The myth of the upwardly mobile

The political debate over the Government's labour market policies has been clouded by a lack of hard facts. New research makes sobering reading

The Conservative Government's single-minded creation of a deregulated and flexible labour market has made Britain the stage for a unique natural experiment during the past 20 years. The payoff has been, finally, one of the lowest unemployment rates among industrial countries. This has made Britain an example that is starting to tempt politicians on the Continent, especially in Germany and France, fearful of the electoral consequences of their jobless levels.

Yet the experiment has had other, less appealing, results. Earnings inequality in the UK has risen faster than in any country apart from the US. The distribution of men's wages is more unequal now than at any time since comparable records began in 1870. This, too, has a political cost. The latest British Social Attitudes survey shows that nine out of ten Britons think the gap between high and low incomes is excessive.

The political debate over the years about the merits of the Government's labour market policies has been clouded by a lack of hard facts. In particular, growing inequality might not matter if it is matched by growing opportunity, so that a wider income distribution at any point in time is offset by greater upward income mobility. Britons might have become more like the many Americans who start their career serving in a fast-food joint but work their way up the ladder, giving more equal lifetime incomes. So, at least, the Government has claimed.

The information needed to assess this claim properly is becoming available. A new publication from the Centre for Economic Performance contains the most comprehensive summary so far of research on what impact the new flexibility has had on incomes and job opportunities, at least for men.

The research has been made possible by the availability for the first time of several "panel" data sets. These contain years' worth of information on thousands of individuals, from official national insurance records and from surveys, allowing specific employment and income histories to be tracked.

Recent academic research has therefore been able to present several conclusions about the results of the British experiment. Sobering reading it makes, too. Consider the following conclusions, which economists would call "stylised facts", about the UK labour market.

r Fact 1: Wage mobility has diminished over time.

The degree of movement up the wage distribution was about a quarter lower in 1995 than in 1980. Most of that decline occurred in the early 1980s but the trend has continued since then. Lower inflation is part of the explanation, however: there is much less movement within the income distribution when increases in incomes are low.

r Fact 2: Wage mobility is higher for the young and concentrated in the first year of work.

This result is not surprising, but it does imply that people who do not escape low pay early in their life will find it much harder later. The average person gains as much in their income in the first year of work as they add in the next four years. About 45 per cent of men leave low pay in their first working year, and only half as many in their second year.

r Fact 3: Most people who move up the income distribution do not move far.

Peter Lilley, the Social Security Minister, has made much of the finding that of the men aged 25-34 in 1978/79 whose earnings were in the bottom tenth of the distribution, only 13 per cent were still in that lowest tenth in 1992/93. True, but a full third of them remained in the bottom three-tenths of the earnings distribution and another 18 per cent were claiming benefits. Just under 16 per cent had made it to the top half of the earnings distribution.

The picture is bleaker for an older age group, aged 35-44 in 1978/79. As the chart shows, there was more downward mobility for this age group. Nearly one in five of the bottom tenth were still in the bottom tenth 15 years on, with 37 per cent in the bottom three-tenths. And 27 per cent were on benefits. Under 7 per cent had climbed into the top half of the earnings scale.

r Fact 4: People who leave unemployment for a low-paid job have a higher chance of becoming unemployed.

In perhaps the most telling result about the jobs market, only half of the prime-age men who were the lowest paid at the start of the Conservative era still had a job 15 years later, and only 60 per cent of the younger men. Of those who had been unemployed in 1978/79, 78 per cent (or 64 per cent of the younger group) were unemployed in 1992/93.

"There is evidence of a cycle of low pay and no pay," one of the papers in the CEP report concludes. The British figures display the phenomenon American researchers have labelled "recidivism": those who leave poverty have a propensity to fall back into it.

r Fact 5: The fall in entry-level wages has increased the number of two-job couples.

Pay at the bottom end of the jobs market has fallen by more than a tenth in real terms since 1980, to an average of just under pounds 100 a week. This has tightened the poverty trap - there is less chance of getting a job that makes it worth giving up benefits. One result has been that while the probability of moving from non-employment into work has fallen for single men and women, and married men, it has nearly doubled for married women whose husbands already work. Increasingly, couples have either no jobs or two jobs because the level of pay at the bottom of the earnings distribution is too low to support a family or warrant giving up benefits.

The bottom line is that during the past two decades, lifetime opportunities have been no more fairly distributed than incomes at any single point in time. This depressing list does prompt some fairly obvious policy conclusions. Paul Gregg, editor of the new CEP volume, focuses on two. First, make entry-level jobs more viable, by reducing tax, for example (as shadow Chancellor Gordon Brown plans to do with a 10p or 15p starting rate). Secondly, getting the unemployed into work is not enough; there is also a need to move people on to higher incomes and to reduce their risk of becoming unemployed again.

However, the existence of a large group of people who stand little chance of leaving poverty and unemployment behind them is not enough to condemn the entire British labour market experiment. To the extent that it has reduced unemployment, greater flexibility is welcome, for those with no job are worse off than those with a badly paid job, and generally unhappier too.

A greater caveat has to be that the evidence sheds no light on how much the Government's labour market shake-up is to blame for the trend towards greater inequality, nor on how far the trend will go. There is a strong case for arguing that influences far beyond the UK, such as new communications technologies or international trade and investment, account for it. Britain has reacted one way, the Continent another, and each has paid a high price in either fairness or jobs.

If the world really is a more hostile place for unlucky sections of the population in industrial countries, it might prove a lot easier to limit inequality via taxes and benefits than to reduce unemployment. Little wonder the French and Germans are still undecided about the British experiment.

"Jobs, Wages and Poverty", Centre for Economic Performance, London School of Economics, January 1997. Price pounds 15.