The answer to the question "should people on low pay be paid more?" is rhetorical, and ranks with questions such as should we pay more attention to the environment? Or should doctors and nurses be paid more than finance professionals and footballers? Questions about low pay are platitudes, which while important, mask complex issues that make for dangerous topics in the hands of vested interests on both the Left and Right of the political spectrum. And this is precisely what has happened to the now lively debate going on about the living wage.
In 1999, the then Labour government established the Low Pay Commission, precisely to depoliticise the issue of low pay and the minimum wage, and take it out of soapbox debate. With income inequality as a political topic du jour, the Labour Party's 2015 election campaign sought to re-politicise it, picking up on the campaign by the Living Wage Foundation for a "living wage." But it is George Osborne who has brought the issue back into mainstream politics by promising to introduce a National Living Wage (NLW) from April 2016. The important issue of low pay and poverty has now become a political football, marginalising the more important issues of how wages are determined, and how the benefits system should be designed to help the least well off. While the idea of high or higher living wage is an apple pie and motherhood phenomenon, as Americans would say, it is basically a wage subsidy paid by a de facto tax on companies, in effect shifting the burden of welfare provision from the state to companies. With the best will in the world, our political leaders and think tanks cannot pursue this route and end up with the higher productivity growth we all crave.
For the sake of clarification, the living wage, set by the Living Wage Foundation in conjunction with researchers at Loughborough University is based on estimates of the cost of living, applicable to all workers, and companies may choose whether to take it on board. Some 2,000 companies, covering about 68,000 workers have been accredited as living wage companies so far. The most recent increases take the living wage to £9.40 an hour in London, and £8.25 an hour elsewhere. The NLW, by contrast is based on a judgement about a fixed percentage of median earnings—now 55 per cent rising to 60 per cent by 2020—is mandatory under law, applicable to all companies but only to workers aged over 25, and will have a far more dramatic effect in the UK labour market. It is estimated that 2.5m people will be eligible for the NLW, rising to almost 4m by 2020 at which point one of the most generous income support systems in the OECD will cover about a fifth of private sector workers. It will be introduced at a rate of £7.20 an hour, rising to £9 by 2020.
One of the most immediate contentious issues, as has been widely publicised, concerns the Living Wage Foundation's allegation that the NLW isn't a living wage at all, but rather and more simply a higher minimum wage. It and others argue that a proper living wage would not ignore about 2m working people aged under-25 and would take into account in-work benefits, some of which are the subject of government cutbacks, viz tax credits. The government claims the NLW will compensate but research houses and think tanks such as the IFS, National Institute and Resolution Foundation have disputed this.
There are, though at least three things we can be sure about. First, since 60 per cent of people earning less than the living wage are working part-time, it's a fantasy to assume that the living wage is somehow going to be a poverty breaking panacea. Some people may end up working even fewer hours. Second, whatever the sums swirling around the NLW, tax credit losses and other government policies, much of the NLW rise will accrue to second earners in the same household, and so undermine the main point of targeting those on welfare and in most need. Third, the Office for Budget Responsibility has estimated, among other things, that the NLW will lead to a modest 60,000 rise in structural unemployment by 2020, but in fact, we have little idea what the full labour market consequences might be. The introduction of the minimum wage hasn't prevented the achievement of a record numbers of people in work, but a double digit increase in the hourly cost of the low paid and least skilled at a time when technology is hollowing out the cohorts of just these types of workers could have more adverse consequences.
It is most likely that large companies and those with a small percentage of low paid/least skilled workers will be well represented among those volunteering to be living wage companies and better able to absorb the cost. The rise in their wage bills as a result of paying the living wage or the NLW will be relatively small. Yet small and medium scale enterprises in the UK employ about 35 percent of the adult workforce but over half the number of workers on the minimum wage. In sectors, such as food processing, restaurants and fast food, hairdressing, hospitality and child and old-age care, we should expect companies to try and compensate for extra labour costs. And the extra labour costs may not be limited to the living wage and NLW because national insurance charges will rise with the rise in wages, and in many companies, there may be pressure to pay existing or new higher paid staff more to preserve wage differentials.
The attempt to compensate could come in any number of ways, ranging from delays to or cancellation of hiring, higher prices charged to customers, a reduction in staff hours and more part-time work, deferred or cancelled investment, lower profits, and ultimately lay-offs. None of these would be good for the economy, government revenue generation, or for durable and robust increases in productivity.
In a nutshell then, everyone could agree in the pub that the living wage is a good idea, and the NLW is a step in that direction. The myopia is that no one is asking who will pay? Someone has to pay, whether it's the company, which tries to defray the cost in some other way, or the workforce which might lose working hours or work, itself, or the taxpayer via higher claims for unemployment or welfare support. The flaw in the whole idea of the living wage is the idea that companies should take on, in effect, the role of state welfare, and that wages should be set not by economics but by some arbitrary ideas about justice. Low pay and poverty are important areas the government must address, but we have mechanisms to do this that are more legitimate and effective: targeted welfare provision is the ideal supplement to an independently set minimum wage, and employment is the only tried and tested defence against poverty.
