The high cost of low pay

As the minimum wage rises below inflation yet again, Matthew Pennycook examines the cost of low pay.

On Monday the National Minimum Wage (NMW) for people aged 21 and over will rise to £6.19 an hour from its current rate of £6.08. This represents a third consecutive annual fall in the real terms value of the minimum wage, now back to levels last seen in 2003. Put simply, the impact of the NMW is stalling. And while the Low Pay Commission’s cautious 11-pence-an-hour rise may be entirely justified in the current economic climate, it will provide little comfort for those that rely on a minimum wage to get by.

None of this is to denigrate the crucial role of the minimum wage. Since its introduction in 1999 the NMW has had a dramatic effect in reducing extreme low pay, providing around one million low-paid workers with the protection of a legal pay floor and ensuring that they are less badly paid than their counterparts in countries such as Germany and the United States. What’s more, this positive effect has come with little or no negative impact on either employment or working hours.

But while the minimum wage continues to shelter a significant minority of British workers from extreme low pay, it is not (and never has been) set at levels that would reduce the overall levels of low-paid work in Britain. Consequently, as a new report released today by the Resolution Foundation makes strikingly clear, its existence does not alter the fact that 5 million workers in the UK – 1 in 5 employees – paid at or above the legal minimum nevertheless remain in low-paid work. These 5 million people earn below £7.49 an hour (£13,600 a year gross for full-time work) and below the level of a living wage that would provide for “a minimum acceptable quality of life”. For this low-paid army – disproportionately female, part-time, and concentrated in the private sector – the NMW provides a safeguard from extreme low pay but not an escape route from life on a low wage.

Low-paid work is, of course, a feature of labour markets in all advanced economies. Yet low-paid work in Britain is associated with a number of negative attributes not shared by other countries. These include higher pay penalties for part-time work, a greater risk that women will find themselves in low-paid work, and a higher risk of low-paid work in certain low-skilled occupations such as social care and childcare.

And among advanced economies, the UK stands out as having one of the highest incidences of low-paid work. This was not always the case. After falling sharply in the early 1970s the share of low pay in the British labour market has grown steadily over the past three decades.

The growth of low-paid work in Britain has been, in part, the product of the steady rise in inequality experienced by much of the developed world in the final quarter of the 20th century. But policy decisions taken over the past three decades have also contributed to the rise, by eroding those institutions that have done much in other countries to arrest the forces bearing down on pay at the bottom of the labour market.

So policy choices matter. Our reliance on an extensive pool of low-skilled, low-paid labour is not predetermined. It’s not the unfortunate but necessary pre-requisite to a strong labour market. Other advanced economies with lower shares of low-paid work have not suffered lost employment or diminished competitiveness. Britain’s low-pay, low-productivity economic model is not the only option available to us.

And it is a model that we pay a heavy price for tolerating. Economically, Britain’s low-paid labour market has been central to the costly – as much £4bn a year – reliance of many low to middle income households on tax credits and other in-work transfers to support household incomes. Socially, low-paid work has been a factor in the gradual rise in in-work poverty since the mid-1990s and is linked to a range of negative outcomes including poor health, higher levels of workplace related stress, and diminished life chances.

Combating low pay is not easy. Tipping the balance away from employment strategies that rely on low paid, low productivity, poor quality jobs and towards 'high road' employment strategies is an almost herculean task. So it is not surprising that many policymakers have preferred to correct market inequities through remedial redistribution. Yet few, if any, believe that the growth in tax credit support that occurred over the past decade can be repeated in these fiscally straitened times. In the years ahead wages will have to do far more of the heavy lifting needed to sustain living standards. But for too long we have confused the existence of the minimum wage with a strategy to reduce low pay. They are not the same thing. So while valuing the vital protection the minimum wage provides for those at the very bottom, we urgently need to start doing the hard thinking required to deliver an ambitious policy agenda to tackle Britain’s endemic levels of low pay.

Margaret Dobb, the wife of a Nottinghamshire miner, holds up a placard at a strike in 1972. Photograph: Getty Images/Hutton Archive

Matthew Pennycook is MP for Greenwich and Woolwich, and member of the Energy and Climate Change Committee. He is PPS to John Healey. 

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Find the EU renegotiation demands dull? Me too – but they are important

It's an old trick: smother anything in enough jargon and you can avoid being held accountable for it.

