Can a low-paid job lead onto better things? New study using Understanding Society data

A new ISER study reveals a strong indication that having a low paid job can improve employment prospects later on, but only in areas with a high local unemployment rate,

The research, Does neighbourhood unemployment affect the springboard effect of low pay? by Dr Gundi Knies from the Institute for Social and Economic Research, University of Essex and Alexander Plum from Otto von Guericke University Magdeburg tracked the lives of more than 1,500 men living in England between 2009 and 2013.

One in five workers in the United Kingdom is employed on a low wage. Whilst some view an expansion of the low wage sector as a necessary measure to increase economic productivity, from
the perspective of the individual and their families a paramount question is whether low pay offers a promising way out of unemployment as well as better prospects of climbing to higher pay, or whether accepting low pay means entering a low-pay– no-pay cycle which it will be difficult to escape from in the future.

Combining data from the UK Household Panel Survey Understanding Society, with local labour market statistics and transport data, the researchers found prospects are better for those on low pay compared to those who are unemployed, but only in areas of high local unemployment
The study revealed significant local differences in experiences.

  • In economically vibrant areas, people experiencing unemployment and those on low-pay both face comparable employment and earnings prospects.
  • In areas with a high local unemployment rate, there is a strong indication that having a low paid job can improve employment prospects later on.
  • Excluding the South East and London, the risk of future unemployment is reduced for those who work on low pay and the probability of becoming higher-paid substantially improved.

Alexander Plum said, “There is a lot of debate about whether it pays off to take on a low-pay job. Our analysis suggests that for some people in neighbourhoods with high unemployment, the answer might be yes. A possible explanation is that employers more readily recognise workers’ willingness to work when there is a higher tendency for locals to be economically inactive.”

The research exploited two unique design features of Understanding Society, firstly that the same people can be tracked over time and secondly that the Study can be linked with small scale neighbourhood indicators.

Even though low-wage jobs can lead to better employment and earnings prospects, policy initiatives aimed at increasing the low wage sector should be treated with caution. Dr Knies said: “The costs associated with being in employment puts enormous pressure on workers who have to make ends meet. Think about commuting costs, for instance and we only find that low-pay pays off in certain types of areas.”

Policy initiatives should focus on incentivising work, for example, by offering support for skills improvement and career advancement to workers in low pay occupations in local areas that offer few prospects.

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