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Jobs and wages

Most working-age adults depend on earnings from jobs as their main source of income. Understanding the labour market has always been a central part of research at CEP and its predecessor the Centre for Labour Economics.

One of the side effects of the Covid-19 pandemic has been an unprecedented upheaval in the way we work. While health, care, food delivery and other essential workers put in punishingly long shifts, sometimes risking their health in the process, many other industries were shut down and the financial support for those stopped from working varied widely between, and within, countries. Then there were those office workers who were confined to their homes - missing interaction, but perhaps not the commute.

The results of this huge experiment will be studied for decades to come. And it is labour market economists who will be taking the lead. Labour market economists study the world of work - how jobs are filled, or not; how people find work, or don't; and what that means for wages and wellbeing. The field is broad, covering the role of education, immigration, ethnicity and gender in people's working lives. And over time, concerns have changed.

In the 1980s, the most pressing labour market concern was unemployment, which was stubbornly high in many European countries including the UK.

The co-founders of CEP's predecessor, the Centre for Labour Economics, Richard Layard, Stephen Nickell and Richard Jackman published their book Unemployment: Macroeconomic Performance and the Labour Market in 1991, just as CEP was set up. The book made a central contribution to understanding what caused unemployment - and how it could be tackled. This was not just an academic analysis: it had policy recommendations as well.

Layard and co-authors argued that it was important to keep the unemployed connected to the labour market through what are sometimes called active labour market policies or "activation". Their view was that the failure of the Thatcher government in the early 1980s to do this contributed to a prolonged period of high unemployment. The implementation of such activation policies, informed by the research covered in the book, is one reason why the rise in unemployment after the global financial crisis of 2007-09 was surprisingly small, given the size of the downturn.

Wage gap grows as employers seek graduates

In the 1990s and 2000s, unemployment fell in many countries, to be replaced by other labour market problems. Now, there was growing concern about the quality of jobs rather than their quantity.

Wages are not the only way to measure the quality of a job, but they are an important factor. In the UK, the 1980s saw rising wage inequality with those at the top doing very well and those at the bottom doing badly. CEP research was among the first to document this for the UK and to investigate its causes. Stephen Machin found that one aspect of rising wage inequality was a rise in the "returns to education" as seen, for example, in a widening gap between those with a university degree and those with lower levels of qualifications. This was perhaps surprising because the fraction of the labour force with degrees was rising so a simple demand and supply analysis might predict that the returns to education would fall.

CEP research was central in explaining this: it indicated that although the supply of skilled labour was rising, it wasn't doing so fast enough to keep pace with rising demand for skills.

CEP research also investigated the two main hypotheses for the rise in the demand for skilled labour - technology and globalisation - concluding that technology was more important. For example, even in non-traded sectors - that is goods and services, such as restaurants, that are usually consumed where they are produced - the shift to skilled workers was still strong even though these activities aren't easily globalised. This idea of "skill-biased technical change" became a common way to view labour market trends.

Skill-biased technical change presents an image of employment shifting towards more highly skilled and desirable jobs. It would seem to support the "education, education, education" mantra of former UK prime minister Tony Blair to ensure that the supply of skills kept up with changes in demand. But, starting in the early 2000s, CEP research started to cast some doubt on the view that this might be a suitable policy response to address some of the changes in the occupational structure of employment that the UK was experiencing.

One striking finding came from Maarten Goos and Alan Manning, who showed that, for the UK, the share of workers in the highest-paying occupations was rising, but so was the share of workers in the lowest-paying occupations. Meanwhile, the share of workers in middling occupations, notably craft jobs in manufacturing, and clerical jobs, was falling. On average, jobs might be becoming better (consistent with the idea of skill-biased technical change) but there was also rising dispersion. As Goos and Manning put it, the structure of employment was polarising into "lovely" and "lousy" jobs.