I don’t know about you, but I found the details of Britain’s European Union renegotiation demands quite hard to read. Literally. My eye kept gliding past them, in an endless quest for something more interesting in the paragraph ahead. It was as if the word “subsidiarity” had been smeared in grease. I haven’t felt tedium quite like this since I read The Lord of the Rings and found I slid straight past anything written in italics, reasoning that it was probably another interminable Elvish poem. (“The wind was in his flowing hair/The foam about him shone;/Afar they saw him strong and fair/Go riding like a swan.”)

Anyone who writes about politics encounters this; I call it Subclause Syndrome. Smother anything in enough jargon, whirr enough footnotes into the air, and you have a very effective shield for protecting yourself from accountability – better even than gutting the Freedom of Information laws, although the government seems quite keen on that, too. No wonder so much of our political conversation ends up being about personality: if we can’t hope to master all the technicalities, the next best thing is to trust the person to whom we have delegated that job.

Anyway, after 15 cups of coffee, three ice-bucket challenges and a bottle of poppers I borrowed from a Tory MP, I finally made it through. I didn’t feel much more enlightened, though, because there were notable omissions – no mention, thankfully, of rolling back employment protections – and elsewhere there was a touching faith in the power of adding “language” to official documents.

One thing did stand out, however. For months, we have been told that it is a terrible problem that migrants from Europe are sending child benefit to their families back home. In future, the amount that can be claimed will start at zero and it will reach full whack only after four years of working in Britain. Even better, to reduce the alleged “pull factor” of our generous in-work benefits regime, the child benefit rate will be paid on a ratio calculated according to average wages in the home country.

What a waste of time. At the moment, only £30m in child benefit is sent out of the country each year: quite a large sum if you’re doing a whip round for a retirement gift for a colleague, but basically a rounding error in the Department for Work and Pensions budget.

Only 20,000 workers, and 34,000 children, are involved. And yet, apparently, this makes it worth introducing 28 different rates of child benefit to be administered by the DWP. We are given to understand that Iain Duncan Smith thinks this is barmy – and this is a man optimistic enough about his department’s computer systems to predict in 2013 that 4.46 million people would be claiming Universal Credit by now*.

David Cameron’s renegotiation package was comprised exclusively of what Doctor Who fans call handwavium – a magic substance with no obvious physical attributes, which nonetheless helpfully advances the plot. In this case, the renegotiation covers up the fact that the Prime Minister always wanted to argue to stay in Europe, but needed a handy fig leaf to do so.

Brace yourself for a sentence you might not read again in the New Statesman, but this makes me feel sorry for Chris Grayling. He and other Outers in the cabinet have to wait at least two weeks for Cameron to get the demands signed off; all the while, Cameron can subtly make the case for staying in Europe, while they are bound to keep quiet because of collective responsibility.

When that stricture lifts, the high-ranking Eurosceptics will at last be free to make the case they have been sitting on for years. I have three strong beliefs about what will happen next. First, that everyone confidently predicting a paralysing civil war in the Tory ranks is doing so more in hope than expectation. Some on the left feel that if Labour is going to be divided over Trident, it is only fair that the Tories be split down the middle, too. They forget that power, and patronage, are strong solvents: there has already been much muttering about low-level blackmail from the high command, with MPs warned about the dire influence of disloyalty on their career prospects.

Second, the Europe campaign will feature large doses of both sides solemnly advising the other that they need to make “a positive case”. This will be roundly ignored. The Remain team will run a fear campaign based on job losses, access to the single market and “losing our seat at the table”; Leave will run a fear campaign based on the steady advance of whatever collective noun for migrants sounds just the right side of racist. (Current favourite: “hordes”.)

Third, the number of Britons making a decision based on a complete understanding of the renegotiation, and the future terms of our membership, will be vanishingly small. It is simply impossible to read about subsidiarity for more than an hour without lapsing into a coma.

Yet, funnily enough, this isn’t necessarily a bad thing. Just as the absurd complexity of policy frees us to talk instead about character, so the onset of Subclause Syndrome in the EU debate will allow us to ask ourselves a more profound, defining question: what kind of country do we want Britain to be? Polling suggests that very few of us see ourselves as “European” rather than Scottish, or British, but are we a country that feels open and looks outwards, or one that thinks this is the best it’s going to get, and we need to protect what we have? That’s more vital than any subclause. l

* For those of you keeping score at home, Universal Credit is now allegedly going to be implemented by 2021. Incidentally, George Osborne has recently discovered that it’s a great source of handwavium; tax credit cuts have been postponed because UC will render such huge savings that they aren’t needed.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle