Low-wage work during the crisis: policy measures in the UK
Damian Grimshaw1
August 2011
Damian Grimshaw, Low-wage work during the crisis: policy measures in the UK, International Labor
Brief (published in Korean) Vol. 9 (9), Korea Labor Institute ©2011, pp. 28-41.
Introduction
Compared to its European neighbours, the UK has a high incidence of low-wage work and
therefore faces an important challenge to monitor and to protect the relative position of lowwage workers during periods of economic crisis such as witnessed during the 2008-2009
recession and subsequent austerity period. Rising unemployment and deteriorations in
business performance can dampen wage income for all workers but especially for those in
low-wage jobs who in the UK context are far less likely to be trade union members, are less
able to carry their qualifications from one job or sector to another, often have a part-time or
temporary employment contract and are therefore in a very vulnerable position.
The aim of this brief article is to first assess the context of recession and the pattern of lowwage work in the UK and then to analyse the relevant responses by government, trade unions
and employers. Four policy areas are analysed - minimum wage legislation, collective
bargaining, welfare benefits (for those in and out of work) and training provision. While
several useful policy measures were introduced in an initial response to the recession, the
post-recession period has witnessed the reversal of positive labour market interventions with
an adverse impact on people employed in low-wage jobs. A conclusion sets out lessons for
policy.
1. The labour market context: the 2008-9 recession and post-2010 austerity
The UK recession was characterised by a prolonged drop in GDP - by six percentage points
over six successive quarters from the second quarter of 2008 until the third quarter of 2009 –
yet a relatively small drop in employment compared to the previous recession of 1991-1992
(see figure 1). Nevertheless, the reduction in the proportion of working-age people employed
has been substantial and still remains significantly below pre-recession levels. Comparing
employment rates for men and women, figure 2 shows that the male employment rate fell by
more than four percentage points, from 79.0% to 74.9% during March-May 2008 to JanuaryMarch 2010 and the female employment rate fell by one and a half points, from 67.0% to
65.6%. The adverse impact of the recession thus fell largely on men, for whom employment
decline was nearly three times the size of that among women.
The reason is that the UK recession was most strongly experienced in the male-dominated
sectors of manufacturing and construction. Two other areas of the economy that were
1
Professor of Employment Studies at Manchester Business School, University of Manchester UK and Director,
European Work and Employment Research Centre.
moderately affected were distribution and hospitality (low-wage sectors) and finance and
business services, both characterised by a relatively mixed sex composition of workers. It is
significant, however, that since mid-2010 men’s employment has started a trend of recovery
while the female employment rate has to date failed to improve. The reason lies with the
impact of the ongoing austerity measures that are leading to job cuts in the female-dominated
public sector, especially in local government. There is a high risk that women’s employment
will not recover its pre-recession level for some time given the severity of austerity measures:
after a decade of steady growth, public sector employment declined by 143,000 (or 2.3%)
from the first quarter of 2010 to the same quarter in 2011.
Trends in unemployment reflect employment changes. After many years of relatively low
unemployment (between 5% and 6%), the recession caused a rapid escalation up to 8% by the
second quarter of 2009. It has stubbornly remained at this level according to the most recent
data, that is, no change in seven quarters, despite the apparent recovery in GDP growth and
the rise in numbers employed during this period. Increasing alongside the unemployment
rate, although with the expected lag, is the share of unemployed people who have suffered
this labour market status for more than 12 months. From the second quarter of 2009, the share
of long-term unemployed increased rapidly from 22% up to 33% by mid-2010.
Figure 1. Annual change in GDP and employment, 1987-2011
6%
4%
2%
2011 Q1
2010 Q2
2009 Q3
2008 Q4
2008 Q1
2007 Q2
2006 Q3
2005 Q4
2005 Q1
2004 Q2
2003 Q3
2002 Q4
2002 Q1
2001 Q2
2000 Q3
1999 Q4
1999 Q1
1998 Q2
1997 Q3
1996 Q4
1996 Q1
1995 Q2
1994 Q3
1993 Q4
1993 Q1
1992 Q2
1991 Q3
1990 Q4
1990 Q1
1989 Q2
1988 Q3
1987 Q4
1987 Q1
0%
-2%
GDP
Employment
-4%
-6%
Note:
GDP at market prices, chained volume; Employment for all aged 16 and over.
Source: UK Office of National Statistics.
