Low Pay Britain 2018

Along with declining numbers in low pay, history teaches us that the NLW is also likely to lead to an increase in the share of employees paid at or very close to the minimum wage. But while that bunching of a larger group of people at the wage floor did occur in 2016, that pattern did not continue in 2017. In fact, the proportion of employees on the lowest wages fell slightly, to 7 per cent. This suggests that employers are opting to maintain the differentials between the lowest-paid members of staff and those on the next rung up, at least to some extent.

Narrowing differentials is not the only option available to firms seeking to respond to, and in some cases offset, the higher wage bill that the NLW brings. The offsetting response policymakers would welcome most – higher labour productivity – has not appeared but there is also little evidence of the most feared reaction – a drop in employment. The typical number of hours worked by low earners did dip slightly in 2017 but remains broadly in line with 2014 and 2015. Price rises in low-paying sectors like accommodation, restaurants and cafes have outpaced the overall inflation rate, but that trend was already established prior to April 2016. While the policy remains a relatively new addition to the UK labour market, no one response appears to dominate so far.

Policymakers need to get to grips with the new frontiers of low pay

The absence of clear negative responses to date is encouraging but should not breed complacency among policymakers. The challenges faced by some employers and low-paying sectors are real and a close eye should be kept on the NLW’s effects. From the point of view of the living standards of those on low pay, understanding how higher hourly pay is translating into weekly wages is crucial, particularly at a time when millions of families in receipt of in-work benefits will be facing large cuts to their incomes.

And with the NLW now just two years away from reaching its target of 60 per cent of median earnings among those aged 25 and over, those concerned about low pay should be thinking deeply about the issues affecting people in low-paid work that stretch beyond the legal minimum hourly wage. For the more than 4 million people projected to still be in low pay in 2020, a deeper understanding of the new low pay challenges we face is needed, alongside the imagination to create new policy responses. As well as the question of hours that has been addressed in other Resolution Foundation research, this report focuses on three key challenges: progression, the role of firms and the opportunities available to low-paid women.

Pay progression is not a reality for most low-paid workers and opportunities are unequally shared

The chance to progress is one of the elements of low pay that has been underexplored, with just one in six low-paid employees moving onto consistently higher wages over the course of a decade. To shine further light on this issue, we examine the routes taken by sales assistants – one of the most common low-paid jobs – to explore the extent of and the routes by which progression is taking place. Some movement does occur: just over half of sales assistants in 2011 had moved into other occupations by 2016, going on to typically earn 18 per cent more than those who stayed put.

But even among those who did switch occupation, those moves were often into similar, low-paying positions. This was especially the case for women, part-timers and older workers. Even more concerning is the weakness of the direct progression route in retail; just 4 per cent of sales assistants had become sales supervisors or retail managers five years later, while only one in 10 such managers had been sales assistants five years earlier. While just one example of a low-paid occupation, and in a sector that can offer genuine opportunities to move onto higher wages, this underlines the challenge facing many seeking to progress and the dearth of opportunities available, especially for those with caring responsibilities.

A handful of firms play a major role in low pay

In contrast to some classical views of the labour market, the firm that an employee works for clearly matters a lot for their pay and wider employment conditions. In some cases, a small number of firms can have a huge influence on certain parts of our labour market. That is particularly true within the world of low pay. Though comprising a tiny proportion of all firms, companies with 5,000 or more workers employ 28 per cent of all low-paid people. Crucially, when considering where power lies at the bottom end of the labour market, low-paid workers are also more likely to be concentrated within a handful of firms than mid- or high-paid employees.

This Britain-wide perspective conceals much greater concentration in particular places and industries. It may be these areas and sectors where concerns about monopsony, or the power of firms relative to workers, should be focused. Considering only those employees and firms present within the data available for 2017, a much higher proportion of low-paid workers in Nottingham and Birmingham are employed by the five firms employing the most low-paid people than in Bristol or London. On a sectoral level, low-paid workers in retail are much more likely to work for one of the five largest employers there than in hospitality.

In one sense, this concentration is an opportunity. Policymakers interested in improving low-paid work and moving towards a labour market with more better-paid jobs could have tremendous impact by targeting some of these biggest players. But the extent to which the lower end of the UK’s pay ladder is concentrated raises more structural questions about the functioning of the labour market, the balance of power between firms and workers and the extent to which the dominance of a handful of firms leads to worse outcomes for employees and the wider economy. If monopsony is a problem in the UK, the low paid are likely to be worst affected.

The low pay gender pay gap is wide and underexamined

A common denominator across these new frontiers of the low pay challenge is that women are the most affected. Women are less likely to progress out of low pay, are more likely to switch into other low-paying jobs when they do move and are more concentrated in a handful of large firms than low-paid men. The government’s gender pay gap reporting has been a welcome step forward, raising the issue of pay inequality up the agenda and sparking conversation and, hopefully, change in companies. But the headlines about unjustifiable gaps among some very well-paid workers in high-profile employers like the BBC are only part of the story. Women are more likely to be low paid than men, with 22 per cent of women falling below the low pay threshold compared to 14 per cent of men.
If the risk of being in a low-paid job was equally shared across the sexes, the mean gender pay gap would be one-fifth smaller. But even within many low-paying occupations, men typically earn more than women, suggesting that more action is needed to help women move into better-paying sectors but also into more senior positions in low-paying industries.

An updated approach is needed to combat low pay

The first step in addressing these new frontiers of low pay is acknowledgement from firms and policymakers that these are issues that need to be tackled. Complacency about low pay led to the situation from the mid-1990s onwards in which the UK was consistently at the bottom of the international league table in terms of the share of workers in low pay. A similar attitude to the challenges of today is likely to result in more workers becoming stuck in low pay, with excessive power held by a small number of firms and the groups that suffer most being women and part-time workers.

The NLW was a policy that understood times had changed and a new approach was needed. That mentality must be carried through into our wider strategy on low pay, dealing with the challenges facing low-paid workers today. Simply delivering the NLW or, indeed, just arguing for further increases in the wage floor, are both far from sufficient. We have come a long way, but there is much further to travel.