Introduction

The lack of growth with
regards to low pay in the UK has become an obvious issue compared to other
similar economies. These issues have had a negative effect on the individuals
and the society they are a part of. The extent and significance of low pay in
the UK will be scrutinised with use of analysis regarding possible policy
solutions that address the issues that occur from low pay.

Significance of Low Pay in the UK

OECD (2017a) defines low pay
as “share of workers earning below two-thirds of median earnings”. As of April
2014, low pay was at £7.67 in the UK according to Corlett and Gardiner (2015).
The UK’s wages are below OECD’s average; this means that the UK have high
levels of low pay in the long term. According to Figure 1, it shows that 15% of
employees are affected by incidence of low pay in the UK. (Keese and Grubb,
2015)

The United Kingdom’s level of
output is restricted due to the workers having low pay and less skills. This
affects the country’s productivity as it keeps the GDP per hour less than the
OECD average, as well as other similar economies such as Germany and France.
This is shown by Figure 2. The International Labour Office (2010) claims that
the future success of any economy depends on how many people are in employment,
how educated and skilled they are to make them productive in their work. In
addition, it is believed that there is a connection between education, skills,
output and economic growth. Therefore, improving skill utilisation, work
organisation and quality of work can positively affect the output of a country.

National
Output per hour worked in 2014; 2010=100

Firm Quality

The United Kingdom relies on
market conditions for outcomes regarding investment and training. Public
spending on the labour market is significantly low compared to Germany and
France, along with other similar countries. (Figure 3) Lanning and Lawton
(2012) state that this can lead to lower levels of employment prospects and
less competitive advantage against other economies.

Public spending within the
labour market from 2000-2014: total % of GDP

Utilisation of Skills

The decrease in semi-skilled
occupations reduces jobs and opportunities for skilled workers, this results in
a skills misallocation. (Figure 4) The inequality will rise along with the
divergence of occupational wages and the lack of job prospects, this is because
low pay tends to occur within low and semi-skilled professions. (Corlett and
Gardiner, 2015)

% of Employee’s over-skilled and
under-skilled, by industry

Policy Responses and Impacts

The implication of low pay can
be stemmed from the organisation of certain firms and sectors will restrict the
relevant resources needed for career development. (Ray et al., 2014) Although
there is an undesirable undertone regarding high labour market regulations and
institutional involvement. Many northern European countries, through higher
levels of labour productivity, innovation and training, have achieved higher
levels of employment protection compared to the UK. (Lanning and Lawton, 2012) The
UK will need to get rid of these policies to improve the development in the
labour force through enhancing job quality.

Human Capital

Human capital is a critical
factor of earnings. Due to unfair distribution of higher education and training
prospects throughout society, it is important that there are further skill
enhancements. This is aimed at those who work low wages in low quality jobs.
(OECD, 2015a)

The government gives financial
aid for those that decide to invest in higher education, even then people are
unaware of these investments. (McNally, 2012) In order to increase the number
of people who go into higher education, career prospects will need to be
targeted through policy incentives and make more information available in
schools and job centres.

Improvements in the knowledge
economy will mean that the gap between highly skilled workers and other workers
will increase. To tackle this issue, the UK needs to achieve a society that is
well skilled and makes use of individual abilities throughout all professions.
(Lanning and Lawton, 2012). In order to improve the overall skills of the
society, the government will need to provide the best facilities for young
people who are trying to attain qualifications such as GCSEs and A-levels.
Setting higher qualification standards for teachers will improve teaching
quality and ultimately lead to higher quality education. (OECD, 2007) This can
result in a more educated society which improves the wages of individuals
involved, knowledge spillovers and economic growth.

In addition, through
government subsidisation, apprenticeships decrease training and recruitment
costs as it gives employers incentives to take part in the scheme to provide
apprenticeships. The government plans to introduce an ‘apprenticeship levy’ to
help the them fund 3 million apprenticeships that will starting between 2015
and 2020. (Amin-smith et al., 2017) Nevertheless, there is still an issue
regarding the significance of low pay as most of the apprenticeships are low
pay and within low progression occupations. According to the Social Mobility
and Child Poverty Commission, employers and the government will need to impose
strategies for earnings and career prospects for apprenticeships in industries
which have low pay and low career prospects. (Milburn et al., 2016)

Moreover, OECD (2007) believes
young people who pursue vocational courses, as opposed to academic ones, do not
have enough resources. Low skilled workers have less chance of receiving the
training they need as they will be preferred to workers who possess better
skills. (Ray et al., 2014).

Trade Unions and Collective
Bargaining

The United Kingdom’s trade union density is greater than other countries with similar economies. However, the density has decreased over the past couple of years at an insignificant rate. (OECD, 2017b) Due to existence of monopsonies, there will be a better representation of workers regarding employment progression and also an increase in earnings. In addition, the involvement of the trade involvement will minimise the levels of unemployment. Overall, it will encourage firms to target quality over price. However, the trade union wage has declined over the past years. In order to for it to be a success, the trade union will need to adapt to the new labour market.

National Living Wage

The National Living Wage (NLW)
was put into effect on the 1^st of April 2016, as an attempt to put
the costs back on to the firms. (The Economist, 2015) According to OECD
(2015b), the outcome of a National Living Wage is unclear, as it could reduce
the chance of low pay, reduce wage inequality in the short run and increase
productivity. However, it can also lead to an increase in unemployment as there
is an increase in labour costs.

A rise in the national minimum wage will affect firms severely in the long run as the productions will increase, exceeding the profits of the perfectly competitive firms. This could lead to an increase in the level of unemployment, with all other factors remaining the same. On the other hand, with regard to a monopsony, there will be reduction in the marginal expense of labour due to the required wage set by the government. This is because the profit maximising point is set above the required wage. The decrease in marginal expensive of labour result in the firm to replace labour with capital in the long run if all other factors remain the same. Although, the National Living Wage increases the wage for individuals in low pay, it can be the case that unemployment will increase if the wage is too high. This is because firms will not be making enough profit and may close down.

Conclusion

The welfare of people and
societies within the United Kingdom is threatened by low earnings. Although the
government has been attempting to come up with a solution for the issue of low
pay, more needs to be carried out to make sure there is an increase in the
improvement of the labour force as well as a decrease in low earnings.
Government policies that aim to decrease the incidence of low pay must target
both demand and supply problems within the labour market. Although, job quality
can be improved through National Living Wage, such development can only support
but not efficiently eradicate the implication of low pay. There should be more
focus on employers, employees and human capital to increase employment
projections in order for employees to gain benefits from being a part of the
labour force.

References

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