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Dr Ala'a Shehabi
Senior Researcher
Dr Ala

The challenges of low pay and inequality for the new government

Authors: Dr Ala'a Shehabi

19 July 2016

Barely a month has passed since the UK referendum on 24 June 2016, but the dramatic shifts in the political and economic landscape have been immense and as yet, unsettled. The UK, under the new leadership of Theresa May will have to decide on the timing and nature of Britain’s exit from the EU - a decision with both major domestic and global implications. The momentous task of steering the UK economy through the course of the divorce proceedings with Europe will require civil society organisations, like The Work Foundation, to double our efforts in noting the impacts on people’s working lives.

In facing the challenges ahead it is both important to understand and address the underlying structural grievances that are likely to have driven the direction of the vote. These were multiple and complex and in months, if not years to come, researchers will be dissecting the statistics to try and make sense of an outcome most Economists did not expect. One of the striking features was grievances and fears over the standard of living and work conditions.

Early analysis of voting doesn’t represent a straightforward pattern in terms of class and income. However, the Resolution Foundation’s analysis of data showed that “the relative levels of pay in an area do matter for how people voted. Areas that voted to leave the EU weren’t those that did badly in recent years, but areas in which people simply earn less.” The author goes on “it is areas that are, and have been for some time, poorer. Or to put it another way, it’s the shape of our long lasting and deeply entrenched national geographical inequality that drove differences in voting patterns.”

The new government

Theresa May’s first speech as Prime Minister last week, seemed to echo an understanding of these grievances. She spoke about a mission to make Britain a country that works for everyone, highlighting job security, ethnic discrimination, the gender pay gap, and that all too often “you have a job but you don’t always have job security.” Beyond this rhetoric, earlier that same day she signalled new policies such as: consumers and workers holding places on company boards, and that shareholder votes on corporate pay should be binding, rather than merely advisory.

Although this falls short of announcing a policy akin to Germany’s model of co-determination and Work Councils, it goes some way in acknowledging the importance of giving voice in corporate decision-making. Stakeholder ownership is also another important mechanism for more inclusive share of wealth.

of a shallow recession in the second half of 2016 could see the unemployment rate rise to 6.5 per cent and increase welfare claimants by 500,000. The new Minister for DWP, Damian Green inherits a large and complex portfolio of welfare and employment reform that is expected to deliver more for less investment over the next few years. The Work Foundation is therefore encouraging the new Minister to continue with the Cameron government’s push for a Green Paper on the new Work and Health Programme, with the hope that the new Chancellor would also increase investment on the early promises of a more flexible budget. New thinking is required to get out of the low wage and low productivity economy that has plagued the British economy.

Key risks to labour market

The major and more immediate concern is the impact on the labour market of restrictions in the free movement of people that has dominated the referendum debate and will determine the new negotiated relationship with Europe. The impact of Brexit therefore has to be split into two. The impact on the labour market in the interim (before Article 50 is invoked and the two year time frame for negotiation after that); and the impact after the official departure of the UK from the EU.

In the interim; rules on work will remain unchanged but retention of global non-UK workers that have found a home in the UK labour market will be difficult. This applies to both the high and the low skilled. For example, 60% of London’s (30% of the UK’s) tourism and hospitality sector comprises of non-British labour, while some multinationals, I have been told by internal sources, have around 48% of their workforce as non-British. The ability of UK firms to recruit and retain a foreign, skilled workforce both from within and outside the EU in the interim period is likely to take a big hit. The right to work in the UK is critical to maintain both the supply of skills and talent needed in some key industries, like tech and higher education, and labour mobility will be one of the biggest bones of contention in the negotiations given the quid pro quo with free movement of capital and trade.

