Changes in the job market predicted to make UK poverty worse by 2020

8th May 2012

New research published today (9 May) by the Joseph Rowntree Foundation finds that changes in the labour market, combined with changes to the tax and benefit system, over the next decade are likely to increase relative poverty rates across the UK.

The report, Poverty and Inequality in 2020: Implications of Changes in the Structure of Employment, also found that changes that we might expect to lead to lower poverty, such as reducing the gender pay gap or rebalancing regional growth, are (by themselves) unlikely to do so. It is widely thought that job market changes could help to reduce poverty in the UK However, today's report finds that expected changes to the labour market will actually increase relative poverty in the UK by 2020 and do very little to affect absolute poverty. The key forecasted changes in the labour market over the next decade, including the type of jobs available and the expected general improvements in the qualifications/skill levels of workforce, will tend to widen inequalities rather than reduce them, continuing recent historical trends.

The main reason for the projected rise in poverty rates is that earnings are forecast to grow in real terms over the decade, while benefit typically will not (and some will fall in real terms through savings in social security spending). As earnings are a more important income source for those in the middle and top of the income distribution than those at the bottom, this causes inequality and relative poverty to rise. But the projected changes to employment structure, such as the continuing growth of both high-skilled and low-skilled jobs at the expense of those in the middle, will also cause relative poverty to rise slightly.

Researchers tried to model best-case scenarios to see whether certain improvements to the labour market (such as reducing the gender pay gap or improving qualifications) would reduce poverty, but none was found to have a significant impact. There are two broad reasons. First, low-earners are not concentrated in low-income households, but are spread across the whole of the household income distribution. This means that increasing pay for all low-earners is not well-targeted on low income households and can even make inequality worse. Second, although an anticipated 1.5m new jobs have been built into the 2020 forecast, it is projected that many individuals in relative poverty in 2020 will still be in households where no-one works, and so are not affected by changes in the labour market structure, suggesting that more jobs are needed.

Two of these scenarios are explained more below:

Gender

Closing the gender pay gap by almost one-fifth is shown to have a negligible impact on poverty measures. This is because, as the report shows, the split between female and male workers across households whether they are richer or poorer is close to 50-50, despite the fact that low-paid workers are more likely to be women - among the lowest-paid 30% of workers, 65% are women.

Qualifications

Reducing the pay gap between workers with degrees and others by 5 per cent does not affect poverty. Fifty-four per cent of individuals in the bottom 20 per cent of the income distribution live in households which contain no workers at all, so they are unaffected by changes in relative pay among workers. Indeed, many of the low-qualified workers who would benefit are around the middle of the household income distribution, hence an effect is to raise the poverty line by raising median income. Of course, at an individual level gaining qualifications can still deliver substantial returns and help people progress in the labour market.

Chris Goulden, Poverty Programme Manager at the Joseph Rowntree Foundation, said: "We need to think again about what would be most effective in reducing poverty. Under current tax and benefit policies, and with the labour market we expect to have by 2020, both relative and absolute poverty rates for families will rise to around one in four."

Professor Rob Wilson, from the Warwick Institute for Employment Research, who led the research said: "Previous research on the importance of skills for improving individual pay and employment prospects suggested that investment in skills could help alleviate poverty and reduce inequality. Our results suggest that things are much more complicated than that."

Robert Joyce, a report author from the Institute for Fiscal Studies, said: "This highlights the need for governments to be clear about how labour market aims fit with objectives relating to poverty and inequality, and to not assume that the two are complementary. Policy-makers may well believe that certain labour market changes are desirable even if they do not reduce measures of poverty or inequality (or if they increase them). But it is vital that such trade-offs are acknowledged: if overlooked, then governments will underestimate how much they need to do via other means to achieve goals such as the large reductions in child poverty currently being sought by 2020."