Nye Cominetti is Senior Economist at the Resolution Foundation.
Britain’s economic malaise is putting far too much pressure on millions of low and middle-income households as they grapple with stagnating living standards. It puts excessive strain on our public services too. Low growth means higher taxes to pay for fraying public services, while high inequality puts extra demands on the state, both via our social security system, and the wider fall-out from families being left behind that stretches across our housing, education and justice systems.
How to tackle this toxic combination is well beyond the scope of one op-ed, though we are taking it on with our Economy 2030 Inquiry, with the LSE. Instead, here we’ll focus on the issue of work – and how a ‘good jobs’ strategy to raise employment and improve job quality can boost growth, relieving some of the pressure on public services.
Let’s start with raising employment. This may sound daunting given the post-pandemic ‘inactivity’ hangover. The proportion of working-age people either working or looking for work is 0.6 percentage points below where it was in January 2020 – which amounts to a workforce a quarter of a million people smaller.
But this participation dip is now fully accounted for by the over-50s, many of whom opted to retire during the pandemic. These workers aren’t likely to return to work any time soon – and as they are mostly well-off homeowners no change to the benefits system would induce them to do so. Instead we should focus on the longer-term, and on removing barriers to work for groups with lower employment.
The Government is on the right track in terms of focusing on long-term routes to higher employment. The planned expansion of free childcare for the under-threes was an important change that will boost employment among mothers. Currently, the employment rate among women aged 25 to 40 with a child under two is 13 percentage points lower than among women without a child or with older children. The Office for Budget Responsibility expect the policy to raise employment by 60,000 by 2027-28.
Similar long-term thinking should be applied to people with disabilities, where there remains a very large employment gap. The employment rate for people of working age with a disability is 54 per cent, compared to 83 per cent among those without one. To close this gap, employers – supported by government – should be encouraged to both take on new staff via more flexible approaches to work and, critically, to stop existing staff from exiting the labour market if they fall ill. A statutory ‘right to return’ after a period of ill-health could help achieve this.
Such an approach would require new labour market rules, and a more proactive approach in jobcentres. But this goes with the grain of where government is heading anyway, and the demands here are largely on employers rather than the state.
Boosting labour supply among lower-employment groups is ambitious – but the lesson of the 2010s is that significant change is possible. That decade was disastrous for living standards, but it would have been even worse for low-and-middle income households without the big employment expansion which took place, raising the employment rate by three percentage points to record levels on the eve of the pandemic. The entirety of this jobs growth took place in households across the bottom half of the income distribution – not surprising as rich households already tend to be fully employed.
As well as getting more people into jobs, we need to boost the rewards from work, and to make work more attractive by improving job quality. Helpfully, the Government is also starting on the right path on these issues, as raising the minimum wage and lowering the ‘taper rate’ within Universal Credit (the rate at which benefits are withdrawn as a person earns more) have both improved the financial incentive to work for low earners. But there is more to do.
A higher minimum wage should continue to be a cornerstone of the UK’s economic policy. The ramping up of the minimum wage (now labelled the National Living Wage) has insulated low earners from the worst of Britain’s woeful pay growth over the past decade. And it has dramatically reduced low pay. The share of workers in Britain with hourly pay below two thirds of the median (a common definition of ‘low’ pay) halved between 2015 and 2022 – from 21 to 11 per cent. And this was achieved without the harm to employment that many people warned of when the minimum wage was first announced.
There is now a welcome political consensus about the need to keep on raising the minimum wage. However, it is already one of the most ambitious legal wage floors of any advanced economy, so we need to think more creatively about how to improve work for low earners.
We should, for example, take on the insecurity that affects too many workers across Britain – for example not knowing how many paid hours of work you are going to do from one day to the next, making it nigh on impossible to budget or plan ahead. We can do this by setting minimum notice requirements for shift changes, or compensating workers if last-minute changes are needed.
We also need to encourage a wider cultural shift in how we work – for example by ensuring that the everyday flexibilities that middle-class white-collar workers enjoy and take for granted are available to lower-paid workers too. Take for example unexpectedly missing a day of work due to a family emergency. Just one-in-ten high paid workers (earning over £60,000) would not be expect to be paid if this happened, but the majority of low earners (earning less than £20,000) would expect to lose out financially.
These small changes can make a world of difference to workers, but put no extra pressure on the state. Statutory sick pay could also be improved in a similar vein. We saw the deadly impact of our failed system during the pandemic – when ill-people could not afford not to work, because the level of sick pay was too low, or they weren’t entitled to any. Failing to extend and expand sick pay was a consistent failure doing Covid-19. We should address it now.
Having more people in work, enjoying better working conditions, and getting paid more for the work they’re doing should ultimately reduce demands on many of our public services, even if it requires the guiding hand of modern labour market rules that the state will need to implement.
But there is another reason why a better world of work can help reduce the strains on the state. One of Britain’s big economic failures of recent decades is a lack of dynamism – and that includes lower job mobility. Moving jobs is good for workers – it’s usually the best way to get a big pay rise – and it’s good for the economy too – as it helps to improve workers’ skills and match them to the jobs they should be doing.
We should worry then that job mobility is down, and we need to encourage workers to move jobs more often. Some would say we need fewer labour market rules rather than more to achieve this – but we already have one of the most flexible labour markets of any advanced economy. Others would argue we need to cut back our unemployment benefits. But we’ve been doing that for years, and it hasn’t made a difference. Instead, we need to take a new approach – de-risking job moves. If workers know they can get the flexibility and security in new jobs that they enjoy in their current ones, they may be more inclined to take the plunge. And we’d all be better off if they did.