U | a-zofinequality

Unpaid wages

Low paid work is a serious problem and perhaps the defining feature of contemporary poverty in the UK. A majority of people living in poverty in the UK today live in a household in which at least one person works, with about one in eight workers being impoverished. This has been driven by sluggish wage growth and cuts to the social safety net combined with rising costs of essential bills, especially soaring house and rental prices. Even as employment reached record levels in the years prior to the Covid-19 pandemic, many low-paid workers were not able to work as much as they liked due to a shortage of full-time positions, with part-time, zero hours, and gig economy work being more and more prevalent leading to not just low but unpredictable wages for many [1].

Given these facts, a robust social safety net which ensures workers on low incomes still have enough to provide for themselves and their families is as important as ever. Even after recent rounds of reforms and cuts, the UK still has an effective redistributive system of taxes and benefits which substantially reduces market levels of income inequality [2]. But providing benefits to the low-paid arguably lets exploitative employers off the hook and perpetuates the underlying problem as employers know that they can get away with paying workers less than a living wage and the government will top it up.

Employers have a collective interest in workers being sufficiently well-paid, both so that their own employees are physically and mentally healthy and more productive and so that there is a robust consumer market for their products – one business’ workers are another’s customers after all. If the need to for state redistribution becomes entrenched such that employers can generally afford to pay employees less than a sustainable level of income, it effectively becomes a public subsidy for employers. Concerns that the welfare state creates a culture of dependency often revolve around the idea that benefit claimants are discouraged from working and are allowed to become idle. Given the recent expansion of in-work poverty it is worth asking if the real dependency culture is that of low-wage employers.

Low pay and the social safety net.

The Working Tax Credit (WTC) was introduced in 2003 as part of a reform to the tax credits system, replacing the Working Families Tax Credit which was created in 1999 [3]. To claim WTCs individuals must work a certain number of hours a week – 30+ for those aged 25-59, 16+ for those aged 60+, the disabled, and those with children [4]. The WTC tops up the incomes of low-paid workers, paying a base amount of £1,960/year which is withdrawn in a tapered fashion: workers earning more than £6,420/year lose 41p in tax credits for every £1 they earn [5].

WTCs are in the process of being replaced by Universal Credit (UC) which reduces with income in a similar manner, though with a more severe taper: 55p (63p until recently) in UC payments is withdrawn for every £1 earned over an individual’s ‘work allowance’; claimants who do not have responsibility for a child or a limited capability for work do not have any work allowance, meaning that their UC payments begin to be withdrawn as soon as they start to do any paid work [6]. Citizens Advice estimate that the transition to UC will benefit 1.8 million working families, especially those working very few hours and single-earner couples with children. However, about 2.1 million will lose an average of £1,600/year [7].

According to a Civitas study, WTCs may have a depressing effect upon wages. Working tax credits lower individuals’ ‘reservation wage’, that is the lowest wage which someone would be willing to accept in order to work at all, since their actual income will be topped up by the state. The fact that working is a condition of receiving tax credits also encourages recipients to accept less well-paid jobs. This both means employers can pay lower wages, and would increase the labour supply (the number of people working or looking for work) which, all else being equal, brings down wages overall.

As of 2015, tax credits accounted for 43% of the incomes of the poorest 1/10th of British families in work, and 27% of the income of the next poorest decile. However, 21-28% of what the government spends on tax credits for minimum wage workers may end up going towards employers who benefit from lower wages [8].

A 2015 Citizens UK report estimated that the government spent about £11 billion/year on benefits and tax credits for low-income workers – arguably subsidising their employers [9].

According to the Joseph Rowntree Foundation, record employment rates in the UK in recent years have been associated with the rise of in-work poverty: the number of people in impoverished working families rose by more than a million in the three years up to 2016-17, with 5/6 of people in low-paid work failing to move up to better-paid work within 10 years [10]. As of 2016-17, 57% of adults and 66% of children living in low-income families lived in families with at least one worker [11]. Between 2004-05 and 2014-15 the poverty rate for adults in working households rose from 12.4% to 15.7% [12]. This trend could certainly be associated with low-wage employment and problems with the tax and benefits system.

Pay openness.

The social stigma around openly discussing how much people are paid helps exploitative employers get away with paying people less than they are worth, as well as protecting other social ills like discrimination. While employees legally have the right to discuss pay, many employers seek to discourage this and even attempt to ban such discussions or insert contract clauses forbidding such discussion – while such measures are not legal they may nevertheless be successful in intimidating workers who are not sure of their rights, have little access to legal remedies, or for whom a legal battle would not be worth losing their job [13, 14].

Employers are, however, perfectly willing to require openness about pay when it works the other way. It is fairly standard practice for employers to ask job applicants to provide information about previous jobs including how much they were paid, while also setting non-specific salary expectations in job adverts such as the ever so useful description of a salary as just “competitive”. Doing this can allow employers to hire people for as little as they think they can get away with and, if they can successfully discourage their employees from discussing pay with each other, might mean workers who were paid less in the past continue to be paid less than their colleagues without ever knowing. An equal pay law introduced in the US state of Massachusetts requires that employers allow their employees to discuss pay with each other if they wish to, but prohibits employers from asking about past salaries in applications, with the overall intent of forming an environment which favours workers’ bargaining power [15].

