Calls for employers to adopt the “living wage”—£8.80 an hour in London and £7.65 in the rest of the UK—are growing louder. Based on the basic cost of living, it is adopted voluntarily by businesses and is intended to raise living standards for low paid workers. But is it the best way to achieve this?by Kayte Lawton / January 23, 2014 / Leave a comment
Background image © REX/David Pearson
Kayte Lawton is a senior research fellow at the Institute for Public Policy Research
Ryan Bourne is head of economic research at the Centre for Policy Studies
I could make any number of rational and moral arguments for the living wage but I think it’s best to start with a simple message from someone who knows about life in low pay Britain. Valdemar Ventura was disciplined by his employer for leaving a letter on Nick Clegg’s desk asking to be paid a living wage for his work as a cleaner at Downing Street. “I just would like enough to give my family a life,” said Valdemar.
This simple statement evokes the call for self-sufficiency and personal responsibility at the heart of the living wage. Valdemar isn’t asking for more tax credits or a hand-out—he wants a decent wage so that he can provide for his family through hard work.
Trade unions and community associations like London Citizens are trying to make this a reality for workers in Britain. The living wage relies on political and community leadership but also on compromises between campaigners and employers.
For people working in low-wage jobs in cleaning, catering, care and retail, achieving a living wage should be just the start. While the living wage is a step up from the minimum wage, currently £6.31 an hour across the UK, it’s still a low rate of pay and many living wage employees will find that their work continues to lack the respect it deserves. There’s no perfect measure of a “living wage” that suits all families and individuals. But living wage movements offer a practical way for low-wage workers to seek a better deal—and given the extent of powerlessness and low pay in parts of Britain’s workforce, this is something we should all embrace.
Emotive campaigns with simple themes are often successful. The “living wage” concept, that everyone should be paid well enough to afford a basic standard of living for themselves and their families, is no exception. After all, who could be so heartless as to support a non-“living wage”?
We’d all like to see increased prosperity and rising wages for those on low incomes. The mistake the left makes is to assume this can be decreed without consequence through either legislation (minimum wage) or cajoling businesses into adopting it “voluntarily.”
Individuals face different circumstances (children, spouse’s job and so on), meaning the rates for the “living wage” have little link to actual living costs. It is, then, a sound bite, used to lobby for a higher effective minimum wage in certain businesses and sectors. So far, the effect has been limited. It has only been adopted by big companies with few low paid workers and public sector bodies whose costs are picked up by taxpayers. But wider rollout, as now proposed by some politicians, would harm many of the most vulnerable people that Kayte says she wants to help.
Wages are a business cost. Artificially hiking wages without productivity improvements will mean fewer jobs (or working hours) and/or higher prices. The people who will suffer most from this erosion of opportunities would be those entering the job market for the first time—the young, the untested and the unskilled, many of whom acquire skills and experience in low paid work before moving into higher paying jobs. For low productivity groups, low wages are a means of competing with existing labour for labour market entry. A living wage floor amounts to chopping away the first rungs on the ladder of opportunity.
It takes a strange moral outlook to consider a labour market with fewer opportunities as morally better than employing people who would otherwise not have a job and be condemned to a life on welfare. For unions, though, there’s a clear rationale: to protect the pay and privileges of their members by eliminating labour market competition.
What I take from Ryan’s response is that Britain’s low earners must simply accept their lot. Any attempt to improve their position will lead to job losses for them or their colleagues, so their only choice is between a miserly pay packet and a “life on welfare.” The implication is that we must tolerate the things we don’t like about capitalism; we are powerless in the face of the immutable laws of supply and demand.
Living wage movements explicitly reject this free-market fatalism, arguing that people create markets and so have the power to shape them for good. They celebrate hard work and enterprise but insist that, in a democratic society, these can and must find a decent reward. Calls for a living wage seek to lift the popularity and legitimacy of contemporary capitalism. (A genuine critique of living wage movements might be that they are basically conservative, focused on raising low wages a little rather than tackling the root causes of economic injustice).
Clearly, increasing wages without improving productivity has to bite somewhere, whether on jobs, prices or profits. But we know from the introduction of the minimum wage that employers can pursue a combination of different options, none of which have spelled disaster so far. And why assume that productivity will not or cannot be improved? Introducing a living wage could be part of efforts to raise productivity by investing in training, reorganising jobs or moving into more profitable markets. Living wage campaigners are optimistic about the capacity of workers and employers to work together to strike a better deal for both.