Figure 2. Employment rates for men and women, 2006-2011
80
78
76
All
Male
Female
74
72
70
68
66
Nov-Jan 2011
Sep-Nov 2010
May-Jul 2010
July-Sep 2010
Mar-May 2010
Nov-Jan 2010
Jan-Mar 2010
Jul-Sep 2009
Sep-Nov 2009
May-Jul 2009
Mar-May 2009
Nov-Jan 2009
Jan-Mar 2009
Jul-Sep 2008
Sep-Nov 2008
May-Jul 2008
Mar-May 2008
Nov-Jan 2008
Jan-Mar 2008
Jul-Sep 2007
Sep-Nov 2007
May-Jul 2007
Mar-May 2007
Nov-Jan 2007
Jan-Mar 2007
Jul-Sep 2006
Sep-Nov 2006
64
Note:
Employment rate for all aged 16-64 years old.
Source: Labour Force Survey online data (www.statistics.gov.uk/elmr/).
Figure 3. Trends in the unemployment rate and the share of long-term unemployed, 2000-2010
8.5
40.0
Unemployment rate (left axis)
8.0
% unemployed for 12+ months (right axis)
7.5
35.0
7.0
30.0
6.5
6.0
25.0
5.5
5.0
20.0
4.5
4.0
15.0
Note: Data cover all people aged 16-64 years old.
Source: ONS (www.statistics.gov.uk/elmr/).
2. Trends in low-wage employment
In a context of recession and the rapid rise of unemployment, what happened to low-wage
work? Figure 4 shows the trend lines for all employees and for men and women separately
since 1997. Following the conventional definition (see Grimshaw 2011), low-wage
employment is defined as the share of employees with gross hourly pay less than two thirds
of median pay for all employees. It is striking that despite the severity of the recession and
scale of employment restructuring that no change is registered in the headline measure of the
total incidence of low pay. The estimated low pay incidence was 21.0% in 2007 and 21.3% in
2010. In fact, as is clear from figure 4, this level has not changed significantly for more than a
decade. There is only a very marginal tendency towards decline, from 22.0%, averaged over
the 7-year period 1997-2003, to 21.3%, averaged over 2004-2010). The level is still high
relative to other countries in Europe (Gautié and Schmitt 2010). Nevertheless, the recession
appears to have had no short-run impact.
Figure 4. The trend in low-wage employment by sex, 1997-2010
35%
All empoyees
Men
Women
30%
25%
20%
15%
10%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Note: Low pay defined as two thirds of the median for all employees using gross hourly earnings excluding overtime pay.
Own estimation of low pay incidence based on published inter-decile earnings data.
Source: Annual Survey of Hours and Earnings, various years.
Why has there been no apparent impact on the headline measure? One potential explanation
is that different groups of the labour market have experienced opposing effects and the
headline average measure nets out a range of diverging trends. Figure 4 does suggest
opposing trends among men and women, although it does not appear that the recession
played a significant role in altering the medium-term trends. There remains a strong sex
division of low wage labour such that women face almost double the risk of low wage
employment as men: women’s low pay incidence was 27.0% in 2010 and men’s was 15.8%.
The gender difference in risk has diminished considerably over the time period shown;
women’s risk of low pay compared to men was 2.3 in 1997 and 1.7 in 2010.2 The recession
did not halt or reverse this trend.
Of course, changes in the sex division of low wage labour reflect multiple, inter-related
changes in the labour market and workforce characteristics. These include the compositional
effects associated with high risk characteristics such as temporary work, part-time work,
being young, being in a low-skill occupation (such as personal services, retail and hospitality
work) and ethnicity (with a high risk associated with being Pakistani, Bangladeshi and
Chinese/other Asian) (Mason et al. 2008b: table 2.3).
Further disaggregation by sex and by full-time/part-time employment status may therefore
reveal a clearer impact of the recession. Again, the evidence on the measure of low pay
incidence suggests little impact. Figure 5 shows that women in part-time work constitute the
largest group of low paid workers in the UK (42% in 2010) and this has not changed in recent
2
This follows a longer trend evident since the mid-1980s (see Mason et al. 2008a: figure 1.1).
years. Similarly, women’s strong over-representation in low-wage employment has not
changed during the recession – a female share of 63% in 2010 compared to a 49% share of
total employment.3 The one group of workers whose share among low-wage work increased
during the recession is male part-timers, from 12.4% pre-recession to 14.2% in 2010. Their
risk of low pay remained relatively stable during the period, so the effect is caused by
growing numbers of male part-timers, from approximately 1.4 million to 1.6 million.
