Which policies can both boost growth and help people on low incomes?

Stagnant productivity and low growth have plagued the UK economy for nearly 20 years. Combined with persistent inequality, this has created a major social and economic challenge for successive governments. Anyone familiar with 1990s politics might be tempted to call it a ‘double whammy’.

The current government has been criticised for its employment rights reforms – which expand workers’ rights related to contracts, pay, protections and leave – and for increasing the minimum wage. The concerns are that these policies will push up labour costs in sectors that employ large numbers of low-paid workers.

At the same time, despite the increases in the minimum wage, too many workers are still in low-paid and often insecure work, and face an enduring cost of living crisis. This constrains their living standards, keeps children in poverty and limits people’s potential.

At the national level, these factors can hold back the country’s economic dynamism – an issue that could be compounded by the need to invest in infrastructure and significantly increase defence spending.

This adds up to a huge challenge, so at Understanding Society, we organised a ‘policy springboard’ event, with the Institute for Employment Studies (IES), the Centre for Cities and relevant government departments, to look at the evidence on growth and inequality together, rather than treating them as separate and potentially opposed goals. Researchers, policy-makers and practitioners spent two days discussing research findings to create practical and implementable policies.

What are the issues that need to be addressed?

Before the event, we conceptualised the core problem, consulted some experts and mapped out the evidence around three major themes:

• Job quality and health: Severe job insecurity affects one in five workers, with zero-hours contracts shown to harm mental health. In turn, mental health problems are a primary cause of long-term sickness in the under-50s, which then affects productivity. But the evidence shows that autonomy and control over tasks at work can boost both job satisfaction and wellbeing.

• The skills investment gap: Participation in training fell from 29% in 2002 to 24% in 2020, with the steepest declines among those who need it most – younger and less-educated workers. As artificial intelligence (AI) and automation reshape the economy, the skills deficit and capacity to move to different jobs threatens disadvantaged groups and ‘left-behind’ communities in particular.

• Stalled job mobility: Under 2% of the workforce make positive job moves (changing firms and industry for better pay and conditions). High housing costs and poor or expensive transport don’t help. Low-paid workers can be confined to their local labour market, with mothers and low-earners often needing to prioritise short commutes over better careers, making it difficult to narrow the gender pay gap.

Is inequality good for the economy?

On the question of job quality and pay, there is an argument that inequality spurs people’s ambitions, and is therefore good for the economy and society. But there is a counter-argument: that inequality reduces opportunities and stifles productivity growth – and here the evidence suggests that the level of inequality required to incentivise economic activity is quite small.

In the United States, Walmart (a large chain of supermarkets) was traditionally seen as a ruthless, price-focused retailer that paid its workers some of the lowest wages in its sector. But, according to the Financial Times, ‘improving starting wages, expanding parental leave and helping employees earn degrees and qualifications... raised morale, reduced staff turnover and improved the customer experience. Such initiatives have undoubtedly played their part in the quadrupling of Walmart’s stock price.’

It must be significant that the International Monetary Fund (IMF) says: ‘We should not jump to the conclusion that a treatment for inequality – redistribution – may be worse for growth than the disease itself’; and that OECD research finds that very high income inequality tends to go hand-in-hand with weaker productivity growth.

Why invest in skills?

‘Average employer spending on training has decreased by 27% per trainee since 2011’, according to the Institute for Fiscal Studies (IFS). And yet training can help adults back into work at a higher rate – 68% compared with 53% who do not receive training in one study by the Resolution Foundation. We also know that women, especially mothers, are working in jobs for which they’re overqualified. The same is true of disadvantaged young people, some ethnic minorities and people who need a work visa.

The need to invest is underlined by the National Foundation for Educational Research’s ‘Skills Imperative 2035’, which suggests that technological, demographic and environmental trends will reshape labour demand within a decade, with steady growth in higher skills professional roles. At the same time, the study expects the loss of up to three million jobs, more than one million of which would be lower-skill occupations, due to automation.

Speaking at our event, Andy Dickerson, professor of economics at the University of Sheffield, suggested that a critical mass of skilled workers can attract business investment and help to break the cycle of low-skilled jobs reinforcing low-skilled workforces. But this requires local businesses to have the capacity to absorb and benefit from new skills and knowledge.

Who moves for work?

The issue of skills is also relevant to job mobility: the median distance travelled to work is only 5km for non-graduates aged 16-27, and 25km for graduates. The level of mobility is even lower for those who live in the poorest areas.

Ken Gibb, professor of housing economics at the University of Glasgow, said at our event that the cost and availability of housing affect who can access jobs in different regions, with high housing costs making key parts of the country inaccessible for many, thereby limiting labour market flexibility. For those struggling to rent or buy, unaffordable housing constrains life chances and has direct impacts on how the labour market functions, and on productivity.

