Local Approaches to Boosting Earnings

24 February 2015

Damien Conyngham-Hynes is a Policy Advisor in the Cabinet Office’s Cities and Local Growth Unit specialising in labour markets and skills. In this blog, Damien details three innovative ideas that could help people increase their earnings through work.

What is the challenge?

Low pay continues to dominate the policy debate in the UK, and rightly so. Whilst the employment rate at 73.2% is at record levels (1) and wages for people who have remained in continuous employment have, for the most part, continued to rise in real terms(2); for some people – particularly those who lost their jobs during the recession – this has not been the case. For instance, it remains the case that over half those living in poverty live in a household where someone works (3).

The issue is one of progression as well as low pay. Almost three quarters of workers who were low paid in 2002 were still in low paid work a decade later. And whilst 46% of these workers did experience high pay at certain points during the decade, cycling between low and high paying jobs, 27% never earned above low pay during that time (4). This figure is significantly worse for some groups, including lone parents and people with disabilities.

These issues have a significant human impact, but they also have a striking fiscal impact. Improvements to the welfare system are expected to save money – Universal Credit alone is projected to save £20.7 billion through higher earnings for people moving into employment and reduced spending on benefits (5). However, there remains scope for improvement. For instance, a recent report suggests that if all UK workers earned the living wage – the wage rate required to provide workers with a basic but acceptable standard of living – the Treasury could achieve gross savings of up to £3.6 billion a year through increased tax revenue and lower spending on in-work benefits.

Structural drivers

Long-term structural trends have contributed to the current low pay-low progression equilibrium.

Stagnant productivity levels and an increasingly polarised labour market are two of these trends. UK output per hour worked in 2013 was 17% lower than the average for G7 countries, and 30% behind the US (7). As productivity is, in the long run, the main determinant of living standards, this marks a worrying trend.

At the same time, increased globalisation and rapid technological advances have led to a growth in both high-paying and low-paying jobs, coupled with significant falls in middle income jobs (8). This pattern of polarisation further entrenches low levels of progression by removing the middle-income jobs that low paid workers may progress into.

Three proposals to counteract the trend

One of the Government’s key policies aiming to tackle this issue is Universal Credit. By ensuring that people are always better off the more they work and by simplifying the system by introducing a single taper, people are incentivised to find and progress in work. This is a positive move; although on its own may not be enough.

NIACE’s proposals for a National Advancement Service in its latest report is innovative, not least because it makes the case for how skills investment could contribute to efforts to boost earnings (9). However there are a number of additional ways to improve the existing system, and the Government is testing these approaches through City Deals and Growth Deals. These include:

  • Tweaking existing programmes to include metrics for progression. The Work Programme’s focus on long-term outcomes is a positive step, but providers should be paid in part for improving their participants’ earnings (10). Through its City Deal, Plymouth have been testing this approach using a randomised control trial to assess how to boost the earnings of young people who have found work through the Work Programme. More radically,  in the future there may be scope for a structural move towards implementing earnings programmes rather than employment programmes. In this case, providers’ primary focus would be on improving earnings for participants, with employment used as a mechanism to achieve this goal.
  • Developing estate-based employment and progression programmes. For residents of deprived estates, there is evidence that housing provider-led employment initiatives can support residents of deprived estates to find and progress in work. The Jobs Plus programme, previously delivered in the US, offered residents financial incentives to work, alongside employment and community support. The scheme was very successful. Tenants’ yearly earnings increased by 6.2% compared to the control group, and in the three sites that did not experience any implementation issues, the figure was 14% (11). These gains continued even after the programme ended. The Black Country, through its City Deal, is piloting a similar approach to reducing welfare dependency in two areas of high unemployment. Further testing and  evaluation of this model in a UK context should be a priority.
  • Generating stronger evidence of ‘what works’. Whilst there is significant evidence of what works in helping people find employment, there is little robust evidence of what works in helping people progress in employment. The previous Employment Retention and Advancement pilots in the UK showed evidence of earnings gains for participants, but did not identify which interventions caused this improvement. A commitment to more sophisticated piloting to generate robust impact evidence at scale should be prioritised so that future policy makers and providers can identify which interventions or combinations of interventions work in the coming years.

The UK labour market’s twin challenges of low pay and low progression are significant but not insurmountable. By improving existing programmes, introducing well-targeted additional support and joining up Whitehall silos, they can be overcome.

1 Office for National Statistics – Statistical Bulletin: UK Labour Market, February 2015
2 Emmerson et al – The IFS Green Budget (Institute for Fiscal Studies, February 2015)
2 MacInnes et al – Monitoring Poverty and Social Exclusion 2013 (Joseph Rowntree Foundation, 2013)
4 D’Arcy, Hurrell – Escape plan: Understanding who progresses from low pay and who gets stuck (Resolution Foundation, November 2014)
5 National Audit Office – Universal Credit: progress update (26 November 2014)
6 Lawton, Pennycook – Beyond the bottom line: The challenges and opportunities of a living wage (IPPR, Resolution Foundation, 2013)
7 Office for National Statistics – Statistical Bulletin: International comparisons of productivity – First Estimates, 2013 (October 2014)
8 Goos, Manning – Lousy and Lovely jobs – The rising polarization of work in Britain (Review of Economics and Statistics, 89)
9 NIACE – No Limits: From getting by to getting on (February 2015)
10 Ben Galim, Krasnowski, Lanning – More than a foot in the door: Job sustainability and advancement in London and the UK (IPPR, 2011)
11 Bloom, Riccio, Verma – Promoting work in public housing: The effectiveness of Jobs Plus – Final report (MDRC, 2005)