Low Pay Britain 2023

Work means very different things to lower and higher earners: not enough of the former enjoy the basics of dignity, respect and security that the latter take for granted.

There is no single thing that makes a job ‘good’ or ‘bad’, but we can confidently list as ‘good’ qualities like security, autonomy, having a voice in the workplace, and opportunities for progression. Volatile pay, intense work, or a lack of certainty over when you work are ‘bad’. These aspects of job quality are distributed very unequally. Workers with hourly pay in the bottom quintile of the distribution are more than twice as likely as workers in the highest paid quintile (38 per cent compared to 15 per cent) to say they have little or no autonomy at work; four times as likely to experience volatility in their hours and pay (22 per cent compared to 6 per cent); and four times as likely to be working fewer hours than they would like (17 per cent compared to 4 per cent).

There are also some less obvious ways in which work is harder for those on low pay. Many in well-paid jobs take for granted the everyday flexibility to be able to take time off to deal with an emergency at home. But that isn’t possible in many low-paid jobs. In a new survey of 2,000 private-sector employees, more than half (56 per cent) of those earning less than £20,000 per year said that if they had to miss work for a day due to a family emergency then they wouldn’t be paid – five times the rate among workers earning above £60,000 (12 per cent).

Some of these differences are hard to eliminate, but their breadth and scale are far harder to justify. Despite a rising minimum wage, job satisfaction among the lowest-paid workers has fallen in the past three decades, while it has been stable for the highest earners. Thirty years ago, low-paid workers enjoyed a significant job satisfaction premium (of 16 percentage points) over higher-paid workers, which has now disappeared, as low-paid work has become more stressful and intense.

The minimum standards different countries set in their labour markets matter greatly for the lived experience of work, particularly for lower earners. While many things in the workplace are hard to regulate (like the autonomy workers have over specific tasks), which is why broader questions about worker power are central to a good work agenda, there are many important areas where universal minimum standards can make a difference. Pay is the most obvious of these (i.e. the minimum wage), but other areas include sick pay, protection against hours insecurity, and also some less obvious areas like parental pay and minimum holiday entitlements.

While legal minimums in these areas are generally universal in the UK, it is mainly low earners who would benefit from raising them. Higher earners tend to be offered occupational entitlements far exceeding the statutory minimum. For example, more than half (56 per cent) of private-sector employees earning below £20,000 expect to receive only statutory sick pay (SSP) or nothing at all if they have to take a week off work through illness, compared to around a tenth of those earning above £50,000. Those earning less than £123 per week (1.6 million workers) are ineligible for any statutory sick pay at all. Similarly, two-thirds (65 per cent) of female workers under the age of 45 earning below £20,000 expect to either receive only statutory maternity pay or not be paid at all if they took a nine-month period of maternity leave, compared to three-in-ten (28 per cent) of those with an income over £40,000 (the rest of whom would expect to benefit from a more generous occupational maternity pay scheme).

This divergence between the experiences of higher and lower earners in part simply reflects how low the UK’s minimum labour market standards often are compared to those set in similar economies. SSP in the UK is just £109.40 per week. This is already low, but combined with the three-day waiting period policy (i.e. SSP provides nothing for the first three days), a worker off sick for a week would get just £43.76 – just 11 per cent of the wage someone working full-time on the minimum wage would earn (£390). The replacement rate of equivalent schemes in other countries is significantly higher: across the OECD, the median replacement rate of mandatory sickness benefit (i.e. statutory sick pay or its equivalent) for a four-week sickness absence is 64 per cent for a private-sector worker on average pay, compared to 11 per cent in the UK.

Similarly, the replacement rate of statutory maternity pay is lower in the UK than other rich countries. Statutory maternity pay would replace 27 per cent of earnings over a one-year maternity leave for a woman earning average pay in the private-sector, compared to a median replacement rate of 40 per cent across OECD countries (and there are 14 OECD countries where the replacement rate is above 50 per cent). The UK sets no minimum levels of advance notice for when workers must be notified of their shifts, and also offers workers a below-average number of minimum holiday days – 28, compared to the OECD median of 31.

And in some areas the UK has actively gone backwards, in 2011 extending to two years (previously one year) the period during which a worker has no protection from unfair dismissal. Currently 2.4 million workers in the bottom hourly pay quintile have been working for their employer for less than two years and have no protection against unfair dismissal.