Beyond trickle-down economics

The policy springboard identified five areas that could not only stimulate growth and productivity, but also boost equality by encouraging a labour market that works better for those on low incomes:

• Small and medium-sized enterprises (SMEs): These are often a dynamic part of the local economy and more likely to provide lower-income jobs than larger companies. But better resources, management and human resource (HR) expertise would help them to provide better jobs and implement good work practices, meaning that they could prioritise long-term capability over short-term survival.

• Pay and conditions transparency: Job adverts that clearly disclose pay bands, flexible working options and benefits would allow low-paid workers to compare jobs more easily. This could improve matching efficiency, shift bargaining power and encourage job changes.

• Reforming recruitment: Companies with a specific demographic profile can end up recruiting in their own image, including class-based hiring, and reinforce bias by focusing on narrow specifics rather than potential and skills. Better recruitment could reduce labour market frictions and improve fairness.

• Integrated localism: Connecting skills training, transport, childcare and social capital can address structural barriers. This requires an understanding of local ‘job dynamics’ (flows in and out, not just the profile of employment in the area) and a place’s industrial strengths. It also requires partnerships and links between local government, business, transport, education and health.

• Investment and skills: Simplifying funding systems would help to reverse declining training investment and expand technical and vocational education courses locally. Input from employers would make sure that what gets offered is relevant.

What does this mean for policy?

We distilled these broad propositions down into a set of specific, practical recommendations:

• Local ‘one-stop’ business and HR hubs: Creating local, pooled resource hubs would give SMEs access to shared HR expertise, management training and business support. This would allow smaller firms to offer the kind of structured career pathways and ‘good work’ practices usually reserved for large corporations, boosting local productivity and job quality without imposing prohibitive costs on individual businesses.

• Devolved skills and transport budgets: The barriers to work – such as poor or expensive travel, and mismatches in skills training – are highly local. Central government should grant devolved budgets and powers to combined authorities where there are strong local alliances of stakeholders such as councils, employers and colleges. These alliances could coordinate local economic development to invest in public transport and tailor skills funding to local industries. This would enable infrastructure that connects deprived communities to jobs, and enhance wellbeing and life satisfaction.

• Transparency in recruitment: Job adverts need to state clearly the starting pay, conditions/benefits and potential for skills development and progression. This would empower applicants to identify roles that offer longer-term prospects. Employers should be encouraged to adopt a skills-based hiring approach rather than one that focuses on formal qualifications and/or past experience. This could reduce hiring bias and help workers to pivot from low-paid jobs into other sectors and emerging industries.

• Turn Jobcentres into ‘career hubs’: Jobcentres should move beyond getting people into any job and instead help them to stay and progress in work. This would require a huge transformation. Work coaches should be trained to provide in-work career advice, helping claimants and workers to navigate skills training and progression with employers. This shifts the focus from simple employment statistics and conditionality to sustainable career growth and higher earnings.

• A portable ‘lifelong learning entitlement’: Current training models often require time commitments that working adults cannot meet, and employers struggle to accommodate. A flexible, portable ‘lifelong learning entitlement’ would allow workers to accumulate credits through short, modular courses that fit around their commitments. Funding should be simplified to support this, so that workers can retrain in bite-sized chunks that help them to progress and respond to technological change.

• Stop benefits getting in the way: For many, the benefits system stands in the way of risk-taking and doesn’t support career growth or higher earnings. Further smoothing of the taper rates for Universal Credit and providing better wraparound childcare support would make sure that every extra hour worked pays off – not just financially but in terms of family support. Low unemployment benefit is a disincentive to those already in a job who are considering taking the risk of changing jobs. There is therefore a case for mitigating some of the risk via targeted uplifted benefits assurances.

Some of these are ambitious policies politically, but if implemented well, with support from their various stakeholders, they have the potential to lift the floor of the labour market, boost mobility and productivity. What’s more, they could help to address the structural barriers that hold people in low-paying, poor-quality jobs. They can also prepare low-paid workers for the disruption that AI is set to introduce.

Where can I find out more?

• Growth with Purpose: a briefing from Understanding Society.
• Insights – Barriers to Opportunity: research and policy solutions for young people’s life chances.
• How productive are the UK’s big cities? A report from the Centre for Cities on 20-year trends in local and national economic performance.
• The potential health implications of a changing labour market: an IES briefing for the Commission for Healthier Working Lives.

Who are experts on this question?

• Raj Patel, Associate Director, Policy and Partnerships, Understanding Society
• Ben Willmott, Head of Public Policy and Practice at the Chartered Institute of Personnel and Development
• Nicola Smith, Director of Policy for the Trades Union Congress
• Naomi Clayton, Director of the Institute for Employment Studies
• Jude Hillary, Co-head of UK Policy & Practice, National Foundation for Educational Research

Author: Raj Patel