The relationship between pay and unemployment

Last month (June 11) the Office of National Statistics (ONS) released figures showing UK employment levels at a record high. With difficulties on the High Street and a struggling car industry, some comfort can be drawn from these figures. Unemployment rates remain historically low, but is low unemployment enough and what does this mean for employers?

In-work poverty is defined as those in households where the household income is less than 60% of the average household income. In effect, this can be seen as an inequality measure and this type of poverty is often hidden as families struggle but just about get by. Some groups have done better than others but generally it can be said that poverty levels, using the above definition, have stayed pretty static over the last twenty years.

Addressing this is a key priority for the Scottish Government under its strategic aim to make ‘A Wealthier and Fairer Scotland’. Reducing the inequality gap and better sharing our wealth should reduce deprivation and child poverty, and agencies are responding, for example, the new strategy from Scottish Enterprise has a focus on high quality jobs; changes to Regional Selective Assistance demonstrate a reluctance to subsidise high volume, low paid jobs.

Many cite the introduction of the minimum wage as a valuable tool in fighting low pay and inequality. At the time many economists argued that its introduction would have a negative effect on employment levels and would harm businesses. When it was introduced in 1999, Professor Patrick Minford claimed a minimum wage level of £3.60 would cost 200,000 jobs. Twenty years on and we have record employment levels and the minimum wage (currently £8.21 for over 25s) continues to rise. Confusingly in 2015 the then Chancellor, George Osbourne, renamed the ‘National Minimum Wage’ the ‘National Living Wage’. The old ‘National Living Wage’ which is calculated on the cost of living needed a new name so became the ‘Real Living Wage’. It is now clear that the introduction of the minimum wage has not had a negative effect on employment levels.

Unfortunately, it also appears not to have reduced inequality, and therefore poverty. A legitimate question would be how high can the minimum wage go before having an adverse effect on inflation, via price increases, business survival rates or employment rates? Likewise, does raising the hourly rate of pay for the lowest paid workers reduce inequality and consequently poverty, or does it just shift everyone’s wages upwards? Economics is an art and there is no formula to work out the perfect level for the minimum wage.

Of course in Aberdeen and Aberdeenshire we have large numbers of highly skilled employees earning much more than the minimum wage. As manager of the Business Gateway service in the North-east I come across many businesses struggling to find employees with the right skills and experience. It is a constant juggling act as staff leave and businesses have to compete in a global market place for a limited number of skilled staff. For employers, an additional downside of low unemployment is the reduced number of available workers and increasing pressure on wage levels.

Most people agree that the introduction of the minimum wage has been a success but with low unemployment and a government focus on high-quality jobs we need to make sure we have available workers with the right skills to allow businesses to grow in line with their ambitions.

Gary Hughes

Gary Hughes