Last week, we published our new evidence briefing on Assessing the local economic impacts of fair employment policies. This provides guidance for local policymakers on how to think through the benefits and costs of adopting fair employment policies or encouraging businesses in their area to do so. It is accompanied by a rapid evidence review on local minimum wages.
In this blog, we explain why we have covered this topic, and why is it important to think carefully about the economic logic and the evidence on impacts of fair employment policies before pursuing them as a policy option.
Why look at fair employment policies?
Amid the short-term pressures of the cost-of-living crisis, and the longer-term pressures from stagnating UK wage growth and changes in labour market dynamics – such as the emergence of zero-hour contracting – more and more local policymakers are looking to improve the situation for workers in their areas.
An increasingly popular approach is local authorities adopting, and encouraging local businesses to adopt, fair employment policies. In the UK, fair employment policies generally mean payment of a living wage and the introduction of fair employment charters, which are frameworks designed to support good pay and fair and flexible working conditions, and promote diversity and social mobility. Fair employment is also a core pillar of community wealth building.
Why it is vital to understand the evidence and economic logic on fair employment
Thinking carefully about the economics of fair employment policies and understanding the evidence on them is important because the intended benefits for workers – including higher incomes, better working conditions, and career progression – rely on a chain of effects. Understanding both the logic and evidence linking the immediate outputs from such an intervention to the outcomes (intended benefits) is important. This will help make the potential impacts of adopting the policy clearer, and will help avoid unintended consequences that could undermine policy objectives.
For example, our briefing explains how the hourly wage gains for low-paid workers from the adoption of a living wage could be offset if there is an accompanying reduction in hours worked (unlikely) or state benefits (likely). If this happens, the policy achieves the right output – higher hourly pay – but the outcome (intended benefit) of higher total household income doesn’t materialise. Additionally, if a local authority pays the living wage, and this offsetting happens, then this means local authority spending replacing central government spending (via benefits) but with local workers no better off. In the context of limited local authority budgets, that would appear to be a poor use of money compared to other forms of spending to support people in low wage work. Knowing if such offsets will happen requires understanding the local labour market, and linking this with an understanding of the economic logic and evidence on the effect of similar policies.
This approach also helps ensure that the overall effect on the local economy is considered, not just the effects on individuals or firms. For example, another potential risk is that businesses that have not adopted the policy, especially those in the tradeable sector, might choose to close or relocate if they face increased competition for labour. This means some local workers could be negatively affected by a policy that aimed to support workers.
The good work agenda – of which fair employment policies are a part – is an important one if we want to improve pay and conditions for workers. But we shouldn’t assume that desired effects materialise just because the objectives are sound. The potential downsides we’ve discussed here need to be carefully considered against the potential benefits if we want to better understand the likely impact of fair employment policies.
You can read our key takeaways from the briefing and rapid evidence review, and also find download links for both documents, on our dedicated page here.