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The Dynamics of Low Pay and Unemployment in Early 1990S Britain

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The Dynamics of Low Pay and Unemployment in Early 1990S Britain A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Gosling, Amanda; Johnson, Paul; McCrae, Julian; Paull, Gillian Research Report The dynamics of low pay and unemployment in early 1990s Britain IFS Report, No. R54 Provided in Cooperation with: Institute for Fiscal Studies (IFS), London Suggested Citation: Gosling, Amanda; Johnson, Paul; McCrae, Julian; Paull, Gillian (1997) : The dynamics of low pay and unemployment in early 1990s Britain, IFS Report, No. R54, ISBN 978-1-87335-772-9, Institute for Fiscal Studies (IFS), London, http://dx.doi.org/10.1920/re.ifs.1997.0054 This Version is available at: http://hdl.handle.net/10419/64582 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu The Dynamics of Low Pay and Unemployment in Early 1990s Britain Amanda Gosling Paul Johnson Julian McCrae Gillian Paull The Institute for Fiscal Studies 7 Ridgmount Street London WClE 7AE Published by The Institute for Fiscal Studies 7 Ridgmount Street London WC IE 7 AE tel. (44) 171 636 3784 fax(44) 1713234780 email: [email protected] internet: http//www.ifs.org.uk ©The Institute for Fiscal Studies, July 1997 ISBN 1-873357-72-9 Printed by KKS Printing The Printworks 12-20 Rosina Street London E9 6JE Preface The Joseph Rowntree Foundation has supported this project as part of its programme of research and innovative development projects, which it hopes will be of value to policy makers and practitioners. The facts presented and views expressed in this report, however, are those of the authors and not necessarily those of the Foundation. The authors thank the Foundation for their support and also Richard Blundell, Lorraine Dearden and members of the JRF Advisory Committee for their helpful comments and suggestions. Amanda Gosling is a Senior Research Economist at the Institute for Fiscal Studies. Paul Johnson is a Deputy Director of IFS. Julian McCrae is a Senior Research Economist at IFS. Gillian Paull is a Research Economist at IFS. Contents Executive summary Introduction 8 1.1 Existing research on earnings mobility for the UK 10 1.2 Measuring low pay 12 1.3 Outline of the rest of the report 14 2 Low-pay dynamics 15 2.1 Introduction 15 2.2 Snapshots of employment, wages and low pay 16 2.3 Movements into and out of employment 28 2.4 Wage mobility and movements into and out of low pay 38 2.5 Conclusions 59 3 The persistence of low pay and unemployment 61 3.1 The degree of persistence 61 3.2 Effects of status in 1991 on future status 70 3.3 Conclusions 80 4 Returns to experience and tenure 82 4.1 Estimates of the returns to experience and tenure 84 4.2 Average wages 89 4.3 Proportions in low pay 92 4.4 Job tenure 95 4.5 Conclusions 98 References I 0 I Executive Summary This report uses the first four waves of the British Household Panel Survey to look at the dynamics of earnings and earnings mobility, particularly among the low-paid. It asks such questions as 'are the low-paid stuck at the bottom of the earnings distribution or do they move up?', 'for how long do people stay low­ paid?' and 'what is the relationship between pay and employment?'. For while we know that earnings inequality has widened remarkably over the past 20 years, we know rather little about the dynamics of the earnings distribution. This report tries to fill some of that gap in our knowledge. Pay and Employment Only about two-thirds of men (aged between 18 and 60 and not in full-time education) remained in continuous employment over the whole period from 1991 to 1994, while fewer than 9 per cent were out of work all the time. The rest spent some of the time in work and some of the time in unemployment. Importantly, we also find that lower relative wages of individuals are associated with a higher probability that they will move out of work in the future. Among men, 30 per cent of those starting in the bottom quarter of the wage distribution spent some time out of work in the next two-and-a-half years (Table I). This was true of just 12 per cent of those starting in the top quarter of the distribution. Similarly, looking at transitions into work, 56 per cent of the men moving out of unemployment moved into a job with wages in the bottom quartile of the distribution. Dynamics of low pay and unemployment TABLE I Probability of moving out of work within 30 months, by position in the wage distribution Per cel!t Quartile PercentaKe leaviiiK work Men Bottom 30 2nd IY 3rd 15 Top 12 Women Bottom 33 2nd 25 3rd 15 Top 17 The clear, and not surpnsmg, message is that movements into and out of work are overwhelmingly experienced by those on, or who can obtain, only rather low wages. Employment Changes and Wage Changes We are not just seeing 'churning' between low pay and unemployment during the 1990s. It is also the case that movements into and out of work are associated with substantial wage changes. Table 2 shows that. of those men who moved out of work and then back in again. TABLE 2 Percentage change in wages for men according to whether any time was spent out of work between Waves 1 and 4 Percent PercentaKe chanKe in waKe Percell taKe o{tilose PercentaKe o{ those not.1pendinK time who do spend time out o{work out o{work Down more than 20'~' lJ.5 33.7 Down IG--20% K.X 10.1 Between 10% down and I O'if, up :n.o 20.4 Up 10-20% 16.4 5.'! Up more than 20% 28.3 29.Y 2 Executive summary over 40 per cent experienced a significant reduction in wages. compared with fewer than 20 per cent of those who continued in work. On the other hand. three in ten of them experienced wage increases of 20 per cent or more. Mobility and the Minimum Wage One important issue associated with wage mobility is how it alters the number of people who would be affected by a minimum wage. We know how many people would be affected by a minimum wage at any point in time, but the numbers affected over a longer period will depend on how many people move onto and off low pay. Suppose we take half male median earnings as a possible level for a minimum wage. On this basis, something like 7 per cent of employed men and 28 per cent of employed women would be paid the minimum wage at any point in time. But over the period between 1991 and 1994, 12.5 per cent of men and 42 per cent of women, who were in work at some point, would have been affected at one time or another. The numbers vary according to the exact level at which a minimum is placed but the pattern is clear. Substantially more people are affected over just a three-year period than are affected at any one time, as a direct consequence of the degree of wage and employment mobility. Churning between low pay and unemployment means that a minimum wage will appear to be more redistributive in terms of income measured over a few years than in terms of income measured at one point in time. Those currently unemployed might benefit from a minimum-wage job at some time in the future. This, of course, is provided a minimum wage is set at such a 3 Dynamics of low pay and unemployment level that it does not affect the probability of the unemployed getting a job in the future. Persistence of Low Pay Relatively few people make it out of the bottom reaches of the earnings distribution into the top half. Of men who were in the bottom quarter of the earnings distribution in 1991, half were still there in 1994 and a further 13 per cent were out of work altogether. Just 6 per cent had made it into the top half of the earnings distribution. Among women, there was slightly more mobility into the top half of the distribution and much more movement out of work. The figures for men and women who started in the bottom two quartiles of the wage distribution are summarised in Table 3. Continuing Effects of Low Pay and Unemployment Of those men who were low-paid in 1991, defined as earning less than £5 an hour, using usual statistical techniques we would predict that about 31 per cent would be low-paid in 1992. But if we take into account the fact that they were low-paid in 1991 in predicting their status in 1992, we find we would predict that 68 per cent of them would be low-paid in 1992.
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