In work; in poverty

In-work poverty is now widespread. The figures are alarming. Research by the JRF published in December 2013 showed that the majority of the 13 million people classified as in poverty (living off less than 60% of the national median income) come from working families. Two thirds of the 2.3 million children living in poverty are from households in which at least one adult works. Simply getting into work does not ensure a sustainable route out of poverty because the job may be insecure, pay poorly or have limited opportunities for progression.

So, how should we tackle this phenomenon? This was the topic of a roundtable event today that the SMF held in partnership with the JRF, with contributions from David Lammy MP, David Norgrove (Low Pay Commission), James Sproule (Institute of Directors) and Sally Copley (Oxfam).

In a wide-ranging discussion, four issues stood out most strongly.

First, self-employment has grown enormously in recent times. We appear therefore to be substituting higher unemployment for higher levels of self-employment. On the surface this is good – fewer are out of work. But, we should remember that the self-employed are not entitled to the national minimum wage. So as the numbers of the self-employed swell, we are creating a large workforce that is not protected by wage regulation, their incomes may be low, their jobs insecure, and, as current SMF research is exploring, their progression / growth prospects may be varied.

Second, we shouldn’t overplay the hand of the National Minimum Wage. As the Chair of the LPC noted, the NMW has already done a significant job at the bottom end protecting some five to seven percent of the lowest paid. In some low paid sectors such as cleaning, the NMW is now at 90% of the median hourly wage – it is pretty much the going rate. The NMW has actually increased in relative terms during the recession (because the median wages came down). But, David Norgrove cautioned heavily against the idea of putting too much pressure on the NMW lever.

Third, there are strong arguments for varying the minimum wage to reflect better the labour market conditions in different parts of the economy, but this is riven with difficulties.  A national wage policy is a blunt tool. It treats the economic circumstances of vastly different sectors and massively different regions the same. A standard rate may be pricing certain regions out, adding to the geographic disparities that afflict the UK; whilst having negligible effect in other areas. Intuitively, a floor that takes greater account of where a firm is located and the sector it operates in might allow it to bite more effectively. It also might enable it to move at a pace that is above the lowest common denominator.

So far, so good? This is where it starts to get complicated.

As noted in a previous blog, there is little logic behind singling out London as a special case as a region. What is more, the differentiation within regions is as stark as the differentiation between regions. The graph below illustrates this variation. It sets out the percentage of workers on low-pay by sub-region. The variation within London is notable, especially Central London versus other parts of London; the difference between Tyne and Wear and the rest of the North East is also marked.

Share of individuals on low-pay by sub-region of workplace, average 2002-12
Share of individuals on low-pay by sub-region of workplace, average 2002-12

The concerns didn’t stop there. Any policy would create geographic boundaries with cliff-edges where the wage floor was higher in one postcode than a neighbouring one. Regional wage floors might also open the door to the localisation of benefits policy (although we obviously have some of this already with Council Tax Reduction and enough in some cases to totally upset the work incentives set at a national level).

Sector policy is perhaps more complicated still. Across different industrial sectors there are markedly different low pay thresholds. Some have suggested varying the wage rules by industrial sector, introducing a special rule for sectors such as financial services where the costs of moving to a higher minimum wage would be much lower than other sectors (such as retail). However, it is the activities of these firms and the activities of their employees rather than the headline sector in which they work which is relevant. For instance, one manufacturing firm may do everything in-house from its cleaning, to its production line, to its IT support. Another firm in the same sector may outsource all its cleaning and low wage activity to a different specialist company. Categorising employers by headline sector and varying the wage floors accordingly may just encourage firms to outsource lower-paid functions.

Finally, there was consensus that in-work poverty needed to be addressed head-on by boosting the productivity of low earners. For all the talk of reductions to the personal tax allowance, benefit rates and wages, this is a topic that often gets missed out, despite its centrality to the phenomenon of in-work poverty. As James Spoule noted, we should have a system that encourages those aged 28, 38 or 48 to train or re-train to expand their skills set so that they can progress in work. Expect more on this topic soon as the SMF publishes a paper looking at how to boost the skills and earnings of the low paid.


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