The implication of the UK leaving Europe and worker’s rights

“The overall contribution of EU employment rights to the UK workforce is substantial” said the TUC in a paper they published shortly before the referendum. Though unlikely that any UK government will seek to roll-back some of the progressive employment rights achieved through the EU – many employers see some newer regulations as being problematic (e.g. on discrimination law, unfair dismissal and tribunals). Some rights have been ‘Made in the UK’ like the National Minimum Wage and the National Living Wage, but others, eg the “gold-plating” in the Transfer of Undertakings (TUPE), and the Working Time Regulations (restriction of a maximum 48-hour working week, rest periods, paid annual leave and extra protection for night workers) have been disputed and rejected. Another likely labour reform that will be amended or repealed is the Agency Worker's Rights (AWR) which gives agency workers the entitlement to the same or no less favourable treatment as comparable employees with respect to basic employment and working conditions, if they complete a qualifying period of 12 weeks in a particular job. Other risks include capping compensation requests for successful discrimination claims and removing a cap on bonuses for bankers. Simon Deakin provides a summary and thorough discussion of the key issues, “It is true that EU law provides many social protections which the UK government would most likely not have adopted of its own accord and which would be at risk in the event of Brexit. But it is equally the case that EU law has not stopped successive UK governments from implementing policies based on an extreme notion of labour market flexibility.”

The longest economic recovery in history

The greatest threat to jobs comes from a faltering economy that has been hit with a new shock before recovery had been fully achieved. Initially dismissed as fearmongering, the Treasury has predicted that 820,000 jobs could be lost, though some say the claimant count could rise to 500,000 in a recession.

The lingering effects of the previous recession has been low pay and job insecurity exacerbated by the previous government’s austerity measures, and the decision by George Osbourne to focus on deficit reduction rather than critical investment in the economy. UK productivity in the last 6 years has been the lowest in Europe.

Recent figures on zero hours contracts have continued to increase, up from just under 700,000 in 2014Q4 to just over 800,000 in 2015Q4 or from 2.3 per cent to 2.5 per cent of total employment. For those for whom it is the only way of earning a living the consequences can be much more serious. It is clear that many people do not want to be on zero hours and zero hours employment contract are often weighted heavily in favour of the employer.

A McKinsey report published last week on income inequality is illuminating in positioning the UK in comparative terms. It showed that “From 1970 to 2014, with the exception of a spike during the 1973–74 oil crisis, the average wage share [share of GDP flowing to wages] fell by 5 per cent on an indexed basis in the six countries we studied in depth, and in the most extreme case, the United Kingdom, by 13 per cent.” It goes on to explain, “Two labor-market shifts have contributed to limited wage growth for middle- and low-skill workers in advanced economies since the 1980s, particularly in the Netherlands, the United Kingdom, and the United States. The first is the total share of GDP that flows to wages in advanced economies, which has fallen as the share flowing to capital has risen. The second is the distribution disparity of income—in other words how that overall wage share is distributed among different income segments. Median income households have been receiving a lower share of the total wage share for a number of reasons, and we discuss several of the most important below. One of the most important is that demand for less-skilled workers has dropped in advanced economies, even as demand for high-skill labor has risen” (p49). Weak demand for low- and medium-skill labour was particularly stark in the UK and other factors such as “financialization” of the economy and the deteriorating power of unions have been cited as leading factors in wage stagnation as well.

Echoing the McKinsey study, research we have previously conducted on the impact of the financial recession showed that:

• Technological change has reduced demand for mid-level workers, leading to an ‘hourglass’ employment structure, with polarisation into low-wage, low-skill jobs and high-wage, high skills jobs. The recession has accelerated this.
• Polarisation in the labour market creates additional challenges for social mobility. Too often low-wage work operates as a dead-end rather than an escalator.
• The least skilled have suffered most in the recession as those with more skills ‘bump down’ in the labour market.
• The skills problem is related not only to skills supply but to poor skills utilisation, particularly in low-wage sectors.

With the possible removal of the European Structural and Investment Funds that have been very important in financing programmes that promote employment opportunities, skill development and social inclusion, it is important that the government gives assurances that it will match this funding from the rebate going forward or if it will be maintained in EEA negotiations. “During 2014-2020, the ESF and European Regional Development Fund are investing around €11.8 billion across the UK. The ESF share of €4.9 billion is funding six operational programmes in Wales, Scotland, Northern Ireland, England and Gibraltar, and includes €206 million for the Youth Employment Initiative (YEI).”

It is even more important today, that the skills and competencies of the British workforce, especially for the young, are maintained, if not increased for the UK to retain its global competitiveness that will be severely hit by Brexit. Meanwhile continued wage stagnation and income inequality if not seriously addressed will drive the social grievances expressed so starkly in the EU referendum.