Transitions between unemployment and low pay

There is a great interest in Britain in the extent to which there exist a ‘low pay/no pay cycle’. That is, to what extent are individuals who are currently low paid more likely to become unemployed than high paid individuals, and are those who are currently unemployed more likely to become low paid rather then high paid when they get a job? To address these and related questions, we model annual transitions between unemployment, low-paid employment and high-paid employment. We use a first order Markov model that also takes into account the endogeneity of initial conditions, selection into employment, and sample attrition. The application is based on data for men from the British Household Panel Survey covering survey years 1991–2000. Our results show that all three selectivity issues should be addressed when analysing men’s labour market transitions. We find that low-paid men are more likely to become unemployed then high-paid men, and unemployed men have a greater chance of becoming low paid than do high-paid men. Transitions from unemployment to low pay are associated with having relatively few educational qualifications. There is also evidence that the experience of low pay or unemployment itself increases the chance of being trapped in those states (separately from the effects of individual heterogeneity).