The impact of robots

Later work by Goos, Manning and Anna Salomons showed that job polarisation was also occurring in other European countries and that it seemed to be connected with technology, as employment was declining fastest in jobs that could be "routinised" - that is, where workers could be replaced by machines and/or computers.

After the global financial crisis, there was widespread concern that new technology - notably robots and artificial intelligence - wasn't just changing the occupation structure but was also leading to a collapse in the demand for workers. Such concerns about the impact of new technology are not new: the world has been through episodes like this in the past without the fears materialising. But these recent concerns found a ready audience without much in the way of supporting evidence.

In 2018, CEP research by Georg Graetz and Guy Michaels was the first to provide such evidence by investigating the actual impact of industrial robots, finding that they raised productivity while having no effect on total employment, although robots were associated with a fall in the demand for low-skilled labour.

The minimum wage revolution

Technological change wasn't the only thing driving a dramatic rise in wage inequality at the bottom of the pay distribution. Starting in the 1980s, a period of deregulation in the labour market, a decline in union membership and, in 1993, the abolition of the wages councils that set minimum wages in several low-paying industries all saw low wages stagnate. Researchers proposed minimum wages to counteract these downward pressures.

It had been argued that these minimum wages destroyed jobs but CEP research found this was not the case. This paved the way for the introduction of the National Minimum Wage in 1999. CEP researchers didn't just investigate the consequences of the minimum wage: they were also active participants in designing it and setting the wage level. David Metcalf, then deputy director of CEP, was a founding member of the Low Pay Commission, followed later by the current CEP director, Stephen Machin. The UK minimum wage, once very controversial, became accepted across the political spectrum: indeed, it was a Conservative government that introduced the National Living Wage (essentially a higher minimum wage for the over 25s) in 2016.

Photo by Yuri Krupenin on Unsplash
Coins in a box. Photo by Yuri Krupenin on Unsplash.

The rise of employer power and the gig economy

The fall and rise of the minimum wage are part of wider debates about how the labour market should be regulated. The 1980s were a period of deregulation in the UK and many other countries, and the balance of power shifted from workers to employers. The decline in unionisation is perhaps the clearest evidence for this. But in recent years there has been growing recognition that perhaps this process went too far, that the state needs to intervene to ensure there is an appropriate balance of power between workers and employers, and that the market alone cannot be relied on to do this.

One idea behind this is "monopsony" - when employers have considerable discretion to set wages meaning that regulation is needed to limit their ability to use this power to disadvantage workers. An old idea, this was revived by CEP research by Manning and it has attracted more attention recently. For example, the Obama White House produced a policy paper on monopsony in 2016 and encouraged the Department of Justice to take labour market competition issues more seriously.

Another way in which the labour market is often said to be changing is towards less traditional and more insecure forms of employment such as self-employment, temporary contracts, zero-hours contracts and the "gig economy". Current CEP research addresses these trends. Nikhil Datta, Giulia Giupponi and Machin consider zero-hours contracts, finding that such contracts have become key in some, predominantly low wage, sectors of the UK labour market. Their survey of zero-hour contract workers found 45% would rather have more regular hours and 28% saying such a job was their only option. Despite this, Manning and Mazeine find, perhaps surprisingly, that subjective measures of job security in the UK, the United States and Germany are not higher than they were in the past; if anything, they are lower.

Four big questions

The labour market has been, and always will be, a key part of CEP research given how fundamental it is in determining people's living standards and quality of life. Questions puzzling economists now include whether the increased use of robots and AI will be a threat to jobs or a source of increased living standards? How can employment contracts ensure an appropriate balance of power between workers and employers? How high should the minimum wage be? And how should skills policy be adapted to meet the needs of new technology and ensure the benefits of growth are shared by all?

CEP has a 30-year tradition of investigating the latest labour market trends, seeking to identify their causes and, where necessary, recommending policies to improve matters. Through policy-relevant cutting-edge academic research, CEP hopes to contribute for another 30 years.

By Alan Manning