Wage inequality and insecure work

Our 21st annual Investor Day on 6 June 2018 will explore what constitutes ‘good work’ and the role that companies, policymakers and investors can play in helping to deliver it.

Man cycling, carrying a delivery backpack - Rathbone Greenbank Investments

Kate Elliot, Senior Ethical Researcher

An analysis of UK income distribution, published by the Department for Work and Pensions in March 2017 for the financial year 2015-16, estimated that 5.8 million working-age adults were in relative poverty, 3.2 million of whom were in working families. It is therefore no longer certain that work of itself can be viewed as a clear route out of poverty. Additionally, while economic reasoning would suggest that bargaining power should be shifting back towards workers, generating higher wages to tackle income poverty, the situation in the UK indicates the opposite.

In purely numerical terms, the current environment for UK workers seems positive. In the third quarter of 2017, the Office for National Statistics (ONS) recorded UK unemployment at 4.3% - the joint lowest level since 1975 - and the total number of unemployed at 1.42 million. This raised the overall employment rate to 75%, or almost full capacity, suggesting that the balance of power should have shifted from employers towards a shrinking pool of potential workers.

However, the wage growth that economists would expect to occur in such circumstances has not materialised. In the UK, real wages - those adjusted to account for inflation - remain below levels seen before the 2008 financial crisis and subsequent recession. Indeed, between 2007 and 2015, the UK was the only advanced economy where wages fell in real terms while the overall economy grew.

Real wage vs. annual GDP growth comparison 

Source: OECD

One factor that may help to explain the stagnation in UK wage growth is a shift towards greater flexibility and consequent insecurity in the labour market. This has in turn created a significant sub-group of ‘underemployed’ workers: people classified as ‘employed’ who nevertheless seek and make themselves available for more work or longer hours. Zero-hours contracts, agency work and the emergence of the 'gig’ economy all contribute to rising underemployment as these working models give little or no guarantee of consistent employment.

In January 2017, economist Michael Saunders, a member of the Bank of England Monetary Policy Committee, acknowledged the rising cost of losing a job. He spoke about the negative impact on future earnings of a period of unemployment - a concept called ‘wage scarring’. He also warned that the safety net provided by welfare and unemployment benefits is now substantially less able to adequately support those in need. In this environment, workers are increasingly risk-averse and unwilling to challenge low wages or unfair working practices.

Flexibility in the labour market, however, is not inherently a bad thing. Many individuals have been able to remain in or re-enter employment because of the availability of flexible contracts that accommodate busy and diverse lifestyles. That flexibility nevertheless becomes problematic when there is a significant imbalance of power between employer and worker interests.

Combating the power gap between employers and workers

The Taylor Review

In July 2017, the government-commissioned Taylor Review of Modern Working Practices was published. This considered how employment law and regulations might be updated to reflect new and emerging business models. It put forward several recommendations including: shifting the burden of proof for determining employment status (and associated rights such as sick pay and the minimum wage) from the individual to the employer; removing ambiguity from existing status definitions; and enhancing the enforcement of current minimum wage requirements.

The Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee published a joint report in November 2017, building on the findings of the Taylor Review. They also proposed draft legislation to help counter worker exploitation, drawing on many of the Review’s recommendations. While this is certainly a positive step, the government’s formal response to the Taylor Review - published in February 2018 - pushes many of the substantive recommendations on to another stage of consultation. With so much attention fixed on the ongoing Brexit negotiations, the difficulties of progressing meaningful legislation at this time should not be underestimated.

Investor action

A legislative response has the potential to create a level playing field for responsible employers to compete fairly with those adopting more exploitative practices to reduce costs. However, while improved legislation is being determined, there are opportunities for investors to engage with and influence companies to promote more socially responsible employment practices.

While there are significant societal benefits to more equitable working practices, there are supporting economic and financial considerations too. Broadly speaking, higher wages mean more disposable income for goods and services in the wider economy. Responsible employment practices may also help companies increase their productivity and lower employee turnover, reducing the costs associated with recruiting and training replacements.

Rathbone Greenbank is an active participant in several engagement projects seeking to address issues surrounding insecure work. We continue to encourage companies to become Living Wage employers, guaranteeing employees a minimum wage reflective of the actual cost of living in the UK. Last year we also supported the Workforce Disclosure Initiative (WDI), a project that aims to increase awareness of and improvements in the quantity and quality of company information regarding employment and supply chain policies and performance. At this time, the results of the WDI’s pilot year are being analysed, but we hope to be able to build on its findings within our engagement programme for the year.

For more information on these issues please join us at our Investor Day on 6 June 2018