Figure 5. The composition of low wage employment by sex and full-time/part-time, 2007-2010
100%
41.8%
41.4%
41.4%
41.6%
12.4%
13.1%
13.2%
14.2%
21.8%
22.1%
90%
80%
70%
60%
50%
40%
Female part-time
Male part-time
21.8%
21.1%
Female full-time
Male full-time
30%
20%
23.7%
23.8%
23.3%
23.5%
2007
2008
2009
2010
10%
0%
Note: Low pay defined as two thirds of the median for all employees using gross hourly earnings excluding overtime pay.
Own estimation of low pay incidence based on published inter-decile earnings data.
Source: Annual Survey of Hours and Earnings, various years.
An alternative explanation for the apparent absence of recession effect on the size of the lowwage workforce is that the measure itself is not designed to capture a potential levelling down
of pay among workers in the bottom half of the wage distribution. If the real values of median
earnings and all earnings below this level are falling then the low pay measure will fail to
capture the negative effects of the recession.
To some extent this is in fact what happened. Real earnings in 2010 at the median point of the
wage distribution have not improved on their 2007 level (figure 6). There was a twofold
recession effect: prices slumped during 2008-2009 leading to a boost in real earnings for all
workers, but then increased during 2009-2010 (RPI of 5.3%) while nominal earnings rose
very little leading to a fall in real hourly earnings of approximately 4% for all workers at the
bottom decile, lower quintile and the low pay threshold. For female part-time workers, the
largest group of low-wage workers, real earnings dropped significantly during 2009-2010 by 4.3% at the bottom decile and by 3.4% at the median level. The drop in real earnings was
also experienced by high wage workers, although it was somewhat smaller. There is some
3
Estimated from samples in ASHE data for 2010. It is worth noting that the higher share of male full-timers
compared to female full-timers among the low paid is the result of their greater numbers in the workforce - 11.1
million compared to 7.0 million, respectively – rather than a higher risk of low pay since women in full-time
work face a higher risk – 16% in 2010 compared to 11% for men.
evidence therefore that while all workers in the UK shared a stagnation of real wages during
the recession the impact has been somewhat more negative among the lowest paid.
Figure 6. Change in real hourly earnings among the lowest paid, 2007-2010 (adjusted to 2010
prices)
£16.00
2007
2008
2009
2010
£14.00
£12.00
£10.00
£8.00
£6.00
£4.00
D10
D20
LPT
Median
Mean
Note: LPT refers to the low pay threshold using the standard definition.
Source: ASHE, various years. Real earnings estimated using the annual Retail Price index estimated from April each year so
as to coincide with earnings data (ONS data).
3. Policies to protect the low paid
The wages paid to low paid workers are more likely to reflect a set of formal and informal
rules, custom and practice than a measure of productivity. This is especially the case in a
service economy where it is difficult to arrive at a reliable measure of productivity for many
workers that is able to provide a useful yardstick for their contribution to a firm’s revenue.
The types of rules that shape the determination of pay for low-wage workers include both
formal institutions (especially a statutory minimum wage and collectively bargained pay
agreements) and informal customary norms (such as the socially accepted rate for a job or the
reputation of qualifications). Other factors outside the direct sphere of a country’s wagesetting system also shape pay determination at the lower end of the labour market. These
include welfare institutions, since the level of unemployment benefits and entitlement rules
for income support shape the incentives to accept a low paid job, and use of in-work tax
credits relieves pressure on employers to uprate pay to attract suitable job candidates. A
further example is skill formation policy, since quality of schooling in principle can boost pay
prospects and improve the likelihood that an employer’s skill investment leads to improved
worker performance, and investment in the infrastructure for vocational training can support
shifts by organisations away from low-level to intermediate-level skill jobs. Table 1
summarises the key responses by government, as well as trade unions and employers, in four
selected areas of policy during the recession and austerity periods.
With regard to the national minimum wage, introduced for the first time in 1999, the
independent Low Pay Commission recommended only small rises in the adult and youth rates
during 2008, 2009 and 2010 in direct response to the recession and subsequent recovery.
