Paid work is never enough: we need to pay attention to the quality as well as the quantity of jobs created

Getting people into employment will not on its own ensure decent living standards and reduce poverty, finds Peter Taylor-Gooby. His research shows that, while higher employment is associated with lower poverty, other factors are more important. The most important factor in reducing poverty levels across the countries looked at was the strength of contractual rights, and other policies, such as access to child care, policies to reduce discrimination against women were also significant.

Most people think paid work is the royal road to a better life for people of working age. The value of work is at the centre of policy thinking across the board, from Labour’s Compulsory Jobs Guarantee to UKIP’s commitment to ‘enroll unemployed welfare claimants onto community schemes or retraining workfare programmes’. Ian Duncan Smith’s Universal Credit puts work ‘at the centre of our welfare system’. The EU’s 2020 Growth Strategy ‘is about more jobs and better lives.’ And so on.

The idea that getting people into work will solve the problem of achieving decent living standards for those of working age was given extra impetus as unemployment rose from about 5 to over 8 per cent between 2008 and 2012, paralleled with a rise in working-age poverty. Now unemployment is falling back towards pre-crisis levels but, as IFS analysis shows, poverty among working age adults is failing to respond. The poor quality of many of the new jobs indicates short-comings in the case for paid work as the foundation of welfare.

Most of those in poverty live in working households. Among families the proportion in households with at least one member in work rose from 50 to 68 per cent between 1996 and 2013 according to the DWP’s Households Below Average Incomes statistics. The job market started to recover from its low point in 2012 but many of the jobs on offer are far from satisfactory. The number of part-time workers rose from 7.2 million to 8.2 million between the recession in 2008 and 2014, the numbers of involuntary part-timers from 0.7 to 1.7 million and the number of temporary workers from 1.4 to 1.7 million. The Labour Force survey shows a doubling of zero-hour contracts between 2007 and 2013 to 300,000.

These statistics suggest that we need to pay attention to the quality as well as the quantity of jobs created. Our new research examines factors affecting employment and poverty across 17 European countries for the period of prosperity and growth between 2001 and 2007. This is the time when the sun shone, the most favourable period in recent history for the work = welfare = decent living standards project. The research shows that, even at this time, new welfare was much more successful at getting people into work than at reducing poverty.

Employment rates rose across Europe, especially for women. However, far from declining, poverty rates also increased (by the standard EU 60 per cent of median income measure) from 18 to 18.6 per cent between 2001 and 2007 in the UK, and also in other successful economies such as Germany (11 to 15.2 per cent), Sweden (9 to 11.5 per cent) or Poland (16 to 17.3 per cent). One explanation is to do with access to paid work. Governments need to make sure that even more people move into work. This is the logic that lies behind the EU’s Employment Strategy and Horizon 2020 programme and behind national work-centred policies such as Universal Credit. Then the great recession swept everyone towards work at any price policies, redoubling the stress on paid work.

These were the good times, when, if ever, the link between work and decent incomes should be strongest. Higher employment is associated with lower poverty, but the analysis shows that, even during this period, other factors were more important. In fact the most important factor in reducing poverty levels across the countries was the strength of contractual rights. Other policies such as access to child care, policies to reduce discrimination against women were also significant.

The level of employment plays a role in ensuring decent living standards, but one that is less powerful than that of employment rights. The suggestion is that while employment is probably a good thing, if we want people to be better off, we also need to make sure that the quality of jobs is adequate. The best way to ensure that is to strengthen contractual rights against dismissal and to promote trade union membership. Recent trends in policy to weaken employment protection, to undermine the role of trade unions and to introduce high fees for access to employment tribunals move us in entirely the wrong direction. Shovelling people into low-paid jobs is all the fashion, but it is not the answer to the problem of poverty among those of working age.

For more, see “Can ‘New Welfare’ Address Poverty Through More And Better Jobs?” by Peter Taylor-Gooby, Julia M. Gumy and Adeline Otto.

About the Author

Peter Taylor-Gooby is Research Professor of Social Policy at the University of Kent’s School of Social Policy, Sociology and Social Research. He chaired the British Academy New Paradigms in Public Policy Programme (2010/2011) and is Chair of the REF Social Work and Social Policy and Administration panel 2011-15, a Fellow of the British Academy, a Founding Academician at the Academy of Social Sciences and, previously, a Fellow of the Royal Society of Arts and President of the British Association for the Advancement of Science, Sociology and Social Policy Section.
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Increase in number of people on low pay

Increase in number of people on low pay
By Left Foot Forward | Published: November 3, 2014

The number of people on low pay has risen by 147,000 to 5.3 million in the last year, according to a study by KPMG.

