Why doesn't work pay?

Posted on Thursday 12th December 2013
Karen Rowlingson

The labour market has shown some signs of recovery in the last year with a fall in unemployment, but getting a job is no guarantee of avoiding poverty and for many people with jobs, work no longer seems to pay.  For the first time on record, more than half of those in poverty in the UK are living in a working family, according to a Joseph Rowntree Foundation (JRF) report. A University of Birmingham report has also highlighted the fact that,in 2012, the real value of workers’ wages fell back to 2003 levels, following several years of pay freezes and economic restructuring. And research by the New Economics Foundation (NEF) found that, in the last three years, workers on low and middle incomes have experienced the biggest decline in their living standards since reliable records began in the mid-19th century. For the average worker, wages have fallen by £1,300 every year since 2010. 

So why doesn’t work pay? The problem in recent years has been a growth in ‘underemployment’ including people working on zero hours contracts (these increased by 50,000 between 2011 and 2012 while the average number of hours worked on such contracts fell). Wage freezes and cuts, at a time when living costs have risen, are also part of the picture.

But the more fundamental root of the problem lies not in the current recession but in more significant long-term shifts since the 1970s. These shifts include changes in the nature of the labour market, with a decline in skilled manual work and growing wage inequality between workers in unskilled jobs and those workers who can command an increased ‘skills premium’ in particular sectors. At the same time, the proportion of national wealth (GDP)going to wages has fallen (from 65 per cent in 1970 to 60 per cent in 2007) as more of the national wealth goes to shareholders rather than workers. Reforms in the 1980s also weakened the ability of trade unions to campaign against these trends and union membership is now half what it was in the 1970s.  According to the Office for National Statistics, around 6.5 million employees in the UK were trade union members in 2012, well below the peak of more than 13 million in 1979. 

The main response to low pay from successive governments since the 1980s has been to try to ‘make work pay’ by providing income top-ups to low-paid workers through the tax credit/benefit system. Universal Credit is the latest attempt to do this but is beset by major technical, implementation and design problems. More importantly, it does nothing to tackle the root of the problem in the labour market and, indeed, merely serves to support employers who pay low wages. Until we address the root causes of low pay,reforms such as Universal Credit will, at very best, merely ameliorate the problem and, at worst, serve to perpetuate it. 

Professor Karen Rowlingson is Professor of Social Policy and Director of the Centre on Household Assets and Savings Management