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Andrew Sissons
Researcher, Big Innovation Centre
T 020 7976 3609
Andrew  Sissons

The danger of a low wage, low security job trap

Authors: Andrew Sissons Andrew Sissons

16 May 2012

Today’s job market figures contain plenty of good news. Employment is up by over 100,000, unemployment is down significantly, and the claimant count has fallen reasonably sharply too. Considering that the ONS also believes that we are in a double-dip recession, that’s a pretty encouraging result.

But for all these positive signs, there are a couple of doubts hanging over these numbers. The first is the scale of so-called underemployment that the headline figures conceal. We may have seen 100,000 new jobs created, but the number of full-time jobs fell; the net new jobs were all part-time. As a result, we now have record numbers of people working part-time because they can’t get a full-time job.

Behind this underemployment problem is a second, closely related issue. If the economy creates jobs while overall output is flat, then something has to give – and that something is productivity, the amount we produce per hour. Productivity matters for two reasons: first, it affects how competitive the economy will be, and how quickly the UK will bounce back from recession; and second, it roughly translates into wages. If productivity falls, the chances are that wages will too. Productivity has fallen sharply since the start of the recession, and has not recovered much since, and this could define the shape of the UK’s eventual economic recovery.

In a sense, these issues of underemployment and low productivity are part of the same trend. The job market is bouncing back, but it is doing so in a weak and insecure fashion. Businesses aren’t getting the same value from their workers that they did before the recession, so they are paying lower wages (relative to inflation), and employing more people in part-time or temporary roles.

In the short-term, it is probably better to have more people in low security, low pay jobs than in unemployment. But this raises a question about what happens when the economy bounces back. If unemployment returns to normal levels, but many workers remain in these lower quality jobs, there is a danger that this might become the new normal for the UK economy. Of course, this bout of underemployment might also be a stepping stone to a fuller recovery in wages, but it is far from guaranteed.

There is a risk that we might see so-called 'hysteresis effects' from underemployment and lower productivity. Economists have often argued that short-term rises in unemployment sometimes become permanent, raising the long-term unemployment rate. There is no reason why this shouldn’t apply to underemployment and wages. If people are forced into less secure, less well paid work now, they may be more likely to stay there in the future, and the UK may shift onto a less prosperous economic trajectory. My colleague Spencer Thompson offered a thoughtful piece last month on how insecure work might damage productivity.

So what does this all this mean for economic policy? In short, reducing unemployment is not in itself enough for a full recovery; it must be accompanied by growth in productivity, wages and good jobs. The government needs to focus relentlessly on exports, on sustaining investment, and on enabling new growth industries to flourish. We need to give businesses the platform to become world leaders, and we need to give people the skills to access good, productive jobs in these businesses. Anything else could leave us with a labour market of pain for years to come.

The Work Foundation has a wide range of research dealing with these issues.

The bottom ten million programme looks at how job prospects, wages and job security can be improved for those at the bottom of the labour market. Our recent report The Skills Dilemma looks at how businesses could better use employee’s skills to raise their productivity.

The Big Innovation Centre aims to transform the UK’s economy, to raise productivity and to create a new wave of growth industries in the UK. You can read our thoughts on these growth industries in The Next Wave of Innovation.

The Good Work Commission examined the challenges facing work in the 21st Century, and looked at what can be done to promote Good Work. You can read the Commission’s final report Good Work and Our Times here.


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