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The Resolution Foundation Earnings Outlook

A look beyond the headline data on the forces behind current developments in pay, how the fruits are shared, and the short- and longer-term drivers of earnings growth

Spotlight: To stick or to twist? Staying and moving jobs under the NLW

Stephen Clarke, Resolution Foundation

The NLW has provided a welcome pay boost for millions of low paid workers and has been the one bright spot in an otherwise bleak pay growth picture. Introduced in April 2016 it has meant that the minimum wage for those 25 and over has already risen by 12 per cent in two years. But while the NLW brings a pay rise it also brings challenges, particularly how to encourage progression when pay bands are being compressed.

Pay progression is obviously important for living standards. But it is also important for productivity with workers moving into roles that better match their talents. Higher pay often entices workers to move jobs, but while there are rewards for moving there are also risks, the new job may not be as secure, or enjoyable as the last one. Weighing up the pros and cons is something most people will be familiar with.

The NLW risks reducing the incentive to change jobs or move to a new employer because it may shrink the pay differentials between jobs towards the bottom of the labour market. By 2020 we expect that 1.7 million of the 25-plus employees will earning £8.75 an hour (the expected NLW rate) and around 2.4 million workers will be earning between £8.75 and £9.45. Historically moving up the pay scale for an employee on the wage floor would have led to a significant pay increase. Unless firms retain pay differentials this may be less true in the future.

The NLW has been in place for over a year now so we can start to estimate what impact it may have had on the incentives to progress. The best way to do this is to see how the NLW has affected pay rises for those moving jobs and those staying put (Figure 4). Two things stand out. First, it pays to move, although only between 10 and 20 per cent of the workforce move jobs or employers each year. Across the pay distribution those who move jobs receive a larger pay rise than those who remain and the returns to moving job are greatest at the bottom.

Figure 4: It pays not to stay

Notes and sources: See notes on Indicator 4: Pay rises

Second, 2016 was the first year since the 2007 when anyone in the bottom half of the pay distribution who remained in the same job got a nominal pay rise above 3.5 per cent. The typical pay rise for earners in the bottom 10 per cent that stuck with their employer was 10.8 per cent and it was 4 per cent for earners in the second decile. As a result of the NLW the pay rise for staying in the same job for those in the bottom 10 per cent of the earnings distribution has never been higher.

Although the returns for remaining in the same job have risen for low earners, moving job would still earn someone double the pay rise. However, although the absolute pay rise is important when weighing up the pros and cons of moving jobs the relative return also matters. Figure 5 shows that in 2016 someone in the bottom 10 per cent of earners moving jobs could expect a pay rise 2.3 times that of someone remaining in the same job. However, in 2015 they could have expected a pay rise 6.7 times higher for moving.

Figure 5: Moving jobs could be more of a gamble than before

Notes and sources: See notes on Indicator 4: Pay rises

Although only for the lowest earners, the NLW seems to have reduced the relative returns to moving job. Businesses and policy makers need to recognise that this makes it even more important to encourage progression. Firms can justify the necessary pay rises by investing in staff and capital, and ultimately raising productivity. The hope is that the NLW, and other changes to the labour market, will encourage firms to do this.[1]

The government can encourage progression by improving financial incentives for those in receipt of means tested benefits. With this in mind, it is all the more worrying that current welfare reforms are in danger of reducing incentives for single parents and second earners. There should also be practical support to help people progress. In the past active labour market policy has concentrated on getting people into work, the challenge going forward will be getting people moving up the pay scale.

All in all then the NLW does not change the fact that it pays to move jobs, however it does appear to change the incentives that low earners face. Over the next few years when faced with the uncertainty of moving jobs it will be more of a gamble to do so. Businesses and policy makers therefore need to ensure that for many it is a gamble they’re still prepared to take.

[1] T Bell & S Clarke “End of an era? The supply of low-wage labour is set to fall and its price is set to rise” in S Clarke (eds) Work in Brexit Britain, Resolution Foundation, June 2017

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Spotlight

To stick or to twist? Staying and moving jobs under the NLW

The NLW has provided a welcome pay boost for millions of low paid workers and has been the one bright spot in an otherwise bleak pay growth picture. But while the NLW brings a pay rise it also brings challenges, particularly how to encourage progression when pay bands are being compressed.

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