© 2017 The Department of Economics, University of Oxford and John Wiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 80, 2 (2018) 0305–9049
Low Paid Employment in Britain: Estimating
State-Dependence and Stepping Stone Effects*
Lixin Cai,† Kostas Mavromaras†, ‡ and Peter Sloane†, ‡, §
†National Institute of Labour Studies, Flinders University, South Australia
§WELMERC, School of Business & Economics, Swansea University,
Using 18 waves of the British Household Panel Study, this paper examines state-dependence
and stepping stone effects of low pay. The results show that both state-dependence and
stepping stone effects of low pay are present. However, there is no evidence to support a
low-pay no-pay cycle. The introduction of the national minimum wage does not appear to
have affected state-dependence and stepping stone effects of low pay.
Early work on the dynamics of pay suggested that being in low paid employment increases
the chances of future low paid employment (i.e. state-dependence of low pay) and perhaps
even unemployment (Stewart and Swafﬁeld, 1999, Stewart, 2007). However, this literature
does not consider the possibility that low pay may also lead to higher pay. As we show
below, following individuals over time between 1991 and 2008 using data from the British
Household Panel Study (BHPS), about 26% (40%) of low-paid women (men) are in higher
paying jobs in the subsequent year. Despite these high percentages, presently, the literature
has paid little attention to the empirical possibility that low pay itself may have a low-pay to
higher-pay stepping stone effect. The core objective of this paper was to develop and esti-
mate a dynamic multinomial logit model of employment which will allow us to examine the
dynamic relationship between no-pay, low-pay and higher-pay outcomes simultaneously.
For the sake of completeness we also include in the analysis self-employment, an em-
ployment status typically ignored in the relevant literature. The policy contribution of this
JEL Classiﬁcation numbers: J24, J31, I21.
*Data from the British Household Panel Study and the Understanding Society have been used in this study; and
they are provided by the UK Data Archive.
While the modelling framework in this study has the advantage of being able to incorporate transitions between
low pay and no pay, it also has limitations. In particular, the modelling framework cannot examine the effects of job
characteristics on the dynamics of low pay because information on these variables is missing for those who are not
employed. This issue may be picked up in future research using a different modelling framework.