Five challenges
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Low pay

Low Pay Britain 2024

Examining the Government’s proposed employment reforms

Nye Cominetti
Nye Cominetti

The Government is planning the largest set of workplace reforms in a generation, with plans to overhaul multiple areas of employment policy. These have the potential to make real inroads in the problem of insecurity at work, and would particularly benefit low-paid workers, who bear the brunt of labour market insecurity. The Government is yet to set out the details of some of these reforms – understandably given it has only been in power a matter of weeks and some of the issues are complicated – and these details will determine how effectively workplace insecurity is tackled.

This – the 14th annual Low Pay Britain report – examines some of the key measures the Government is proposing, analysing their potential to improve workplace security while also exploring the risks and trade-offs. The four areas we focus on are unfair dismissal, sick pay, hours insecurity, and the minimum wage. There are strong arguments for reform in all these areas, their success hinges on the careful implementation, and a careful balancing of the needs of workers against potential impacts on employers and the broader economy.

Key findings

  • In the UK, there are several forms of labour market insecurity which employment policy does relatively little to counter.
  • One example is ‘hours insecurity’, where workers lack control or predictability over their hours of work, facing the risk of having shifts cancelled at late notice. The number of workers experiencing this goes beyond the 1 million workers on zero-hours contracts – around double this number of workers express high anxiety about unexpected changes in their hours of work. 17 per cent of employers using low-paid flexible work say they give only a day’s notice of shift changes. There is currently nothing in UK policy to mitigate this type of insecurity.
  • Two other dimensions of labour market insecurity are the risk of job loss workers face, and the income protection offered in the event of job loss. On both dimensions UK policy offers less security than most other advanced economies. According to the OECD’s employment regulation index, it is easier for employers to dismiss individual workers in the UK than all but five other OECD countries, while unemployment benefits offer an earnings replacement rate of 17 per cent (for a worker on average private sector pay), compared to 57 per cent across the OECD.
  • A further example is the level of protection offered to sick workers. The UK’s Statutory Sick Pay (SSP) system offers a lower level of earnings protection for workers facing sickness absences than equivalent systems in most other OECD countries. For the four-in-ten workers who rely on SSP, the three waiting days in the UK system combined with the low payment (£116.75 per week) mean that someone working full-time on the minimum wage would see their earnings fall by 74 per cent if off sick for a week.
  • All these forms of insecurity affect low-paid workers more than high-paid workers. 8 per cent of low-paid workers (defined as workers with hourly pay in the bottom fifth of the earnings distribution) are on zero-hours contracts, versus 0.6 per cent of the highest paid. When job exits have spiked during recent downturns (during the Covid-19 pandemic and the financial crisis), the lowest-paid workers have been twice as likely as the highest-paid workers to lose their job. Meanwhile, 42 per cent of workers in the lowest hourly-pay quintile would expect to receive either no pay or Statutory Sick Pay (SSP) only if off sick for a week, compared to just 13 per cent of the highest-paid workers.
  • Policy makers face potential trade-offs when making changes to employment policy. Measures to improve employment terms and conditions bring about the risk of negative effects on employment – although the history of the minimum wage shows that to date such improvements have been possible without causing significant employment losses. There are also potential trade-offs with specific reforms. Most obviously, making dismissals harder (by reducing the qualifying period for unfair dismissal protection) has the potential to reduce hiring rates, or to encourage greater use of temporary contracts.
  • Overall, the UK’s starting point as a country with a high-insecurity and low-regulation labour market means there is room to undertake reform without turning the UK’s labour market into one that is high-regulation. For example, making unfair dismissal protection a ‘day one’ right would still leave the UK’s overall score on the OECD’s employment protection index below the OECD average – level with Ireland and New Zealand.

Recommendations

  • Unfair dismissal. The qualifying period for unfair dismissal protection should be lowered from its current two years. The Government says it wants to make unfair dismissal protection a day one right, but also to continue to allow employers to use probation periods. The law will have to change to make unfair dismissal a potentially fair reason for dismissal, but limit probation periods to six months. The Government should make the process for making dismissals during probation periods straightforward.
  • Sick pay. The Government plan to remove ‘waiting days’ and the eligibility earnings threshold (currently £123 per week) from Statutory Sick Pay (SSP). Both measures would expand sick pay support to additional workers – in the first case to workers reliant on SSP who face a sickness absence of fewer than four days, and in the second case to workers earning below £123 per week without an occupational sick pay scheme. However, the Government has no plans to raise the level of SSP, meaning workers who rely on SSP will still experience a significant earnings reduction when off sick. The Government should consider raising the level of SSP, potentially linking it to workers’ earnings level – moving to a 65 per cent earnings replacement would bring the UK in line with the OECD average.
  • Hours insecurity. The Government are proposing to give workers a right to a contract with minimum hours reflecting the hours they regularly work. To tackle hours insecurity, this right must apply to all workers (not just those whose hours are already ‘regular’), and must offer minimum hours on a weekly or bi-weekly basis (and not over a longer period such as over a year – as was the case with a similar reform in Ireland in 2019).
  • Minimum wage. The Government’s minimum wage policy is only a one-year holding policy, but currently it is similar to the previous Government’s – the National Living Wage is likely to rise in line with average wages in 2025. The Government should consider adopting a bite-increasing target, while also giving the Low Pay Commission clearer guidance on how the benefits of a higher minimum wage should be balanced against potential costs.

Further reading

Great expectations in hard times?
Previewing the big decisions for the Chancellor in the new Government’s first Budget
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Emily Fry, Cara Pacitti, James Smith
The growth mindset
Sizing up the Government’s growth agenda
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Emily Fry, Greg Thwaites
Building blocks
Assessing the role of planning reform in meeting the Government’s housing targets
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Camron Aref-Adib, Jonathan Marshall, Cara Pacitti
Nye Cominetti
Nye Cominetti Principal Economist