We need to address Britain’s Jekyll and Hyde labour market

Published on Jobs, Skills and Pay

The latest chapter in the British labour market’s Jekyll and Hyde story was published this week. New data on jobs, pay and inflation continued the plot of recent months: an impressively high employment rate twinned with woeful wage growth that’s unable to keep up with prices.

But for one group at least, recent developments have been mostly positive. The National Living Wage (NLW) has meant the pay of the lowest earners has outpaced both typical wages and inflation. Whether this will be enough to deal with one of the ugliest sides of the UK’s economy – its reliance on low-paying, low-skilled work – remains to be seen.

What’s clear is that, for the first time this century, the NLW has put the first structural dent in low pay. The number of employees in low pay fell from 5.4 million in 2015 to 5.1 million in 2016 – the biggest fall in 40 years. After decades of inaction, this is real progress. And it’s all the more impressive given the complaints it’s drawn from both ends of the political spectrum. Some said it would be a ‘jobs-killer’ and have called for it to be scrapped, while others have called it a con, that’s not nearly high enough. The evidence to date suggests the NLW is striking the desired balance. If you ever want evidence that good policy making can make a massive difference to people’s lives, this is it.

That doesn’t mean government or the Low Pay Commission – the independent body tasked with monitoring the NLW’s impact – can be complacent. Their oversight role will be all the more important in coming years. The NLW is set to continue its rapid ascent up until 2020, by which time it will affect around one in seven employees. It goes without saying that at some point, ever higher minimum wages will do more harm than good. Identifying that crossover point is easier said than done however.

Adjusting to the National Living Wage needn’t be reactive, after the evidence emerges. There is much that business and government could do now to make a higher minimum wage easier to implement.

The first step would be recognising that, for most people, low pay is not a stepping stone to higher pay but a dead end. Just one in six of those who were low paid in 2006 had escaped onto higher wages by 2016. Nor is the risk of getting stuck evenly distributed; fewer women make a sustained move out of low pay with the dearth of good quality, flexible, part-time work the likely main culprit.

The need for clearer pathways into higher-skilled roles is already pressing but one of the side effects of the NLW could be to make progression less attractive. Some firms have narrowed the pay gaps between entry level positions – paid close to the NLW – and higher-paid roles. A minor pay rise for what can often be a major increase in responsibility may not be so attractive to staff, and a lack of promotion opportunities isn’t good for businesses either.

Government could support employers, helping firms improve the design of jobs, career routes and offering more training and development. With the industrial strategy due, giving pride of place to some of the less sexy but big low-paying sectors like retail and hospitality would show government is serious about progression.

For all the panic about automation leading to mass unemployment, the UK has significantly fewer robots per employee than other large economies (and a lot more people in work). A glance at the country’s woeful productivity figures only confirm that greater investment in technology is badly needed. With the UK trailing the most productive countries across a range of sectors, including retail and hospitality, more could and should be done.

But government’s role extends beyond industries. The six-week wait and the cost of phone calls have dominated discussion around Universal Credit. Beyond these crucial considerations however, reducing the rate at which Universal Credit payments are tapered away as people earn more would make progression more appealing. The UK’s decades-long problems with low pay and progression won’t be solved by the NLW. But a genuine strategy to get to grips with these issues could make our labour market a bit more Jekyll and a little less Hyde.

Conor D’Arcy is a senior policy analyst at the Resolution Foundation