How to make progress on low pay

The latest deliberations of the Bank of England’s Monetary Policy Committee published this week provide some good Easter cheer, with members concluding that ‘it was likely that productivity had started to rise after several years of stagnation’. This may mean that real wages can start to edge upwards once again.

But, before we get too excited we should look properly at our baseline on both pay and productivity.

While the recession triggered both a dip in real wages and undermined productivity, the UK’s problems of low pay and poor productivity are deep-rooted, long-run and interconnected. The large proportion of workers on low pay in the UK is high by international standards and predates the recession. The problem is entrenched also in another way: namely, that – as the SMF reveals in a new report today – one in eight workers over the age of 25 are stuck in low pay for a year or more. This equates to some 2.9 million employees.

This lack of mobility is hugely worrying: it proves false the popular political maxim that work is a route out of poverty; and, it means the Treasury must make massive pay-outs in tax credits and housing benefit to allow those on low pay to attain a decent standard of living.

But most fundamentally, it holds back the UK economy by undermining productivity– because potential talent in parts of the workforce remains under-utilised. In terms of output per hour, the UK languishes 24% behind France and Germany; even further behind the USA. And, many low-paid workers lack decent skills and qualifications.

So, what’s the best route out of this? Our findings suggest that we must make concerted efforts to train up the low paid. For instance, the low paid who receive training are almost twice as likely to progress up the occupational ladder compared to the low paid that do not receive training. In fact, when they receive training, the low paid are more likely to progress up the occupational ladder than the non-low paid who receive training. More generally, the earnings premium from achieving a qualification (whether Level 1, Level 2 or Level 3) is significant – around 10%. So, training can be a route to boost progression, productivity and earnings.

But, (I can hear some saying) shouldn’t we just leave it to firms to decide when to invest in their employers? Don’t they always know best as to what skills are needed?

The answer is no – a range of factors get in the way. Although there are significant apparent gains to training, those in low pay are much less likely to receive training than the better paid, to be offered training by employers and to take up training when they are offered it. While firms may have a strong motivation to train up their employees in firm-specific skills (such as instructing someone how to operate a machine that the business uses), they have much less of an incentive to invest in generic skills (such as communication or numeracy). This is because all-purpose skills are likely also to be of value to other employers (even potentially competitors) who may poach the worker.

Constraints prevent low paid workers from taking up training as well. Many baulk at the costs of training (likely to become more of a problem with the shift of costs away from government onto to learners); family commitments get in the way; past experiences of education may make some feel that learning is not for them. Therefore, both employers and employees need encouraging to invest to the optimum level of skills.

That is what the SMF’s proposed ‘Skills for Progress’ scheme aims to do. We calculate that the government would be able to spend over £2,000 on each person stuck in low-paid work through a mixture of training costs and financial incentives for employees, recouping the money through increased tax receipts and lower benefits paid out. This money would be made available to firms to spend on employees stuck in low pay. We estimate that training would also lead to higher wages – with a single adult currently on low pay taking home an additional £555 per year.

Tackling low pay in this way would be a real route to making progress.


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