It is clear that pay isn’t the only thing that matters at work. This is not just true in an abstract sense – things like being treated with dignity and being given adequate time off have a real and tangible value to workers. We surveyed workers on what, other than higher pay, would make a positive difference to them at work, and more than half said they would be willing to turn down a pay rise for this improvement – some as much as a 10 per cent rise. The most commonly-chosen improvements were more paid holiday, fewer hours, work to be less intense, more flexible hours, and a greater ability to work from home. Not far behind these was being treated with more dignity at work – chosen by one-in-20 respondents.

What concretely would a platform that aims to make progress look like? The priority areas would be sick pay, hours and pay volatility, and unfair dismissal, each of which can be broadly seen as policies relating to security at work. On sick pay, we must improve the level of SSP and make it universally available. We propose an earnings replacement approach, where SSP is paid at 65 per cent of a worker’s usual earnings (close to the median OECD replacement rate over a four- week sickness absence of 64 per cent). Furthermore, the number of ‘waiting days’ should be reduced from three to one – meaning workers would receive SSP from the second day. For a full-time minimum wage worker facing a week off sick, this system would mean SSP of £203.19, compared to £43.76 under the current system. This would be a significant benefit to the approximately 4.1 million workers in the private-sector who expect to rely on SSP for protection when they are sick or the 1.6 million workers who earn too little to be eligible.

On hours and pay volatility, we propose a right to a contract with minimum hours (reflecting a worker’s usual work pattern), a right to at least two weeks’ advance notice of shifts, and compensation for late changes. This would be of benefit to the 1.1 million workers on a zero-hours contract and the 7.2 million workers who say they are anxious about unexpected changes in their hours of work (of whom 2 million are in the bottom hourly pay quintile). And the period after which unfair dismissal applies should be lowered to one year, as was the case until 2011. Both of these sets of changes are about treating low earners with greater dignity and respect, and giving them the kinds of security and control that higher earners take for granted.

Beyond these priority areas, there is also a case for raising the UK’s floor when it comes to parental pay and raising the minimum holiday entitlement, where in both cases the UK should consider matching the median entitlements available in other OECD countries.

If the idea of raising standards to ensure wider access to good jobs sounds far-fetched, we should remember that when it comes to pay that is exactly what we have done. The improvements made to the minimum wage in recent years have transformed the low pay landscape in the UK.

Since the National Living Wage’s 2016 introduction, the minimum wage has been lifted rapidly. In 2015 the adult minimum wage was worth 54.5 per cent of median hourly pay among the group covered; in 2022 this was 62.9 per cent. The UK’s minimum wage is now among the highest in the world – currently the only rich countries with higher minimum wages (relative to median pay among full-time workers in those countries) are France, New Zealand and Korea. Based on the target path of the UK minimum wage, by 2024 the UK’s minimum wage will have passed France and Korea’s current minimum wage levels.

Raising the wage floor has hugely reduced hourly pay inequality. The proportion of employees in ‘low’ hourly pay (earning below two-thirds of the median) fell to 9 per cent in 2022 (2.5 million workers), by far the lowest since our data series begins in the late 1960s, and has more than halved from 21 per cent in 2015 (5.5 million workers). It has also fundamentally reshaped the distribution of pay growth – in the 1980s and 1990s, the highest earners saw the fastest pay growth and the lowest earners the slowest; this pattern has been reversed in the minimum wage era. Of course, the usual caveats apply, namely that the minimum wage only applies to the hourly pay of employees, and so has a limited impact on weekly pay inequality, and no direct impact at all on self-employed workers. But this is what a transformational policy looks like. And fast upratings are set to continue: the Government has set the Low Pay Commission a target of raising the National Living Wage to ‘bite’ of two-thirds of median hourly pay among the group covered by 2024.

Along with much-needed broadening of how policy improves lower-paid work, a good work agenda would continue to build on the success of the minimum wage. The current minimum target period ends in 2024, so policy makers need to decide this year what the next target should be. Based on the record so far – of significant wage gains, and negative employment effects still proving ‘elusive’ – it makes sense to set a new, higher target.

Continuing at the current pace of uprating (of raising the ‘bite’ of the minimum wage – its value relative to median hourly pay – at 1.2 percentage points per year) would imply a target path reaching a bite of 73 per cent by 2029, the likely end of the next parliament. On current OBR forecasts that would mean reaching a value of £13.12 in that year, or £25,660 per year for a full-time worker. The pace of uprating matters, because it determines how long it would take to row back from an uprating ‘overshoot’ – which if we keep raising the minimum wage is likely to happen at some point. Raising the bite at 1.2 percentage points per year would allow policy makers to ‘undo’ annual upratings fairly quickly by freezing the minimum wage in cash terms.

