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Poverty and low pay in the UK: the state of play and the challenges ahead

Observation

The problem of low pay is increasingly dominating the domestic policy agenda. At an event in Westminster this morning, to mark the end of a programme of research funded by the Joseph Rowntree Foundation, we are setting out and discussing the latest evidence on poverty in the UK and in particular the challenges posed by the rise of in-work poverty. The presentations from the event are available below. This observation summarises the key points.

The nature of low income in the UK has changed radically. This is due to a combination of good and bad news. In the past the great problems were the number of workless households and the prevalence of poverty in old age. Both of those problems still exist, but are now considerably smaller. In 1994-95 22% of children and 18% of all non-pensioners lived in households where no adult was in paid work, and most of these were in poverty. The latest figures are 13% and 12% respectively. As is now well known, the prevalence of poverty among pensioners has also fallen dramatically. But earnings growth for those in work has been historically weak.

All this means that today the big issue is the number of people who live in working households who are in poverty. 57% of people in poverty are children or working-age adults living in a household where someone is in paid work; up from 35% in 1994-95.[1]  This means that poverty is far more sensitive to the plight of low-earning working households than used to be the case. In-work poverty has become one of the most important challenges we face.

A closer look at trends in earnings for low-earning households

  • The major reason why paid work lifts households above the poverty line less reliably than in the past is simply that earnings growth in the UK has been so low since the early 2000s, and non-existent overall since the recession – linked to our dismal productivity performance.
  • In addition household earnings growth at the bottom end has been even weaker than the average over the past 20 years.
  • The driver of that rise in household earnings inequality has been a rise in earnings inequality among men. This in turn has occurred despite little change in inequality in hourly wages between men; it has been caused by changes in hours of work. Men with low hourly wages are now much more likely to work part-time than they were in the past – a quarter of the lowest earning men now work less than 30 hours a week. Understanding the reasons for this should be a priority.

What has been the policy response?

  • Since the mid 1990s, rising cash transfers from the state have kept inequality in net incomes between working households approximately flat, despite the rise in inequality in household earnings among the same households. Big increases in tax credits since the late 1990s were especially important in this regard: real spending on tax credits and equivalents rose from £7bn per year in the mid 1990s to a peak of £32bn in 2011, and is currently £25bn.
  • The policy direction is now very different. Cash transfers have been, and are being, cut back as part of the fiscal consolidation. Real tax credit spending is falling. The major policy lever that is now being pulled to try to prop up low earners is a large rise in the minimum wage. This is already having clear impacts - growth at the bottom of the hourly wage distribution has been far higher than for the rest over the past couple of years.
  • But the potential beneficiaries from minimum wages are different from the potential beneficiaries from cash transfers – one reason why it is unhelpful to think of them as substitutes. Higher minimum wages are paid to people with low individual hourly wages. Higher cash transfers are typically paid to people in low income households. There are reasons why one may want to do both of these things, but minimum wages are not very well targeted at households with the fewest resources.
  • Both policies share one crucial feature: they involve tradeoffs. This doesn’t mean we shouldn’t use them; but it does mean they can only be pushed so far before the tradeoffs associated with them become too big to bear. Generous tax credits are expensive and can have big effects on work incentives. Beyond some point higher minimum wages will start hurting the employment prospects of the low skilled by making it too costly to employ them. That point might still be some way off – we simply don’t know.
  • Ultimately then, if we want to prevent low-earning households falling further behind then we may have to do it the hard way: understanding better, and addressing, the underlying causes of their low earnings.

The drivers of low pay: a story of (lack of) progression

  • Taking a lifecycle view of wages tells us that low pay is highly related to lack of pay progression. The wages of the low- and high- educated, and of men and women, end up much further apart by age 40 than they were at the start of their careers.
  • Different sources of wage growth tend to go together and to be complementary to each other. For example, experience and education are both positively associated with higher wages, but the association with experience is much stronger for the high-educated than the low-educated. We also see the lower-educated getting far less job-related training than the higher-educated.
  • The fact that women’s wages fall behind their male counterparts over the lifecycle is, in part, related to a remarkable lack of wage progression in part-time work: in other words, past experience in part-time work seems to count for very little when it comes to the hourly wage that can be commanded now. Understanding the reasons for this is an important challenge.

Policy is not powerless in the face of the rising challenge of in-work poverty. Both tax credits and minimum wages have had big impacts over the past 20 years – and, for the most part, broadly the intended impacts. They are tools that governments can use perfectly sensibly. But in the long run, if low earners are to stay in touch with the rest then applying these patches may not be enough: there is probably no adequate substitute for better understanding, and addressing, the underlying problem.


 

End note

[1] Measuring incomes after deducting housing costs and using a poverty line of 60% of median income. All numbers in the second and third paragraphs are calculated using the 1994–95 and 2015-16 Family Resources Survey.

Presentations

Incomes in low paid employment, Robert Joyce, Associate Director IFS

Poverty in the UK: past trends and future outlook, Agnes Norris Keiller, Research Economist IFS