How can we tackle in-work poverty?

“For increasing numbers of people in Scotland, and the UK more generally, just getting a job has not meant getting out of poverty.” (Scottish Government 2016)

Naomi Eisenstaedt, Independent Advisor on Poverty and Inequality to the Scottish Government

The number of people living in poverty in Scotland fell from 21% of the population in 1999/2000 to 14% in 2013/14. The number of people living in poverty where at least one adult in their household works now represents around 40% of all those in poverty (Scottish Government, 2015) (Figure 9).

The jobs market in Scotland has changed considerably over recent decades. Since 2000, the share of jobs that are low-paid has increased, while the share of middle-ranked jobs has fallen. With a smaller number of mid-paid jobs, in manufacturing, for example, it has become harder for people to progress through the ranks from low-paid jobs. While increasing job polarisation can be found throughout Europe, the UK has seen a larger rise in the number of low-paid jobs than most European countries (Rogers and Richmond 2015).

Low pay is one of the main contributing factors leading to in-work poverty (hours worked and benefit changes are other important factors). Figure 9 shows that the gap between the 90th percentile of earners and the 10th percentile of earners is now wider than at any point since 1999.  Median incomes and the incomes of the top 10% of earners have grown by 54%, whilst the incomes of the bottom 10% of earners have grown by just 49%.

Scottish gross weekly income for all employees, 1999 to 2015

Income

Source: SPICe, based on nomis data

What is being done about low pay?

There are two major policy initiatives specifically aimed at dealing with low pay:  first, the introduction by the UK Government of the National Living Wage (NLW) for those aged 25 and over, in place of the National Minimum Wage (NMW); and, secondly, the Scottish Government’s promotion of the Living Wage to employers across Scotland.

National Living Wage (NLW)

The NLW, set out by the Chancellor in the 2015 summer budget, is a minimum hourly rate currently set at £7.20 for those aged 25 and over. It took effect from 1 April 2016. The Resolution Foundation has estimated that the NLW will result in an hourly pay rise for around about half a million people in Scotland, around one in five of the Scottish workforce (Resolution Foundation 2016). The Office for Budget Responsibility (OBR) has suggested that employees who would otherwise be earning the NMW will see an extra £28 in their weekly pay by 2020 (OBR 2015).  Those earning above the current NMW but below the NLW will also see their pay increase and there might also be knock on effects for those earning just above the NLW, in order to maintain pay differentials.

How will the introduction of the National Living Wage affect jobs?

The latest report from the Low Pay Commission highlights research into the introduction of the NMW in 1999 (Low Pay Commission 2016). This shows that, while there was little effect on employment levels, there is some evidence that there was a small reduction in hours worked. It is not known whether the introduction of the NLW will have a larger effect. The OBR estimates that, assuming no other changes in the labour market, the introduction of the NLW could see 60,000 more people unemployed by 2020 across the UK (OBR 2015).

There have been some concerns raised that the introduction of the NLW could lead to employers being tempted to hire people under the age of 25 in order to avoid paying higher wages. Those over 25 could also see a reduction in hours, leading to underemployment. A survey of employers by CIPD suggests that 9% of businesses would consider reducing hours and 8% of business would hire more workers under 25, or more apprentices (CIPD 2015).

Living Wage

Unlike the NLW, the Living Wage is a voluntary rate which is set annually by the Living Wage Foundation based on a “minimum socially acceptable standard of living”. The Scottish Government funds the Scottish Living Wage Accreditation Initiative. Accreditation shows that the employer is committed to paying all staff, including sub-contractors, the Living Wage. At the time of writing (April 2016) there were 539 accredited Living Wage employers in Scotland.

Related to this the Scottish Business Pledge is a voluntary initiative from the Scottish Government to encourage businesses to uphold some of the “best modern business practices”, including a commitment to paying the Living Wage. So far, 240 organisations have signed up to the Pledge.

The Scottish Government recently provided funding as part of its health and social care budget specifically aimed at helping ensure care workers delivering publicly-funded care are paid the Living Wage. However, a recent report by the Scottish Government’s Independent Advisor on Poverty and Inequality highlighted the challenges faced by the lowest paying private-sector industries, such as retail and hospitality, in absorbing the additional costs of the NLW and the Living Wage (Scottish Government 2016).

Andrew Aiton

Sources:

CIPD (2015) Half of all employers expect to be affected by the new National Living Wage, Press Office. Available at – http://www.cipd.co.uk/pressoffice/press-releases/nlw-rf-release-181115.aspx [Accessed 27 April 2016]

Low Pay Commission (2016) National Minimum Wage, Low Pay Commission Report Spring 2016. Available at – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/507455/10493-TSO-Low_Pay-ACCESSIBLE_05.pdf [Accessed 27 April 2016]

Office for Budget Responsibility (OBR) (2015) Economic and Fiscal Outlook, November 2015. Available at – http://budgetresponsibility.org.uk/docs/dlm_uploads/EFO_November__2015.pdf [Accessed 27 April 2016]

Rogers, G. and Kenny, R. (2015) Scotland’s labour market: ‘job polarisation’ and inclusive growth, Fraser of Allander Economic Commentary, 39 (1), pp. 85-97. Available at – http://strathprints.strath.ac.uk/53548/1/FEC_39_1_2015_RogersGRichmondK.pdf [Accessed 27 April 2016]

Scottish Government (2016) Independent Advisor on Poverty and Inequality, Shifting the Curve, A Report to the First Minister. Available at – http://www.gov.scot/Resource/0049/00492430.pdf [Accessed 27 April 2016]