Each year, members of the Commission took special note of evidence related to
unemployment, inflation (which fluctuated greatly) and pay settlements (see LPC reports for
2008, 2009 and 20104). The resulting recommendations brought to a halt the previous years
of steady rises in the minimum wage above growth in average earnings: during 2001-07 the
minimum wage increased substantially from 45.2% to 52.7% of median earnings; then,
during 2008-2010 it remained stable at a little over 52% (ASHE data, own calculations). It is
notable that while employers supported the LPC’s position to raise the minimum wage during
2001-04, by 2005, well before the recession, the peak employer association (Confederation of
Business Industry, CBI) was already calling for alignment with average earnings growth
(Grimshaw et al. 2010). The Low Pay Commission was responsive to the employer position
and the impending recession clearly reinforced this new cautious approach. For the first time,
the Low Pay Commission received requests in 2009 from employer organisations to freeze
the level of the minimum wage, including from the CBI. It also received dramatic last-minute
appeals from the Trade Union Congress to ignore the CBI.5
Table 1. Assessment of policies for the low paid during recession and austerity, 2008-2011
Challenges?
Government policy during:
-Recession
-Austerity
Union and employer
actions
i) National
minimum wage
How to build improvements
in the wage floor in order to
protect real wages and
preserve spending power/
aggregate demand?
Frozen relative to
average earnings
Frozen relative to
average earnings
Unions lobby the Low Pay
Commission for aboveaverage rises but employers
argue for a freeze
ii) Collective
bargaining
How to retain union
members, extend collective
bargaining and negotiate
pay rises in a context of
rising unemployment,
employers’
unwillingness/inability to
pay and strong fluctuations
in inflation?
Continued usage of
‘Two-Tier Code’
but no other efforts
to extend coverage
in low-wage sectors
Abolition of
‘Two-Tier Code’
In many agreements, unions
are unable to prevent
erosion of pay differentials
and the use of the minimum
wage as the ‘going rate’ of
pay; some examples of
effective ‘bottom-loaded’
pay settlements
iii) Welfare
benefits
How to protect low wage
workers’ ‘reservation
position’ by ensuring decent
welfare benefits in and out
of employment?
No policy to
improve
unemployment
benefits. New
policy to improve
return-to-work
incentives with
targeted tax credits
Cuts in welfare
spending include
change in
indexation that
reduces
unemployment
benefits and tax
credits
Union protests against
welfare spending cuts since
2010
iv) Skill/training
policy
How to support continued
investment in education and
skill development to
underpin pay advancement?
Commitment to
£1bn per year
‘Train to Gain’
policy action; new
employee right to
request to time to
train in large firms
Abolition of
‘Train to Gain’;
25% reduction in
further education
budget; abolition
of education
maintenance
allowance
Union protests against
education and training cuts
since 2010
Source: Own compilation.
4
5
All Low Pay Commission reports available at www.lowpay.gov.uk/
See www.tuc.org.uk/newsroom/tuc-16424-f0.cfm
A second direct mechanism that influences the position of low paid workers is collective
bargaining of wages. In general, this institutional mechanism is relatively weak in the UK
although there is a strong public-private sector divide with approximately 70% of public
sector workers covered by a collective agreement and only 20% of private sector workers
(see Barratt 2009). Moreover, low-wage sectors are among those with the lowest levels of
trade union membership. For example, union density is just 12% in the retail sector and 5% in
hospitality (op. cit.). For the most part, therefore, the pay rates for low-wage workers are
decided unilaterally by their employer.
During the recession, despite the context of very small rises in the minimum wage (1.2% in
2009 and 2.2% in 2010) employers in several low pay sectors appear to have continued two
pay practices that run counter to the interests of low wage workers: i) failing to restore pay
differentials in line with the rise in the statutory minimum wage; and ii) using the minimum
wage as the entry rate, or ‘going rate’, for new and sometimes incumbent workers (Low Pay
Commission 2010: 39-41). As a result, more workers are being compressed at the bottom of
the wage structure at or just above the minimum wage. In the words of the LPC report:
Analysis of the earnings distribution shows that a clear spike has been observed at the
minimum wage in every year since 1999. In recent years, despite the minimum wage
increasing only in line with average earnings, that spike has become larger. This clearly
demonstrates that the minimum wage has affected earnings and their distribution (Low Pay
Commission Report 2010: 41).
This phenomenon may be said to be typical of a national employment model, such as the UK,
where a statutory minimum wage combined with weak joint regulation of wages produces
very limited ripple effects from upratings in the minimum. Low wage workers have very
limited resources and bargaining power to protect established pay differentials (whether won
on the basis of seniority, skill or qualification) and the result is a heightened segmentation of
a class of low wage workers. The limited ripple effect also explains why, despite continued
minimum wage rises, the incidence of low pay (see figure 4) has remained relatively stable in
recent years. There are nevertheless some examples of collective agreements that have
benefited low paid workers by both setting the lowest rate significantly above the statutory
minimum wage and agreeing a ‘bottom-weighted’ pay settlement. A good example is the pay
agreements for the National Health Service in which the lowest rate (for a newly hired
cleaner) was close to 20% above the statutory minimum wage in 2010 and bottom-weighted
pay deals were secured in 2007, 2009 and 2010 (Grimshaw et al. 2010).
