We must get used to a new world of work

Put a dismal productivity performance and a flexible labour market together and that’s what you get. One consequence is that a majority of people who are classified as poor now live in a household where someone is in work. This is a complete turnaround from 20 years ago when two thirds of the poor lived in workless households. We used to think that tackling worklessness and increasing pensioners’ incomes would sort out poverty. That’s another longstanding assumption we need to re-evaluate.

Poor productivity is at the root of much of this but it’s not the whole story. For one thing, work is changing. There are now more than four million people classified as sole traders; a third of the growth in the number of people working in the past decade is due to this growth in self-employment. And if employee earnings have been doing badly, then the incomes of the self-employed have been doing even worse. Their average recorded profits are down by nearly 20 per cent since 2008.

This big expansion in self- employment is partly driven by the expansion of the so-called gig economy. That might itself be one sign of a change in the balance of power in the labour market. The temptation for companies to use self-employed workers rather than those on standard employment contracts are considerable. They avoid not only employer national insurance contributions but also regulation around minimum wages, pension contributions and holiday pay.

Even among those with standard employment contracts, the remarkable collapse of union membership in the private sector since the 1980s has changed the relationship between employee and employer. Union members are now overwhelmingly working in the public sector, white-collar and middle-aged. Low wages largely affect the young, those in the private sector, and those in service industries. Fewer than 10 per cent of the lowest-paid private sector workers are union members, compared with 66 per cent of the highest-paid public sector workers.

It may also be that this picture of very high levels of employment is a bit misleading. Many of the self- employed are working much less than full-time. There has been a sustained increase in the number of men in employment who are working part-time. Twenty years ago virtually all men in work worked full-time, and often worked overtime on top. Today a fifth of men with the lowest hourly earnings work less than 30 hours a week. They are in work, but far from fully employed.

And while overall employment rates are very high, this is in large part because of the growing presence of women in the workforce, especially lone parents and women in their early sixties who historically have been distant from the labour market. The effective pool of workers has grown. Male employment rates, on the other hand, may be high but are still below the levels of the 1970s, especially for older men. In interpreting the overall employment numbers it’s important to understand what is happening to men and women separately.

There is one more surprise though. I bet you’re thinking this woeful wage growth reflects, on average, the high-paid doing perfectly well, thank you, and the low-paid doing much worse. That was true up to 2008, but not since. Over the past decade there have been bigger falls in earnings for the top 1 per cent than in the middle. And earnings at the bottom have done best of all. That has been especially true since the introduction of the national living wage which has raised the minimum hourly earnings of those aged 25 and over from £6.50 an hour in 2015 to £7.83 today.

Big increases in this minimum are set to continue through to 2020, by which time more than one worker in ten will be receiving it, with much higher proportions among women and in some parts of the country. That’s a lot of people having their wages set directly from Whitehall.

This is a punt on the part of government. We don’t know what the effect will be. With luck it will boost wages, productivity and incomes. But it could easily reduce hours and employment still further. Increasing yet again the difference between employment and other forms of work could also accelerate the move into self-employment, especially if the government continues to fail to deal with the big tax advantages that companies get from using self-employed contractors. Boldness on the minimum wage alone is not enough.

This article was originally published in the Times and is reproduced here with full permission. Paul Johnson is director of the Institute for Fiscal Studies, follow him on Twitter @PJtheEconomist.