What are the effects of low pay on the economy?

What are the effects of low pay on the economy?
September 25, 2017 Felicity Anderson

What are the effects of low pay on the economy?

The UK job market has seen a big shift in recent years, moving away from ‘jobs for life,’ towards increased self-employment and the ‘gig economy,’ which offers workers enhanced flexibility but has a darker side, with low pay and reduced rights frequently the norm.

This prevalence of low pay has many potentially damaging effects on the economy, such as reduced productivity, limited growth and purchasing power, plus a dangerous rise in consumer debt.

Here CashLady looks in more detail at the effects of low pay on the economy.

Low pay in the UK

Unemployment in the UK has hit a 42-year low, which according to the rules of supply and demand, should see increased wages for workers as employers are forced to rely on a scarce labour market.

Yet figures from the Office of National Statistics, highlighted in the Financial Times, show that wage growth hasn’t followed and despite Britain’s economy adding an extra 2.5m jobs since the economic pre-crisis peak in 2008, wages remain £15 lower per week.

Worrying levels of low pay, particularly among women, have also recently been highlighted by the Low Pay Commission, with the news that as many as 580,000 workers receive even less than the minimum wage.

The gig economy and low pay

The reason for the trend towards low pay is seen by many as the increase in badly paid, part-time work, which features zero- hours contracts, and provides less risk for employers but far more for workers.

According to Jim Edwards, writing for The Business Insider about the effects of the gig economy on low pay,

“Pay no longer moves upward as unemployment goes down because companies like Uber, Just Eat, and Deliveroo can switch off their demand for labour on a minute-by-minute basis.”

Low pay equals low spending power

One of the most obvious negative effects of low pay for the economy is a lack of consumer spending, which restricts economic growth and recovery.

This is particularly important as consumers have been the main driver of UK economic growth since the financial crash.

Reduced demand for goods and services, resulting from low wages, combined with rising prices, has seen UK consumer spending growing at its weakest rate in nearly three years.

Low pay and rising consumer debt

What are the effects of low pay on the economy?

As wages fall and prices increase, many people look to credit cards and unsecured loans to help remain financially afloat, and as such, consumer debt has risen rapidly in recent months.

If borrower’s financial circumstances change, such as in the wake of Brexit, and they are unable to repay their personal loans or credit cards, then it becomes a major problem for the economy as lenders, such as banks, fail to recover their money.

The Bank of England recently warned that the sharp rise in consumer credit could negatively impact lenders, costing them up to £30 billion if borrowers default in the event of rising inflation and unemployment.

With such economic uncertainty around Brexit, the bank of England has advised lenders to set aside over £11 billion to help mitigate the potential economic fallout.

Low pay and the housing market

Low pay has prevented a generation of potential homeowners from purchasing their own bricks and mortar.

Instead, they must live with mum and dad to save for a deposit, or give up the dream of home ownership altogether, and pay high rents instead.

While house prices have been increasing in recent years, it has started to slow, with prices falling for the fifth month in a row, as housing affordability becomes untenable, and uncertainty around Brexit mean people are less likely to move and put their home up for sale.

This drop-in house prices provides much-needed relief for buyers, who are gifted with higher purchasing power but brings troubling economic uncertainty for homeowners who may see the value of their homes diminish.

Low pay and job prospects

Unskilled labour

Low pay and cheap labour means that employers are typically less inclined to invest in training for their staff, resulting in the emergence of an increasingly unskilled workforce, which perpetuates the cycle of low pay and limits job prospects.

Fewer job opportunities

Older workers, meanwhile, are more likely to stay in low-paid jobs as they seek to save for retirement or pay off debts.

Due to this decreased job movement and lack of promotional opportunities for younger workers, the new generation is pushed out of earning more, which sees their spending power vastly reduced and economic growth stagnated.