Wage and employment opportunities for unskilled workers have declined precipitously over the last decade-and-a-half in many developed economies. Furthermore, manual wages are now more unequal than they were a century ago. At a lunchtime meeting held in London on 4 October 1996, Jonathan Haskel (Queen Mary and Westfield College and CEPR) summarized the extent to which wage and employment prospects have turned against the unskilled, and described recent work by economists that attempts to explain and quantify these important trends.

Haskel claims that there has been a serious deterioration in the economic position of the unskilled and low paid in recent years. Perhaps the most striking change has been in the size of the gap between the lowest and the highest wage earners in manual occupations. He presented data for the United Kingdom showing that the spread of male manual wages had remained fairly stable from 1886 to 1977, despite the widely differing influences of industrialization, the Great Depression and two World Wars. Yet, in the last 20 years, the gap has widened substantially.

Another manifestation of the increasingly disadvantaged position of unskilled workers in developed countries is evident in the changes in the average wage of manual, relative to non-manual, workers. In 1948, for example, non-manual manufacturing workers in the United Kingdom earned an average 1.5 times as much as manual workers, reflecting the tendency for most manual workers to be less well educated and less skilled than non-manuals. In 1978, 30 years later, the ratio had fallen to 1.3. But, in the last 18 years, relative non-manual wages have risen again to restore, more or less, the 1948 position.

Since the war, the relative employment of skilled workers has risen steadily. Before the 1980s, this relative rise was helped by the fact that the skilled were also becoming relatively cheaper. Subsequently, the relative employment of the skilled has continued to rise, even though they have become more expensive again. This underscores the decline in the economic fortunes of the unskilled: even though they are becoming cheaper, industry does not want them.

How can this be explained? The steady post-war increases in the proportions of people staying on at school and proceeding to higher education clearly has raised the supply of relatively skilled workers, and this probably accounts for the rise in their relative employment. However, being more plentiful, their relative wage could have been expected to fall – as happened initially. That it has since risen again suggests that the supply movements have been outweighed by changes in demand.

Two hypotheses for explaining why demand has shifted in favour of the skilled are currently under intense examination. The first – the ‘trade hypothesis’ – is that unskilled workers in the industrialized world can no longer compete with cheap unskilled labour in developing countries. The second – the ‘technology hypothesis’ – is that technological changes, such as the computer revolution, have shifted demand away from routine unskilled tasks to jobs that require educated, able and flexible employees. Hence, the increases in demand for skilled labour over recent years.

The trade hypothesis turns out to have only limited support. If it was valid, imports would have risen the most in unskilled-intensive sectors. In fact, imports appear to have risen fairly uniformly across manufacturing sectors, regardless of the skill level of their labour forces.

The technology hypothesis seems more promising. A test of the effect of computers is to look for larger increases in skilled wages in firms and industries where computers are introduced more heavily. This is exactly what we observe. The skilled-wage premium has risen sharply in industries – such as office machinery and food manufacture – which have introduced computers intensively. It has risen less in industries, such as metal manufacturing, where computerization has been less intensive.

Research has also studied the effects of the decline in trade unionism and the abolition of wages councils that enforced minimum wages. Since unions tend to equalize wages, falling union power and membership might increase the wage spread. The abolition of minimum wages is also likely to cause wages to fall at the bottom of the distribution. The question is how much these two effects contribute; current research suggests that their impact is not substantial.

Turning to the future, Haskel argues that four policies suggest themselves. These are: increased protectionism; education and training designed specifically for the unskilled unemployed; public works projects targeted at the unskilled; and altering employer taxes on the skilled and unskilled.

All these policies might be justified on equity grounds, if there was a preference for equality. Given a preference for inequality, however, they would be denied, so this line of argument is unlikely to be decisive. What of efficiency? The first option – protectionism – might improve the relative position of the unskilled, but it would probably worsen the position of workers in general by reducing the country’s potential gains from trade. The differential tax argument might seem more attractive, but the outcome would depend on how relative wages responded to changes in relative tax rates. Cutting employer taxes on the unskilled might simply cause unskilled wages to rise as workers sought to capture some of the benefit accruing to employers, which would raise again the equity issue.

This leaves the education/training and public works options, both of which probably would command fairly wide support, but they do require careful design. Targeting public projects must avoid displacement of current employees by others drawn from the unskilled/unemployed pool. For its part, training needs to be sufficiently broadly based to enable workers to cope with future changes of technologies.

A final response might be simply to let the signal of higher wages induce the unskilled to make themselves skilled. But given the continued decline in the fortunes of those at the bottom of the pile, it becomes a political question of whether we are prepared to wait that long.