Recent governments have championed pay openness as a way to tackle discriminatory pay gaps. Since 2017 large employers have been required to submit data about their gender pay gaps which is published by the Government [16]; Theresa May has also proposed requiring the same reporting of pay gaps between employees of different ethnicities [17]. These ideas could be expanded to generally make information about pay more accessible while strengthening the legal protections for open discussion of the matter. Competitive markets work best when information about market conditions is widely available; obfuscation about pay unfairly favours employers at the expense of workers and should be challenged.

Living wage.

The introduction of the national minimum wage does appear to have reduced wage inequality in the lower end of the income distribution, suggesting that wages towards the middle of the pay distribution have not risen by as much as those supported by minimum wage increases at the low end [18].

The influence of the minimum wage upon pay settlements seems to be significant, with a survey finding that 30% of workplaces mention the minimum wage as an influence on pay settlement. There is evidence that this may involve pay compression and ‘bunching’ of pay settlements, with raises tending to be about the size of any increase in the minimum wage [19].

If wage inequality has declined because of the minimum wage, this does not necessarily mean it has acted as a negative ‘drag’ on wages. Middling wages may still have risen, and may have still risen by about as they otherwise would have. They may just have risen by less than those on lower wages. You would expect to see some wage compression at the lower end of the scale even if minimum wages had no knock-on effects, since the floor of the pay distribution would have risen

A study by the NIESR for the Department for Business, Energy and Industrial Strategy which included a broad literature review found mixed evidence, but broadly concluded that increases in the minimum wage do raise the incomes of directly impacted low-paid workers by more than would happen in the absence of an increase, and also have positive spillover effects on earners up to the 20th-25th percentile, with a time lag. A plausible mechanism for explaining this is that minimum wage increases put pressure on firms to also increase the wages of those just above the minimum wage level in order to maintain pay differentials [20].

A report for the Low Wage Commission looking at the impact on businesses of the introduction of the National Minimum Wage, from 1999 to 2011, found that the labour costs of low-wage firms increased which may have been covered by increased labour productivity [21]. This suggests that the impact of the minimum wage was that firms paid more in wages and made up for it by attaining greater returns.

A study of the impact of the introduction of the National Living Wage in 2016 (in practice, an increase of the minimum wage for workers aged 25+ from £6.70 to £7.20) on wages in the care sector found that it generated significant wage growth for low-income workers without reducing employment or hours worked, as well as having a positive spillover effect on the wages of those aged under 25 [22].

Name and shame.

The Government has been engaging in name-and-shame tactics against companies breaking paying workers less than the minimum wage. However, since there is legal force behind the minimum wage, shame is not the only thing used – fines are also issued and backpay extracted [23].

The Living Wage campaign, which pushes for a wage higher than the legal minimum, has managed to win commitments from several thousand companies with resulting wage increases and knock-on effects on pay policies [24]. By 2018 an increase in the voluntary “real” Living Wage rate was estimated to have increased the wages of over 180,000 workers thanks to 4,700 employers having committed to pay the voluntary higher rate [25]. Citizens UK estimates that the Living Wage campaign has won over £500 million in wage increases since 2001 [26].

The social pressure and desirability of being seen as a living wage employer does seem to have had an effect. In 2018, calls for Premier League football clubs to pay the voluntary living wage to all staff received support from MP Frank Field and the then-Sports Minister Tracey Crouch [27].

Employee mobility.

A 2007 paper using British data found that voluntary changes of job are associated with wage increases for low-paid workers, backing up a history of studies that find that moving jobs is a means for increasing wages [28].

Low-paid workers tend to remain stuck at that end of the pay distribution – only 17% of those who were low paid in 2006 had moved up to substantially better paid jobs by 2016; 48% had achieved a raise at some point but not sustained it; 25% were stuck in low-paid work throughout [29]. The upward mobility of low-paid workers therefore seems to be very limited in general, and those who do manage to find better-paid worker tend to fall back down.

A study of the US workforce for the Federal Reserve New York found that, between 2011-17, 70% of low-wage workers remained in the same job and just 5% found a better job within a 12 month period [30]. It may be that switching job does boost earnings, but that most workers, especially low-paid workers, do not or cannot switch jobs effectively to take advantage of that. Efforts to create a more competitive labour market which favours workers’ bargaining power should take this into account, and greater transparency about pay across different employers could act as a motivator for people in low-paid work to seek opportunities elsewhere if they are undervalued at their current job.

1https://www.jrf.org.uk/report/what-has-driven-rise-work-poverty

2https://www.ifs.org.uk/uploads/BN249.pdf

3https://revenuebenefits.org.uk/tax-credits/policy/research/where-it-all-started/

4https://www.gov.uk/working-tax-credit

5https://www.gov.uk/government/publications/rates-and-allowances-tax-credits-child-benefit-and-guardians-allowance/tax-credits-child-benefit-and-guardians-allowance

6https://www.gov.uk/government/publications/universal-credit-work-allowances/universal-credit-work-allowances

7https://wearecitizensadvice.org.uk/universal-credit-must-adapt-to-support-working-families-9de645173b45

8https://www.civitas.org.uk/content/files/taxcreditsandwages.pdf

9https://www.citizensuk.org/taxpayer

10https://www.jrf.org.uk/report/budget-2018-tackling-rising-tide-work-poverty

11 https://researchbriefings.files.parliament.uk/documents/SN07096/SN07096.pdf

12https://www.cardiff.ac.uk/research/features/the-truth-about-in-work-poverty