End low pay and meet poverty targets

We now have targets to cut child poverty by half within three years and eliminate it by 2020. The anti-Poverty Strategy launched late last year is also committed to ending poverty generally.

We need strong policy levers if we are to achieve these ambitious targets. It is important how we spend the billions of pounds allocated to the Northern Ireland departments; tax credits and child benefit are good ways of boosting the incomes of poor families; the national minimum wage has given small increases to the lowest earners.

However, we have ignored one crucial issue – how do we share out the annual Northern Ireland wages bill of about £14 billion? Why do economists, politicians, journalists, civil servants, trade unionists and voluntary organisations have little to say about the allocation of such a vast amount of money?

Inequality

We have known for years that incomes in Northern Ireland are lower than the UK average. Last year median incomes for all employees here were £40 per week less than in the UK and mean earnings were £59 lower.

Less well known is that we have a very unequal distribution of incomes; it is worse, for example, than the North East of England, Scotland and Wales. So low-paid workers here suffer a double blow – overall earnings are lower than the UK average and the total wages bill is loaded in favour of employees at the top end.

Indeed inequality is the central issue in the Northern Ireland poverty debate. The simple fact is that the rich are getting richer and the poor are staying the same. Not only is the gap between top and bottom earners soaring in cash terms but the well off are getting higher per centage increases than the low paid.

Looking first at hourly earnings for all adult employees, Figure 1 demonstrates how the gap between the highest and lowest earners has grown over the last 16 years, from £6 to £15.

The size of the differential has long been a disgrace that is rapidly becoming a scandal. Over the last three years, top earners have had a rise of £3.34 per hour compared with only 46 pence for the lowest paid. Wages at the top have shot up by 20% but those at the bottom have increased by less than 10% between 2003 and 2006. The national minimum wage is not doing enough to help low-paid workers.

What matters to ordinary employees is how much they earn per week. When the higher hourly pay rates are combined with longer working hours for the better paid and for men, it adds up to an even bigger disparity.

Figure 2 reveals the alarming finding that the pay of the lowest 10% of workers actually fell last year from £108.70 to £97.50, a drop of £11 at a time when people on high earnings got an extra £21 per week.

What seems to be happening is that the Northern Ireland economy is creating a lot of badly paid part-time jobs; in addition there is the possibility that wages are being held down by the ‘Polish’ factor, the influx of migrant workers.

In combination, the reduced pay and shorter hours of low paid workers mean they are falling drastically behind high earners. In 1990 the gap between them was just over £300 per week but now it has jumped to £600. Worse still, the gap in weekly pay is getting wider at an ever-faster rate. In the latest six years, top earners have enjoyed a weekly pay rise of £143 (up 26%) but bottom earners have merely crept up £3.20 per week (3.4%).

Solving the problem

There is remarkably little debate about how we spend the annual wage bill of nearly £14 billion. Yet even a slightly fairer distribution of pay could make a huge dent in the problem of poverty.

Devolution opens the possibility of a new way to allocate pay rises, perhaps through social partnership agreements like those that have operated successfully in the Republic of Ireland for many years. An essential feature of an agreement in Northern Ireland should be the loading of more money at the bottom of the pay scale.

Pay rises are normally expressed as a percentage, recently running at about 3%. The problem is that 3% means £1,800 extra for someone on a salary of £60,000 but only £300 for a person earning £10,000 per year. We could reduce the growing inequality if we allocated the money through flat rate increases.

Flat rate increases directly benefit people on low incomes and the lower their incomes the more they gain. If we continue with per centage increases the lowest paid will be receiving an extra £36 per week after five years; instead we could allocate the same total pay rise on a flat rate basis ie give everyone the same annual increase in actual pounds.

Note: for simplicity these figures are for full-time adult workers only, numbering about 495,000.

Then the low-paid worker would get twice as much (£75) in year five; the extra £39 per week is more than £2,000 per year, which would make a very big contribution to ending the problem of the working poor. The next lowest group would gain an extra £32 per week and those on the 30^th percentile would benefit to the tune of £26 per week after five years. Indeed the majority of employees would do better if there were flat rate rather than percentage pay rises. In year five, people right in the middle (median) would get an extra £10.60 per week.

The new Executive and Assembly can shift the allocation of public resources but they can also take an initiative to get employers, trade unions and civil society round the table to draw up an agreement that will end poverty wages.

Pending negotiation of such a fair pay system for all workers, the public sector can implement the principle of flat rate increases, subject to negotiation with the unions.

High-paid workers might oppose a fair system since their increases would be smaller. However, the balance of the argument strongly favours tackling low pay in order to end poverty. The alternative is for the scandalous inequalities that have arisen in recent years to become even worse.

Data are from the Annual Survey of Hours and Earnings (ASHE), published by DETI (detini.gov.uk) and the former New Earnings Survey.

For simplicity this article refers to the highest paid and lowest paid 10%. The 10^th percentile actually marks the employee who is 10% above the bottom earner and the 90^th percentile is 10% below the highest earner. Ten percentiles make a decile.