Low Pay in the UK: Causes and Solutions

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12th Apr 2019 Employment Reference this

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Introduction

The lack of growth with regards to low pay in the UK has become an obvious issue compared to other similar economies. These issues have had a negative effect on the individuals and the society they are a part of. The extent and significance of low pay in the UK will be scrutinised with use of analysis regarding possible policy solutions that address the issues that occur from low pay.

Significance of Low Pay in the UK

OECD (2017a) defines low pay as “share of workers earning below two-thirds of median earnings”. As of April 2014, low pay was at £7.67 in the UK according to Corlett and Gardiner (2015). The UK’s wages are below OECD’s average; this means that the UK have high levels of low pay in the long term. According to Figure 1, it shows that 15% of employees are affected by incidence of low pay in the UK. (Keese and Grubb, 2015)

Figure 1 – Source: (OECD, 2015b)

The United Kingdom’s level of output is restricted due to the workers having low pay and less skills. This affects the country’s productivity as it keeps the GDP per hour less than the OECD average, as well as other similar economies such as Germany and France. This is shown by Figure 2. The International Labour Office (2010) claims that the future success of any economy depends on how many people are in employment, how educated and skilled they are to make them productive in their work. In addition, it is believed that there is a connection between education, skills, output and economic growth. Therefore, improving skill utilisation, work organisation and quality of work can positively affect the output of a country.

National Output per hour worked in 2014; 2010=100

Figure 2 – Source: (OECD, 2016a)

Firm Quality

The United Kingdom relies on market conditions for outcomes regarding investment and training. Public spending on the labour market is significantly low compared to Germany and France, along with other similar countries. (Figure 3) Lanning and Lawton (2012) state that this can lead to lower levels of employment prospects and less competitive advantage against other economies.

Public spending within the labour market from 2000-2014: total % of GDP

Figure 3 – Source: (OCED, 2017c)

Utilisation of Skills

The decrease in semi-skilled occupations reduces jobs and opportunities for skilled workers, this results in a skills misallocation. (Figure 4) The inequality will rise along with the divergence of occupational wages and the lack of job prospects, this is because low pay tends to occur within low and semi-skilled professions. (Corlett and Gardiner, 2015)

% of Employee’s over-skilled and under-skilled, by industry

Figure 4 – Source: (Wright and Sissons, 2012)

Policy Responses and Impacts

The implication of low pay can be stemmed from the organisation of certain firms and sectors will restrict the relevant resources needed for career development. (Ray et al., 2014) Although there is an undesirable undertone regarding high labour market regulations and institutional involvement. Many northern European countries, through higher levels of labour productivity, innovation and training, have achieved higher levels of employment protection compared to the UK. (Lanning and Lawton, 2012) The UK will need to get rid of these policies to improve the development in the labour force through enhancing job quality.

Human Capital

Human capital is a critical factor of earnings. Due to unfair distribution of higher education and training prospects throughout society, it is important that there are further skill enhancements. This is aimed at those who work low wages in low quality jobs. (OECD, 2015a)

The government gives financial aid for those that decide to invest in higher education, even then people are unaware of these investments. (McNally, 2012) In order to increase the number of people who go into higher education, career prospects will need to be targeted through policy incentives and make more information available in schools and job centres.

Improvements in the knowledge economy will mean that the gap between highly skilled workers and other workers will increase. To tackle this issue, the UK needs to achieve a society that is well skilled and makes use of individual abilities throughout all professions. (Lanning and Lawton, 2012). In order to improve the overall skills of the society, the government will need to provide the best facilities for young people who are trying to attain qualifications such as GCSEs and A-levels. Setting higher qualification standards for teachers will improve teaching quality and ultimately lead to higher quality education. (OECD, 2007) This can result in a more educated society which improves the wages of individuals involved, knowledge spillovers and economic growth.

In addition, through government subsidisation, apprenticeships decrease training and recruitment costs as it gives employers incentives to take part in the scheme to provide apprenticeships. The government plans to introduce an ‘apprenticeship levy’ to help the them fund 3 million apprenticeships that will starting between 2015 and 2020. (Amin-smith et al., 2017) Nevertheless, there is still an issue regarding the significance of low pay as most of the apprenticeships are low pay and within low progression occupations. According to the Social Mobility and Child Poverty Commission, employers and the government will need to impose strategies for earnings and career prospects for apprenticeships in industries which have low pay and low career prospects. (Milburn et al., 2016)

Moreover, OECD (2007) believes young people who pursue vocational courses, as opposed to academic ones, do not have enough resources. Low skilled workers have less chance of receiving the training they need as they will be preferred to workers who possess better skills. (Ray et al., 2014).

Trade Unions and Collective Bargaining

The United Kingdom’s trade union density is greater than other countries with similar economies. However, the density has decreased over the past couple of years at an insignificant rate. (OECD, 2017b) Due to existence of monopsonies, there will be a better representation of workers regarding employment progression and also an increase in earnings. In addition, the involvement of the trade involvement will minimise the levels of unemployment. Overall, it will encourage firms to target quality over price. However, the trade union wage has declined over the past years. In order to for it to be a success, the trade union will need to adapt to the new labour market.

National Living Wage

The National Living Wage (NLW) was put into effect on the 1st of April 2016, as an attempt to put the costs back on to the firms. (The Economist, 2015) According to OECD (2015b), the outcome of a National Living Wage is unclear, as it could reduce the chance of low pay, reduce wage inequality in the short run and increase productivity. However, it can also lead to an increase in unemployment as there is an increase in labour costs.

A rise in the national minimum wage will affect firms severely in the long run as the productions will increase, exceeding the profits of the perfectly competitive firms. This could lead to an increase in the level of unemployment, with all other factors remaining the same. On the other hand, with regard to a monopsony, there will be reduction in the marginal expense of labour due to the required wage set by the government. This is because the profit maximising point is set above the required wage. The decrease in marginal expensive of labour result in the firm to replace labour with capital in the long run if all other factors remain the same. Although, the National Living Wage increases the wage for individuals in low pay, it can be the case that unemployment will increase if the wage is too high. This is because firms will not be making enough profit and may close down.

Conclusion

The welfare of people and societies within the United Kingdom is threatened by low earnings. Although the government has been attempting to come up with a solution for the issue of low pay, more needs to be carried out to make sure there is an increase in the improvement of the labour force as well as a decrease in low earnings. Government policies that aim to decrease the incidence of low pay must target both demand and supply problems within the labour market. Although, job quality can be improved through National Living Wage, such development can only support but not efficiently eradicate the implication of low pay. There should be more focus on employers, employees and human capital to increase employment projections in order for employees to gain benefits from being a part of the labour force.

References

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  • OECD. (2015a). OECD Employment Outlook 2015. [online] Available at: http://www.keepeek.com/Digital-Asset-Management/oecd/employment/oecd-employment-outlook-2015_empl_outlook-2015-en#.WOsmklMrLLY [Accessed 10 Apr. 2017].
  • OECD. (2015b). How does Slovenia compare? – Employment Outlook 2015. OECD. [online] Available at: https://www.oecd.org/slovenia/Employment-Outlook-Slovenia-EN.pdf [Accessed 6 Apr. 2017].
  • OECD. (2017a). Earnings and wages – Wage levels – OECD Data. [online] Available at: https://data.oecd.org/earnwage/wage-levels.htm [Accessed 5 Apr. 2017].
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  • Ray, K., Foley, B. and Hughes, C. (2014). Rising to the Challenge: A policy agenda to tackle low pay; The Work Foundation
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