But importantly, alongside a new target path, we need a much clearer framework for deciding when to stop uprating. The Government’s current remit is vague: the Low Pay Commission is asked to stop raising the minimum wage relative to typical pay when there is ‘significant’ risk to the employment prospects of affected workers. But ‘significant’ is not defined and too often it is taken to mean any meaningful negative effect on employment. This is not the appropriate test: it is right to avoid lastingly locking groups out of work given the impacts on health and well-being, but the lost wage gains from not proceeding with further minimum wage rises should not be ignored. (We should not turn down a wage gain for millions for the sake of lowering unemployment by a couple of hundred, for example.) While there is no right answer to calibrating the employment versus wages trade-off, it is time for the Government to think harder about what is acceptable and provide that steer to the Low Pay Commission, before rather than after disemployment effects are found. Targeting an employment elasticity of -0.3 (where 30 per cent of the wage gains to minimum wage workers are lost to lower employment) may be appropriate.

As with the employment effects that worry policy makers when it comes to the minimum wage, other policy areas also involve specific trade-offs. For example, a sick pay scheme needs to balance the income protection offered to workers against potential incentives to ‘shirk’. On that question, our judgement is that SSP could be significantly more generous while still offering strong work incentives. But this would still mean that UK workers would take more sick days – because they could afford to do so. At present, sick days in the UK amount to 4.5 days per worker per year, compared to 9.2 in France and 11.7 in Germany, both countries whose sick pay systems offer better income protection.

Overall, our proposals to raise minimum labour standards will lead to higher labour costs, and it will be important for policy makers to view them in the round. The Low Pay Commission should be tasked with evaluating impacts, and with advising Government on the timing and specifics of each policy area (i.e. we should apply the policy mechanism used to set the minimum wage to other areas).

But important as these ‘micro’ considerations are, we need to also think bigger about the trade-offs involved in raising minimum employment standards. In doing so, production costs would rise in sectors employing large numbers of low earners, including retail, hospitality and other non-tradeable services, and social care. Some of this would be passed on to consumers in the shape of higher prices (although the minimum wage literature tells us that other margins of adjustment, like profits and productivity, also apply). This in turn might lead to lower consumption and output in these sectors (or, in the case of social care, a higher demand on the public finances). And production patterns may also change – either in terms of how we produce (for example, production might become more capital intensive) or in what we produce (for example, the UK might produce less labour-intensive services).

We should take these effects seriously but, rather than panic about them, integrate them into a wider renewed economic strategy. First, the higher standards and prices trade-off is simply spelling out the clear distributional picture when it comes to raising employment standards. The benefits would mainly flow to lower-income households: among the poorest fifth of households, hospitality and leisure comprise a quarter of employment, compared to just a tenth of employment among the richest households. The costs, meanwhile, would be disproportionately borne by richer households, who spend a larger share than poorer households on those services (households in the top fifth of the income distribution spend 35 per cent of their money on hospitality and leisure, compared to 23 per cent among the poorest fifth of households).

A second reason is that, to the extent that changes in prices led to shifts in consumption behaviour, this would make the UK less exceptional compared to other countries. In the UK, hospitality (hotels and restaurants) is fairly cheap compared to other goods and services we consume (hospitality is 10 per cent cheaper in the UK than if the ratio of prices in hospitality to other goods in services was the same as in Europe as a whole); perhaps as a result, we consume a lot of it compared with most European countries (hospitality comprises 10 per cent of our consumption, compared to 6 per cent across the EU). Overall, therefore, the wider changes which could flow from higher minimum standards in the labour market are consistent with a wider strategy to raise growth and to reduce inequality.

It is easy to congratulate ourselves on the progress the UK has made on the minimum wage. And of course, we should – this progress has been real and meaningful. But we need to recognise that the broader challenges facing lower earners means the UK is a long way from having put ‘good jobs’ centre stage. Rather than just celebrating the minimum wage, we need to learn the lessons it provides about what is possible. Progress on minimum standards beyond pay certainly is – most similar economies already manage it. But we need to think about this in the context of our overall economic strategy, and about how that can provide more good jobs. A package of reforms which is grounded in that big-picture view of the nature of the UK economy and the challenges it faces means it is not just about improving work for low earners, but about all of us living in a better and less unequal country.