London has a low pay crisis: is Brexit the answer?

London is suffering from a low pay crisis. Job numbers in the capital have never been higher, and unemployment rates have never been lower.

But having a job no longer guarantees a pathway out of poverty: in the middle of the 1990s, 28 percent of impoverished Londoners were in working families; 20 years later, that proportion has risen to 58 per cent.

The economic data may say that London is still booming, but low-waged Londoners aren’t feeling it.

The problem is not unique to London, but it is particularly acute for the capital’s lowest-waged sectors and people, where pay barely keeps up with the UK average.

Londoners need to earn at least 40 per cent more than people outside the capital to sustain a decent standard of living. But while median wages are 34 percent higher in London than across the country, wages for the bottom tenth of earners are only nine per cent higher.

In sectors such as wholesale and retail, accommodation and food, and administration and support services, the bottom 10 percent of earners in London earn less than the national minimum wage.

These are also the sectors most reliant on workers from other parts of Europe; they make up nearly one third of workers in accommodation and food services. So would tighter immigration controls after Brexit help to push up wages?

If cheap labour from overseas has allowed employers to keep wages down, reducing labour supply will surely push wages to a point where local workers will fill vacancies?

This appears to be the government’s hope for our post-Brexit immigration system. Under the proposals published at the end of last year, new European workers would in future face the same restrictions as workers from further afield.

Overall caps on numbers of skilled workers would be lifted and minimum skill levels lowered, but employers would still have to register to sponsor workers and pay a minimum salary of £30,000 (except for those occupations listed as having a skills shortage).

That translates to an hourly rate of £14-16, well above the London median for accommodation and food, wholesale and retail, administration and support, and arts and entertainment jobs – some of the most ‘Europeanised’ sectors.

In short, fewer foreign workers taking low paid jobs would mean more jobs and better wages for Brits. But we should be careful what we wish for.

While there is some evidence that immigration does have a slightly negative effect on pay at the lower end of the scale, the relationship is not straightforward, particularly in a city like London where so few people are unemployed and so many are workers from overseas.

Firstly, there is no fixed number of jobs – no ‘lump of labour’ – that can either go to cheap foreign workers or a better paid, UK-born workers. Foreign workers create jobs, generating new taxes, buying goods and services, and bringing new ideas and innovations to the city.

Any short-term boost to wages resulting from labour shortages could quite quickly be offset by the pressure of rising costs or loss of customers – leading eventually to fewer jobs and lower economic output.

A good example is the restaurant sector (one of the lowest paid) where rising wage costs, business rates, and food costs have already led to a spate of closures.

Secondly, if European workers were locked out of lower waged work, and pay levels did start to rise, where would the workers come from instead?

London only has around 250,000 people actively looking for work (though more who are ‘economically inactive’ or looking to work more hours), and the number of jobs occupied by EU workers is three times that.

Rising wage levels in London could draw more people into work by making jobs more rewarding, but could also accelerate internal migration, sucking talent from other UK towns and cities at a time when the political priority is on rebalancing the national economy, not deepening its fissures.

Lastly, there is a deeper and less tangible impact, easily overlooked if we view migrants simply as a source of labour competition. London’s character has evolved as a city of exchange, a city where people from across Europe can come to work with as little paperwork as they would need in their own countries.

This has been central to London’s appeal over 30 years of growth, as a global centre for higher education, for creativity, for music and fashion.

Gluing up immigration policy on the basis of marginal economic evidence may not just imperil individual enterprises, but could strike at the heart of London’s success, and the success it brings to the rest of the UK.

London does need to tackle its low pay problem, and to equip its workers with the skills needed to boost productivity and pay.

The Centre for London has argued in the past for the introduction of a London Minimum Wage, at a higher level than the National Minimum Wage (now renamed ‘National Living Wage’), as well as for better enforcement of the regulations that are in place.

Higher minimum wages would need to be introduced carefully, particularly when businesses are feeling the pressure of soaring business rates and the weak pound, but it does have the virtue of addressing the issue – low pay – directly and in a way that responds to London’s circumstances, rather than through a blunt reform driven as much by populist rhetoric as by economic rationality.

By Richard Brown, research director, Centre for London.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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