Labour Market Outlook Q1 2023

In recent months, labour market commentary has been dominated by the knock-on effects of the ongoing cost of living crisis. High inflation continues to erode real wages, despite strong nominal pay growth – and, in contrast to some policy makers’ fears that private sector wage growth could in itself drive prices higher, the latest evidence suggests that wage growth could now be flatlining. The Bank of England and OBR both predict a recession, and a rise in unemployment, over the coming year. And despite ticking up in the latest data, workforce participation – which fell during the Covid-19 pandemic, and remains 1.1 percentage points lower than pre-pandemic – continues to be a dominant issue for the labour market and the wider economy.

The spotlight of this Labour Market Outlook focuses on a longer-term issue: the decline in workplace training, and the impact on low-paid workers. We find that, holding constant a range of observable characteristics, workers paid at the wage floor appear more likely to receive training than other workers – a result consistent with employers investing in training to increase workers’ productivity in the face of minimum wage rises.

Spotlight | Training among low-paid workers

Skills and human capital are a crucial driver of productivity and economic growth over the long term. But work-related training is in decline, despite big shifts in the skills needed to thrive in the workplace. In this spotlight, we look in more depth at the changing rates of training since the early 2000s among low-paid workers, and particularly those at the wage floor.

First, how has the overall decline in workplace training affected low-paid workers – who are the least likely to receive training, despite having the highest potential gains to doing so? (In this spotlight, we focus on what the Labour Force Survey calls ‘off-the-job’ training – work-related training that takes people away from their day-to-day job, as opposed to ‘on-the-job’ training which includes learning by doing.)

It might seem reasonable to expect that low-paid workers have been at the sharp end of the fall in training, given that employers have always been more reluctant to upskill them. But as Figure 1 shows, the decline in training has, if anything, been driven by higher-paid workers and university graduates. In 2003, the highest paid were 2.4 times as likely to receive training as the lowest paid; this had fallen to 1.9 times by 2019, and 1.6 times by 2022. Similarly, over the same period workers with a degree went from being 2.0 times as likely to receive training than those without a degree to 1.7 times as likely.

Figure 1: The decline in training has been driven by higher-paid workers and graduates

This small narrowing of the gap, of course, does little to change the overall problems with training in the labour market: an overall decline in the amount of training happening, and low-paid workers being consistently less likely than higher earners to get training. Indeed, the decline in the training gap has arisen because low-paid workers’ training levels have stayed relatively constant while training among higher earners has declined starkly; this could simply be because employers had more scope to cut back on training among higher earners to begin with, or because there is a minimum amount of essential training that employers cannot eliminate.

But there could be more going on beneath the headline result. The period covered by Figure 1 witnessed a rising National Minimum Wage (NMW) – and while this has not had the large negative employment effects that some feared, it is plausible that a rising wage floor could have affected training provision.

In theory, the minimum wage could have affected training in one of two ways. In the face of rising labour costs, employers could choose to cut back on other expenses (including training) for those at the wage floor – there is evidence that this has happened in Germany and Japan. More positively, firms could choose to invest in training for their minimum wage workers: this could be in an attempt to boost their productivity to match their higher wage rates; moreover, if a higher wage floor reduces worker turnover, this will encourage employers to train their workforce because they reap the benefits of doing so over a longer period. UK evidence from the early days of the minimum wage found some evidence that on balance, the minimum wage increased training. More recently, a UK study has found that companies responded to a rising NMW by raising labour productivity, which the authors suggest is partly due to higher levels of training. And in 2016, a Resolution Foundation survey of employers found that 15 per cent of firms had increased their training provision in response to the introduction of the National Living Wage and 21 per cent planned to do so over the next five years.

In Figure 2, we break down the rates of training over time to focus on minimum wage workers, those who are above the minimum wage but still low paid, and all other earners. The data is relatively volatile, and so it is difficult to draw strong conclusions. But the chart finds no evidence that those who are paid at the wage floor have received less training than those paid slightly above the NMW – and in fact, there are periods where those who are covered by the NMW appear to have had more training than those who are paid slightly above the minimum.

Figure 2: There is no evidence that employers have cut training among minimum wage workers

Workers at the wage floor, of course, are likely to have different characteristics to other low-paid workers – and as the minimum wage has risen to cover more workers, the composition of the minimum wage group has also been changing over time. As one example, if minimum wage workers tend to be younger (a factor that is associated with higher levels of training overall), then this could be pushing up training rates among those at the wage floor.

In Figure 3, we ask the question: what would we expect to happen to training rates if employees were equivalent in a range of observable characteristics – such as age, sex, and job type – except for whether they were paid at the wage floor. After accounting for all of these factors, we would expect the average worker at the wage floor to be 12 per cent more likely to get training than a comparable worker paid above the NMW.

Figure 3: Controlling for other characteristics, minimum wage workers are more likely to receive training

This evidence is consistent with a rising minimum wage encouraging employers to invest in training, perhaps to improve the productivity of their workforce. (These results emerge only when we run the analysis in Figure 3 for the 2010s, rather than the full period shown in Figure 2: this is consistent with the fact that in the early days of the minimum wage, both the level of the wage floor relative to typical earnings and the number of workers covered were relatively low, so we would expect smaller effects in general.)

Even if the NMW has helped give a relative boost to training among the lowest earners, however, it is also clear that far more policy action is needed on training – both to raise the overall amount of it, and to address the fact that low earners as a whole are far less likely to get training than those on higher pay. In addition, there are important questions around the utility of the training received by lower earners: lower-qualified adults are more likely to undergo training for health and safety, and their training is less likely to be for career progression, than those with higher-level qualifications, and low-paid workers are also less likely than higher earners to get training that will help them move jobs, reducing their power in the labour market. In future work as part of the Economy 2030 Inquiry, we will be developing policy recommendations to enhance skills and human capital to contribute to higher economic growth and lower inequality in the 2020s and beyond.