Childcare vouchersjThe research indicates that 22 per cent of employees are now earning less than the Living Wage – up from 21 per cent last year.

According to the data, part-time, female and young workers are the most likely to be earning a wage that fails to provide a decent standard of living.

The research, conducted by Markit for KPMG, also found that the proportion of people earning less than £7.65 per hour (£8.80 in London) is higher amongst part-time workers. More than 4 in 10 part-time workers take home less than the Living Wage, compared to 13 percent of full-time employees.

There are also more part-time roles paying less than the Living Wage (2.98 million) than full-time jobs (2.29 million), despite making up less than a third of all UK jobs.

The research revealed that during October of this year almost three times as many people who earned less than the Living Wage (29 per cent) reported that their household finances had worsened over the month, compared to just 10 per cent who saw an improvement. Meanwhile, twice as many people who earn below the Living Wage (18 per cent) reported an increase in their need to borrow, compared to 9 per cent who saw a reduction.

The financial outlook for many remains bleak. Five per cent of those earning less than the Living Wage said they expected to see their household finances worsen between now and November 2015. Almost a quarter (22 per cent) also reported fears over job security.

Commenting on the research, head of Living Wage at KPMG Mike Kelly said:

“Although there are almost 1,000 organisations pledged to pay a Living Wage, far too many UK employees are stuck in the spiral of low pay.

“With the cost of living still high the squeeze on household finances remains acute, meaning that the reality for many is that they are forced to live hand to mouth. Inflation may be easing, but unless wages rise we will continue to see huge swathes of people caught between the desire to contribute to society and the inability to afford to do so.

“For some time it was easy for businesses to hide behind the argument that increased wages hit their bottom line, but there is ample evidence to suggest the opposite – in the shape of higher retention and higher productivity. It may not be possible for every business, but it is certainly not impossible to explore the feasibility of paying a Living Wage.”

http://leftfootforward.org/2014/11/increase-in-number-of-people-on-low-pay/

Minimum wages: the economics and the politics

Minimum wages are increasingly popular with politicians and the public; even most economists now agree that they have little or no negative effect on employment. Alan Manning discusses this newfound enthusiasm – and the likelihood that it will lead to much higher minimum wages in some parts of the world.

There was a time when the minimum wage was seen as a backwater of labour market policy, an appendix for which the best one could hope would be that it did not cause any problems. But no longer: in many countries, there is now a strong movement to raise minimum wages.

In November last year, Angela Merkel finally announced that Germany would be introducing a minimum wage, replacing or supplementing the current system that sets minima in a small number of lowpaying sectors and collective bargaining that sets minima in some other industries. In May this year, Swiss voters will be asked to vote on the world’s highest minimum wage – 22 Swiss francs an hour (about £15) – with one canton already having voted for that rate in principle though another has rejected it. And in 2011, the free market redoubt of Hong Kong introduced a national minimum wage.

In the United States, President Obama seems to have given up hope of his proposal to raise the federal minimum wage to $10 per hour in the face of an impasse in Congress. But he has recently used his executive power to impose a $10.10 minimum wage on the few hundred thousand people who work on federal contracts.

The president is also actively encouraging states and cities to raise their local minimum wages, thus bypassing the obstacles in Washington. Increasing numbers of them are doing so, and some are going further: Seattle’s mayor, for example, proposes a $15 minimum wage. Minimum wages at this level – about 60% of median hourly earnings – are pushing the envelope of what has ever before been attempted with the minimum wage.

The UK is not immune from this newfound enthusiasm for the minimum wage, with all the main political parties seemingly falling over themselves to find some way to inject new vigour into the National Minimum Wage. Last autumn, the business secretary Vince Cable wrote to the Low Pay Commission (LPC), asking it to consider the economic circumstances in which the minimum wage could be increased at a rate above inflation. And the Labour Party has set up a Low Pay Review to consider options.

Not to be outdone, Chancellor George Osborne in January expressed the opinion that the nascent recovery means that the minimum wage can now be increased substantially. Without quite saying it in so many words, he dropped a heavy hint that he thought £7 an hour would be reasonable within 18 months, which would be a 10% increase from the current rate of £6.31.

I was a member of an expert panel convened by the Resolution Foundation and chaired by the LPC’s first chairman George Bain to reinvigorate the National Minimum Wage. Central to our ideas was that the LPC has been very successful in doing a limited thing – setting a minimum wage to tackle extreme low pay. But the wider problem of low pay remains as serious as ever and – in spite of its name – the LPC has never attempted to develop a strategy for this bigger problem. The LPC seems to have convinced itself that the minimum wage could not be pushed much higher without threatening jobs, but the consequence is that we can never learn whether that judgment is correct.

