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Professor Geraint Johnes
Professor of Economics at Lancaster University
T 020 7976 3516
Professor Geraint Johnes

November Director's Report

Authors: Professor Geraint Johnes

11 November 2014

Low pay is in the news. Between 2010 and 2013, the hourly pay of full-time men at the bottom decile of the wage distribution rose from £7.20 to £7.50 – an increase of some 4.2%. The corresponding figures for women were £6.72 and £7.00 – also representing a 4.2% increase. But over the same period, prices rose by more than 10%, implying a fall of around 6% in real pay.

In 2013, the Living Wage – which measures the wage deemed necessary for a full-time worker to cover the cost of necessities - was £7.45 per hour outside London and £8.55 in the capital. It is clear that many full-time workers are being paid less than this basic level. This imposes strain on workers, their families and communities. It imposes strain also on the public finances as welfare payments support those who could not otherwise make ends meet. It is opportune therefore to ask what can be done to promote – and justify – higher pay.

Before answering that question, it is important to consider some of the factors that have brought us to the current situation. It is now almost 20 years since Richard Freeman asked whether our wages are set in Beijing. His point was that global competition in traded goods and services puts downward pressure on firms’ costs, including wages. This tendency has been exacerbated by the skill-biased nature of technical change, with technology becoming increasingly complementary to the input of some workers but increasingly a substitute for tasks performed by others. The consequent ‘ hollowing-out’of the labour market has since been well documented. Over the years since the Great Recession, labour productivity has stagnated . This reflects partly the mix of jobs available – the productivity of some workers being constrained by the jobs they do – but it also reflects a marked decline in productivity within occupations.

The Work Foundation’s recent report on low pay describes the problem in some detail, and makes recommendations for action by policy-makers and practitioners. These include the development of new career ladders that are not locked into old patterns but that recognise the constraints and opportunities offered by technological developments. They include also recommendations on the role that should be played by Local Enterprise Partnerships and sector organisations in supporting business through times of rapid change in the labour market. Further recommendations concern the remit of the Low Pay Commission and the role that should be played by the Living Wage in future policy.

It’s not enough though. More work is needed to support businesses and policy-makers in providing a framework that can support a sustained increase in productivity and pay. At The Work Foundation, we will do our part by continuing to produce research in this area – indeed we are currently entering a new phase of work. If you would like to know more about this, do please get in touch.