Ryan is right to say that the living wage has only a limited relationship with the actual cost of living faced by individuals and families. No single hourly rate of pay can guarantee that everyone receiving it will reach some accepted standard of living, and in-work benefits will remain important for many. The point of the living wage is to enable people doing important work (caring for our elderly relatives, cleaning our offices) to secure a decent pay rise and feel a little more respected, a little more self-sufficient—not to solve all their problems at once.
Kayte has highlighted what the living wage is really about: a belief that capitalism is fundamentally exploitative. From Kayte’s response, you wouldn’t think the spread of free market principles had seen the biggest elimination of absolute poverty in history and continual improvements in living standards for two centuries. Insulated from socialistic doctrines, it could do more still.
People like Kayte blame markets for exposing a reality that was not created by the market. The reality is this: some individuals do not have the skills to command the wage that Kayte thinks should be a minimum. This may be because they’ve had a substandard state education, for example. But for their long-term benefit, getting a low paid job with in-work support, acquiring skills and developing human capital would be the best route of improving their lot. Kayte’s policy lessens opportunities by producing fewer jobs, accelerating substitution from labour to capital (watch out for machines taking orders at McDonalds in future), and encouraging hiring of older workers.
Extrapolation of consequences from the much lower minimum wage simply won’t do. Even then, the existence of large numbers of unpaid internships and high youth unemployment suggests it is already eroding some opportunities. And if you don’t think squeezing firms’ profit margins will affect investment and start-ups, you don’t really believe in capitalism.
Productivity benefits which might occur are usually motivation effects which operate by attracting the best people to a company within an industry. This cannot be rolled out across a whole economy. If it did, and pay drove productivity rather than vice versa, we could solve sub-Saharan African poverty by forcing employers to pay everyone a living wage—a patently absurd idea.
The policy aim should therefore be threefold: to address underlying causes of low pay, to maintain opportunities and market signals, and to reward work through the tax and benefits system. That’s why the Centre for Policy Studies has long pushed for both a significant rise in the personal allowance and for an earned-income tax credit to replace existing tax credits. Rather than effectively taxing employers for creating net opportunities, having the state take less money from pay packets or tax credit reform would be far less damaging ways of improving take-home pay and encouraging more self-sufficiency.
I agree that we need to tackle the root causes of low pay; this is what living wage campaigns are all about. They address the lack of bargaining power that makes it hard for low earners to negotiate a better deal with employers. At their best, they work with companies to improve productivity and profitability so that they can afford to pay it.
Education and training are important, but demand for low-skilled workers is high in Britain despite big improvements in the qualifications of the workforce. Tackling the underlying causes of low pay must also mean looking at why so many British businesses can only offer low paying jobs.
Raising the personal allowance again or spending more on tax credits won’t get to grips with this problem. And neither look plausible given the scale of spending cuts the next government must plan for. Increases to the personal allowance will do little for Britain’s five million lowest paid workers, since they already earn too little to pay tax.
Living wage campaigns don’t have all the answers. They are often small and underfunded, and their progress will be slow and piecemeal. Wider action is needed to make sure that millions of employees can secure the pay rises they have missed out on over the last decade while real wages have barely risen. But independent living wage campaigns will remain a vital part of the struggle.
I don’t doubt the sincerity with which Kayte and others approach this, but their solution is based on misdiagnosis. The idea the primary cause of low pay is “lack of bargaining power” of workers smacks of a corporatist vision of employers, unions and campaigners and governments all working together to raise pay and buck market trends. We tried this disastrously in the 1970s.
So what can we do? Making sure our workforce is well-equipped for technological advances that will revolutionise the workplace further is crucial. But Kayte’s right, there will continue to be a demand for low-skilled workers—a good thing for those who wouldn’t find employment elsewhere. A living wage rollout would erode opportunities for employment and learning “on the job.”
The living wage campaign aims to make sure that someone working full time can fulfil an acceptable standard of living. But when I point out that this can be achieved through raising the personal allowance or cutting taxes, Kayte says this wouldn’t help Britain’s lowest paid workers because many of them work part time and so wouldn’t benefit. This is a shifting of the goal posts from the original aim. In reality, the government could also significantly increase the national insurance starting threshold to make very low-paid workers more self-reliant and improve the take-home incomes of the working poor.
A recent Treasury report showed overall employee compensation has kept pace with economic growth in recent years, but workers weren’t benefiting because more was taken out in “social contributions.” If we really want to make people more self-reliant, governments should stop picking workers’ pockets and let people provide for themselves.