological change mean that we need to understand why certain sectors are dependent on low pay. The experience of the low-paid themselves means that we can’t just point the finger at individuals: women are losing out because of the nature of the jobs available to them, young people because of the kind of working life they are forced to accept. Low pay need not be a fact of life, and in my next article I will show how it is holding back recovery.

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