UCL: Ethnic minority workers earn much less than white counterparts within the same firm

Ethnic minorities make up an ever larger share of the UK workforce. Where just over 6% of all workers were from minority backgrounds 20 years ago, now it’s nearly 14%.

Yet employees from non-white ethnic groups still tend to earn less than similarly qualified white employees. The overall gap in median wages was 2% in 2019, according to the latest figures from the UK’s Office for National Statistics. However, after taking account of other differences, such as age and education, the current gap widens to around 10%. A recent Bank of England study estimated the gap to be 10% for men and 9% for women.

One possible explanation for this gap could be that ethnic minority workers tend to be employed by firms that pay lower wages. But our new study, which has just been published in the British Journal of Industrial Relations, demonstrates for the first time that the wage gap has existed between workers in the same organisations.

Our study analyses data on employees in the British Workplace Employment Relations Surveys from 1998, 2004 and 2011, when the study was most recently published. The surveys may be from a few years ago, but the data are unique in Britain in linking employees to their workplaces.

This allows researchers like us to establish the extent to which the ethnic wage gap is due to where people work. The data also makes it possible to account for many other potential differences – such as education – which could explain the wage gap.

Many people think the answer to this problem is mandatory pay reporting, which would require firms to publicly disclose certain earnings data about different ethnic groups. The UK government takes a different view, stipulating that pay reporting should only be voluntary.

Our research indicates that leaving employers to monitor pay rates is unlikely to lead to progress, unless it also leads to changes in how companies actually set wages.

We found that Britain’s workplaces were highly segregated in the period covered by the data. Around one third of employees had no co-workers from a non-white ethnic group. Equally, when ethnic minority employees were present, they often accounted for a relatively high share of all workers.

Nonetheless, we were able to show that this segregation did not contribute to the ethnic wage gap. We found that male employees from non-white ethnic minority backgrounds earned around 11% less on average in our data than equivalent white co-workers, while for women the gap was around 7%.

The gap varied by ethnic group but we found that ethnic minority employees earned less than white co-workers across all main ethnic groups. We didn’t break down different areas of the economy or compare the public and private sectors, although previous findings have suggested that the gap is narrower in the public sector.

One interpretation of the gap around wages is that non-white employees are being treated unfairly. This is hard to prove, but we did examine alternative explanations in our research.

Perhaps, for example, ethnic minority workers accept lower wages because the work offers other rewards that they value. If so, they might be less pushy about pay rises and consequently don’t earn as much.

Yet according to the data in our study, these workers were less satisfied with their pay than white peers who receive the same wages and other rewards. This explanation therefore seems unlikely.

Our analysis also accounts for differences in qualifications and years of experience between white and non-white workers. Indeed, in the years covered by our study, ethnic minorities were more likely than white employees to feel over-skilled in their role.

In light of such findings, the broad picture is therefore consistent with ethnic minority employees being paid unfairly. We can’t be categorical that there is discrimination, although it is worth pointing out that its existence in the recruitment process is well established in the UK and other countries.

The UK government opted to back voluntary pay reporting in March after rejecting a recommendation from the Commission on Race and Ethnic Disparities that it should be mandatory. The Department of Business, Energy and Industrial Strategy is now planning to publish guidance to employers on voluntary ethnicity pay reporting.

This is despite the fact that a requirement for all UK firms with 250 or more employees to report on their gender wage gap has been found to reduce it by 15% to 20%.

Our new study looks specifically at the effect of pay monitoring on the ethnic wage gap. Many large employers are now monitoring data on pay and ethnicity. In 2011, only 3% of all employers were reviewing relative pay rates by ethnicity. We found that the gap was no smaller in these workplaces than in workplaces that were not.

What else can be done to address the problem? To encourage fairer pay and a more transparent pay structure, our study identifies the importance of job evaluation. This is used to systematically assess the relative value (or comparable worth) of a job in relation to other jobs within the workplace.

Our study found that the average ethnic wage gap in workplaces with a job evaluation scheme was one-third smaller than in workplaces without such a scheme. The increased transparency that such schemes can engender is one route, it seems, towards fairness in wage setting. The ethnic wage penalty was also one-third smaller in workplaces with a recognised trade union.