One important feature of collective bargaining that had protected low wage workers
considerably was in fact abolished in 2010 despite the obvious adverse effects on pay and
conditions. The ‘Two-Tier Code’ ensured that public sector agreements were in practice
extended to workers in private sector organisations that provided subcontracted services to
the public sector. The Code was abolished as part of an effort by the new 2010 right-wing
government to reduce labour market regulations. It is very likely that with current enormous
pressures to cut public spending, public sector organisations will exploit new outsourcing
contracts to reduce costs and private sector firms will respond by lowering pay rates and
other terms and conditions.
A third indirect influence on the relative position of low paid workers derives from the
system of welfare benefits, including unemployment benefits and in-work tax credits.
Compared to other European countries, the UK system is regarded as only weakly
interventionist with low levels of expenditures (Bonoli 2010). It is perhaps unsurprising
therefore that despite the rapid escalation of unemployment during the recession, there were
no policies to increase the level of unemployment benefits, or to extend entitlement (as seen
in France, for example). It is surprising, however, that the government’s austerity budget in
2010 announced a change in the indexing of benefits which from April 2011 reduced the
value of unemployment benefits. The switch from the Retail Price Index, which includes
housing costs, to the Consumer Price Index is expected to generate a considerable saving for
the Treasury but to reduce income for the unemployed.
There were some positive interventions during the recession period to facilitate integration of
the unemployed and inactive. These included the Young Person’s Guarantee (including a
£1billion Future Jobs Fund) and return-to-work tax credits for disabled, lone parent and older
workers moving off benefits into low wage work. Again, however, the government response
in the UK is complicated by the radical shift in political approach of the new government
elected in 2010. In particular, the new government abolished the Young Person’s Guarantee
despite the evidence on government websites that suggest this policy measure was at least
partially effective as a job stimulation measure and offered additional support to many
vulnerable low wage groups.6
A fourth area of policy that shapes the status of low-wage workers is education and training.
One major initiative that was continued during the 2008-2009 recession was the ‘Train to
Gain’ policy that provided government subsidies to employers that supported training to
National Vocational Qualification Level 2. While there were questions about its initial
governance, a 2009 evaluation of the programme reported survey evidence of improved
business performance from the training. Also, for those employees for whom the NVQ was
their first qualification it was reported as providing a welcome boost in self-confidence (NAO
2009).
Despite this, the new government in 2010 abolished the policy with effect from July 2011, in
part to reduce public expenditures, but largely in line with its ideological drive to withdraw
the state from labour market interventions. The government also reduced spending on further
education by 25% just at a time when the lack of jobs means many people look to advance
their education. Moreover, a further austerity measure announced in 2010 was the abolition
of the means-tested education maintenance allowance (up to £30 per week) which supported
16-19 year olds in further education and provided a platform from which to escape low-wage
work.
4.
6
Conclusion
See http://research.dwp.gov.uk
While interesting in certain respects, the UK model unfortunately does not offer positive
lessons for other countries in how to protect low-wage workers during a recession and
recovery. Among its European neighbours the UK stands out as a strongly neoliberal
economy and this also applies to its system of labour market governance. In the key areas of
government policy that influence the relative position of low-wage workers, policy reforms
have on balance worsened the relative position of low-wage workers: the national minimum
wage has not been increased, pay agreements have generally failed to restore pay
differentials, welfare benefits have been cut (including in-work benefits for low-wage
workers) and important areas of government spending on education and training have been
reduced or abolished altogether.
An evaluation of the UK response to the recession is complicated by the change of
government in 2010 and the demand for austerity measures to cut the government deficit. It is
a strengthened ideological commitment to neoliberalism rather than the austerity crisis that
explains why the government has abolished a raft of measures that previously assisted lowwage workers – including the Two-Tier Code, Train to Gain and the Young Person’s
Guarantee. In forthcoming years, as the Low Pay Commission has already noted, there is
likely to be a growing segmentation of workers in low-wage jobs unless alternative policy
measures are implemented to facilitate wage improvements.
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