Unwrapping the agency worker pay penalty

Christmas is coming – and many of the presents we’re all busy buying are being picked and packed in warehouses, delivered by drivers, or sold to us in shops by staff who are not directly employed, but who work through an agency instead. So how has this part of the workforce fared over the course of 2017?

Perhaps unsurprisingly in a year when low levels of unemployment and a falling numbers of migrants have led to a tighter labour market, the number of agency workers plateaued in 2017 (Figure 1). When we launched our agency worker project last year we suggested that if this contingent way of working grew at a similar rate to that we had observed in the previous five years, we could expect to see as many as one million agency workers in the UK by the end of the decade. The latest data now suggests we are no longer on trend to reach that threshold.

Figure 1: Agency workers over time: UK Source: RF analysis of ONS, Labour Force Survey

But is this more propitious labour market also feeding through to improvements in agency workers’ pay? At first glance this would appear to be the case: average hourly pay for those working through an agency grew by 2 per cent in real terms over the first three quarters of 2017, in contrast with a 2 per cent fall for other types of staff. While some of this uplift was provided by the National Living Wage – with over a quarter of agency workers paid at or very close to the wage floor, above inflation increases in the NLW have a significant effect – on balance, all agency workers look to be doing better in the pay stakes than their directly employed counterparts.

Or are they? Before directly employed staff decide to jump jobs they should think about how the pay levels of agency workers compare with their salaries. When we compare the hourly wage of agency workers and employees with same personal characteristics (age, gender, migrant status, ethnicity, experience and the like) who do the same type of work (when it comes to industry, occupation or whether the job is full or part-time for instance), we can see that agency workers remain at considerable disadvantage. On average, over the period 2011-2017 we estimate that like for like, agency workers have been paid 23p less an hour than employees who work directly for a firm.

However, this ‘agency pay penalty’ is not distributed equally through the workforce. As Figure 2 shows, in some occupations working via an agency comes with a pay premium rather than a pay penalty. But interestingly we don’t observe the simple occupational gradient as we might expect, with those in higher paid jobs able to extract more from the workplace while those lower down the occupational scale subject to heavier penalties.

Figure 2: Difference in hourly pay between agency workers and employees controlling for personal and job characteristics, by occupation: UK

Source: RF analysis of ONS, Labour Force Survey

So what explains this picture? We think (at least) four things could be going on. First, managers and senior staff who work through agencies often take on unpopular, trouble-shooting roles for which they may be able to command a premium. Second, many workplaces in caring and leisure have legally required staff ratios – as we have noted for social care, this can oblige firms to pay a premium for staff needed at short notice. Third, other research has shown that in professions such as teaching, staff are prepared to accept a lower pay rate in order to avoid what they see as high levels of bureaucracy. And fourth, the smaller penalties we observe in elementary and other low paid jobs may simply be because so many in those occupations are at the wage floor that the difference between the pay of agency workers and other staff is naturally slight.

Whatever the reasons, the fact that an agency worker sitting (or standing or lifting) next to an identical employee is not being paid an equivalent rate should give us pause for thought. We estimate that across all occupations, agency workers lost £400 million of earnings in 2017 as a result of the agency pay penalty. That’s a lot of Christmas presents they could have bought for their families, but also a loss to the public purse. With over one in ten agency workers claiming tax credits or Universal Credit the state is substituting at least some of these lost wages, as well as forgoing the additional tax it could levy if agency workers were paid in full.

This state of affairs is all the more concerning given that the government introduced the Agency Worker Regulations 2010 explicitly to give those with 12 weeks-plus of continuous service in the workplace pay parity with comparable employees.  While we have some concerns about how agency workers interpret survey questions about length of service (do they report the length of single assignments, for example, or instead the length of time they have worked with a specific agency?), it is possible to look at the subset of agency workers who say they have been working in their existing role for 3 months-plus (Figure 3). As this shows, in some (but not all) occupations the agency pay penalty is attenuated. Nonetheless, we still estimate the lost earnings of these longer term workers totals around £300 million for 2017.

Figure 3: Difference in hourly pay between agency workers and employees controlling for personal and job characteristics, by occupation and length of employment: UK

Source: RF analysis of ONS, Labour Force Survey

It’s fair to say that there could be a number of reasons why these lower rates of pay exist which we aren’t picking up in our analysis here. Perhaps agency workers are less motivated, for example, or lack a very specific set of skills needed for the job? But another potential explanation lies with the very law designed to end unequal pay between agency workers and employees. The 2010 Regulations allows agency staff to forgo their right to pay parity with direct employees in return for a contract that offers pay between assignments (a so-called ‘Swedish derogation’ contract). But as both the Taylor Review and the joint BEIS-Work and Pensions Committee report have acknowledged this year – and three focus groups we have run recently with agency workers also confirm – such contracts are widely abused.

In this festive season maybe it’s time for the government to give agency workers a present too. Closing this loophole in the law and enforcing the right of agency workers to equal pay with comparable employees would be a gift to the tune of £990 a year for the average administrator who works through an agency, £800 a year for the average sales or customer service staff and £285 a year for the typical worker in an elementary occupation. Now that really would make for a merry Christmas, one and all.