Can the UK avoid a two-track economy? Research from SKOPE’s labour market segmentation project

1. Can the UK avoid a two-track economy?Research from SKOPE’s labour market segmentation project Craig Holmes SKOPE Public Policy Forum, Cotswold Lodge, Oxford November 9th 2010

2. Introduction • Two questions: • What is meant by a two track economy? • Why might we end up with one? • Often thought about in terms of a good job-bad job dichotomy • Good jobs • High wages, high skill, job security, opportunities to progress • Bad jobs • Low wages, low skill, little job protection, frequent turnover • Why a dichotomy, and not a continuum?

3. Introduction • Possible (known) labour market phenomena: • Labour market segmentation • Polarisation and the hourglass economy • Technological progress • Off-shoring • Increasing incomes at the top  demand for low-wage services • “Two tracks” implies barriers to mobility • Barriers may by more localised than these models suggest

4. Labour market segmentation • Classical theory of labour markets is driven by the supply-side • human capital theory (e.g. Becker 1964) • compensating differentials • allows for imperfections in the labour market • This emphasis has come at the expense of the demand-side • Alternatives: • Job competition model (Thurow, 1970) • Institutionalists (e.g. Kerr, 1954) • Labour market segmentationists

5. Labour market segmentation • Segmented labour markets: • Primary sector – good wages, skilled work, secure employment • Secondary sector – low wages, frequent turnover • Workers become “trapped” – including misallocated workers • Doeringer and Piore (1971): primary segment created by ILMs • ILMs created to deal with specific skill bilateral monopoly • Also as response to employment risk (Piore, 1975) and imperfect information (Shapiro and Stiglitz, 1984; Lazear, 1981) • However, evidence on existence of two segments is weak • Mayhew and Roswell (1979) – no dividing line in UK labour market • Many studies find mobility is limited, but not impossible

6. Polarisation and the hourglass economy • Routinisation hypothesis (Autor, Levy and Murnane, 2003): • Price of computer capital has fallen since late 1970s • Computer capital replaces labour engaged in routine tasks • Non-routine tasks may be complementary to computer capital (e.g. management, skilled professionals) • Result: growth in non-routine occupations due to changes in demand (complementarities) and supply (displaced routine workers) • Polarisation hypothesis (Goos and Manning, 2007) • Routine occupations found in middle of income distribution • Non-routine occupations found at top and bottom of distribution • Managers, skilled professionals at the top • Non-routine ‘service’ occupations at the bottom e.g. hairdressers, cleaners

7. Polarisation and the hourglass economy • Hourglass economy shown through changes in employment share of groups of occupations ranked by (initial) average wages – each of approx. 10% of labour force. • e.g using LFS 1981-2004:

8. Polarisation and the hourglass economy • However, this assumes fixed wage structure of occupations. • Looking at wage distributions gives different picture. • e.g. FES 1987-2001

9. Polarisation and the hourglass economy • What’s missing? • Wages for different occupations have changed or have spread out: • Expanding occupations wages are much more varied (e.g. managers) • Increasing wages of those remaining in routine work • Numerous other effects on distributions aside from change to occupational structure over same period: • Declining power of unions • Increased female participation AND declining gender pay gap • Change in education attainment AND changes in returns to education? • Increasing returns to experience

10. Polarisation and the hourglass economy • Compositional changes on wage distribution:

11. Polarisation and the hourglass economy • Changing graduate premium across the distribution:

12. Polarised, segmented or something else? • Both models suggest the development of a ‘two track’ economy • Both face significant problems: • LMS has limited empirical support • Polarisation evidence is misleading given incomplete theory • Yet, barriers to mobility are likely to exist • Barriers could get stronger • Need to understand these barriers for any policy which aims to improve upward mobility to be successful

13. Barriers to mobility: work organisation • Question: is there a better typology of work? • Kohler, Goetzelt and Schroder (2006): • ILMs weakened by macroeconomic changes and the ‘demand for flexibility’ • Moving the boundaries or blurring them?

14. Barriers to mobility: work organisation • Marsden’s (2007) tournament model • increased use of project-based, freelance work • Workers build reputations  Prize: status. • e.g journalism, consultancy, academia • Parallels with skilled manual work • Work has always had a “project” structure • Workers build reputations  Prize: regular employment • Are occupational labour markets changing?

15. Barriers to mobility: routinisation • Change in occupational structure has not created two polarised segments • May still have effects on mobility • Careers are comprised of a number of upward moves • From any job, the number of upward moves available is limited • Changes to structure of occupations may therefore harm some established career paths • Pockets of immobility across the labour market • Different effects across different cohorts

16. Barriers to mobility: routinisation • One aspect: where do displaced routine workers go? • Mobility analysis: • NCDS, 1981-2004 (ages 23-46) • Occupations recorded at six dates (1981, 1986, 1991, 1995, 1999, 2004) • Routine occupations and non-routine occupations (professional, managerial, intermediate and service) • Logit regressions of routine workers job moves between these years • Introduced a economy-wide measure of routinisation – separates out career progression from displacement

17. Barriers to mobility: routinisation • Results: • Upward career mobility from routine occupations not uncommon • Not aided by vocational qualifications below level 4 • Is aided by academic qualifications at level 2+ • Career progression more likely for older workers with less specific skills • Routinisation increases frequency of job moves • Displaced workers educational levels was important for the direction of this mobility: • Academic qualifications at level 4+  professional occupations • Academic qualifications at level 2-3  intermediate occupations • Vocational qualifications no protection against downwards moves (incl. Levels 4-5) • More experienced workers less likely to be displaced (but not older workers per se)

18. Conclusion • Economic models of good-bad job dichotomy face significant problems • The UK does not appear to have moved to a ‘two-track’ economy • However, barriers to mobility exist, have changed and may continue to change. Understanding how these are formed is key for any policy designed to promote upward mobility • What are the entry requirements to “primary segment” jobs? • Which qualifications help displaced workers? • How has routinisation changed firm’s demand for skills? • How have these changes affected career paths?

19. Contact Details Craig Holmes ESRC Centre on Skills, Knowledge and Organisational Performance (SKOPE), Department of Education, Norham Gardens, Oxford Email: craig.holmes@education.ox.ac.uk