So what explains this widespread enthusiasm for the minimum wage? In my view, both economics and politics are at play.

The economics of minimum wages

A generation ago, the vast majority of economists would have said that a rise in the minimum wage inevitably costs jobs. This has changed, with two strands of research having the biggest impact. In the United States, the work of David Card and Alan Krueger, then both at Princeton University, shattered the cosy consensus and argued that the actual evidence linking the minimum wage to job losses was weak. Although their findings were controversial (and the debates rumble on to the present day), there has been a large shift in the weight of academic opinion.

The other strand of research that has been very influential examined the UK experience, with CEP researchers playing a sizeable role, though not the only one. Some people predicted that the introduction of the National Minimum Wage in 1999 would cause hundreds of thousands of job losses, but this simply did not materialise. Any impact on employment seemed to be tiny and LPC research has reached similar conclusions for subsequent years when the minimum wage rose faster than average earnings. In spite of this accumulating empirical evidence, it is still common to find economists fall ing back on the argument that a minimum wage must cost jobs because demand curves for labour inevitably slope downwards. Faced with a conflict between the evidence and twentieth century economic models, they reject the evidence rather than the theory – not an ideal template for scientific endeavour. But there are, in fact, uncomplicated theoretical reasons why the minimum wage set at modest levels has little or no effect on employment.

First, the increase in total labour costs associated with a given increase in the legal minimum wage is often considerably smaller than the numbers suggest. As the minimum wage rises and work becomes more attractive, labour turnover rates and absenteeism tend to decline. Moreover, the cost associated with losing a job rises; so, arguably, workers are inclined to work a bit harder and need less monitoring. Of course, an employer could voluntarily choose to pay higher wages if net labour costs actually fell, so a reasonable guess here is that these offsetting economies reduce, but do not eliminate, the impact of a rise in wage rates.

Then there’s the gap between employer perception and reality. Individual employers often view a rise in wages with horror, assuming it will drive them out of business. But all too often, they are implicitly assuming that they alone will suffer the cost inflation when it affects their competitors as well. Prices rise a bit and the effect on employment is only through the effect of a fall in sales, which may well be minimal.

But there is a more fundamental reason why there is no evidence of the job losses predicted by standard economic theory. The key assumption – that labour markets are highly competitive – is often wrong. The view of the labour market that underlies ‘Economics 101’ is not one that many people would recognise. For in this hypothetical world, losing a job is no big deal because finding an identical job is no harder than discovering that the local Sainsbury’s is out of milk and going to Tesco instead.

But that is not most people’s experience of labour markets. The reality is that competition for workers is not as strong as many economists would have you believe. An employer who cuts wages will find that most employees are unhappy, but that few will just walk out of the door. So it may make economic sense for employers to pay workers less than the marginal worker adds to revenues. In this more realistic world, a rise in the minimum wage will not necessarily price the marginal worker out of their job.

The politics of minimum wages

Academics might like to think their research has a big influence over public policy, but the driving force behind higher minimum wages is that they are very popular. Many people think there is something very wrong with an economic system in which someone who works hard is still unable to provide an adequate standard of living for themselves and their families. Such views have always been common, but they are much more common after the crisis when living standards are threatened and the link between growth and living standards seems to have been severed.

So in most countries of the world, voters (including right-wing voters) support rises in the minimum wage. In the UK, a poll in January 2014 found 66% favouring a substantial increase in the minimum wage – with majorities among supporters of all main political parties. In the United States, a poll in March 2013 found 71% in favour of raising the minimum wage, including 50% of Republicans. In Switzerland, voters seem to support the record-breaking minimum wage even as it is opposed by their government.

In some places, these political pressures will almost certainly lead to much higher minimum wages than we have seen in recent experience – perhaps to around the 60% of median earnings mark. This is the point at which many economists get nervous that negative effects on employment must surely kick in, but we do not have many studies to know whether these concerns are valid. There are only a few countries around this level currently – Australia and New Zealand (with low current unemployment rates) and France (with a more dysfunctional labour market) – so this is hardly conclusive one way or the other. But it seems likely we may be about to find out.

Note:  This article was originally published in the Spring issue of the Centrepiece magazine and gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics.

About the Author

Alan Manning is professor of economics at LSE and director of CEP’s community research programme. His 2003 book, Monopsony in Motion: Imperfect Competition in Labour Markets (Princeton University Press), explains the theory behind minimum wages; and his 2009 CentrePiece article ‘The UK’s National Minimum Wage’ describes CEP’s role in providing the intellectual context for the policy, advising on its implementation and evaluating its impact.

More than a Minimum: The Resolution Foundation Review of the Future of the National Minimum Wage’, was published in March 2014.