Living wage: Is there such a thing as a free pay rise?

A street cleaner An increase in the living wage could save the government a lot of money as the better-paid workers will pay more in tax

Should every employer pay a living wage?

You're likely to be hearing that question quite a lot in the coming days, with a KPMG survey today showing that nearly 5 million UK workers earn less than a living wage, and politicians and activists across the country gearing up for Living Wage Week from 4-10 November.

That's when you'll see the Mayor of London, Boris Johnson, announcing the new living wage for London, with great fanfare. You'll also see Labour showcase the big Labour councils across the country that are becoming living wage employers themselves.

Politicians of all stripes like the idea of private companies paying their lowest-paid workers a bit more, for moral reasons and also because it could save the government a shedload of cash.

In 2010 the Institute for Fiscal Studies calculated that bringing every private sector worker up to the living wage would raise total earnings (before tax) by around £12bn. Around half of that - £6bn - would go directly to the government, in higher tax revenues and lower benefit and tax credit payments.

That's a nice bit of spare change for the chancellor, especially one whose government wants to "make work pay". But no-one wants to be seen to be pushing new costs onto businesses at a tough time for the economy - let alone costing jobs. And it is private employers who would pay that extra £12bn (plus another £1.5bn in employers' national insurance contributions, for good measure).

Cost neutral?

So, when it comes to the living wage, politicians are really looking for a free lunch: or rather, a free pay rise. They want an increase in wages for people at the lower end of the pay spectrum that doesn't cost anyone any money.

Does such a miraculous thing exist? Many will be understandably sceptical. But KPMG claims that you can pay higher wages without paying higher costs.

"At KPMG, we have found that the improved motivation and performance, and the lower leaver and absentee rate amongst staff in receipt of a living wage means that the cost is offset and paying it is the right thing for our business."

Boris Johnson says the same thing about the many companies that have decided to pay the living wage in London.

Some will consider this far too good to be true. Others will think it makes sense that employers benefit from giving their workers a reason to value their job - and getting some good publicity, as well.

The key point is that the firms reporting these positive consequences are the firms that have chosen to pay this wage. So, presumably, they had done their sums beforehand and decided the benefits outweighed the costs.

What about everyone else? Can you pressure other low-wage companies to pay more, without costing jobs?

Economists used to say no: if employers have to pay more for labour, they use it less. Then, starting in the 1990s, academic evidence started to build up about the minimum wage, in the US and the UK, suggesting that, at the very bottom of the labour market, telling companies to pay people a little more did not actually cost jobs.

Another fear about the minimum wage was that it would lead to escalating pay demands from workers higher up the chain, eager to preserve the old differentials. But that doesn't seem to happen either. Pay rates at the lower end just get more compressed - with a lot of people bunched around the minimum rate (there's a summary of some of the key evidence here.)

However, these results apply to cases where the minimum wage stays pretty low - in other words, when it remains well below most definitions of the living wage. Even supporters of the minimum wage worry about the implications of pushing it a lot closer to that level.

Dark side

A few facts: the minimum wage has risen a bit faster than average earnings since it was introduced in 1999 and about twice as fast as inflation. Working full-time on the minimum wage you can earn about 53% of the median UK wage. In 1999 you would have earned about 46% of the median. (See this government report).

There is not much evidence that this rise in the minimum has cost jobs. Overall, we know that employment has grown in the past 2 years by 750,000, at a time when households and businesses were being squeezed.

But ministers also know that at least some of the 4.89 million earning less than a living wage are people who have recently "priced themselves into work" to avoid unemployment. In that sense, they are the dark side of Britain's "flexible" labour market, which has enabled employment to stay strong, even when our economy is flat.

This was brought out in recent research by economists at the Resolution Foundation (you see I have been doing my homework....) It found that higher unemployment was now having a much greater "chilling effect" on wages than in the past.

In the late 1980s and 1990s, a doubling of unemployment over six years would probably have led to the real wages of the average worker being about 7% lower than if unemployment had stayed the same. But things changed after 2002, the authors claim. Now, the same increase in joblessness would squeeze real wages for the average workers by 12%. Low paid workers have been most affected by this: for them, a doubling of unemployment means a real wage squeeze of 17%.

What does all this mean for the living wage? It means that politicians are going to carry on liking this campaign - but carefully. They are going to be nervous of anything that sounds like pressure on companies, and living wage employers will continue to be a self selecting group.

Around 3% of adult workers currently earn the minimum wage. If today's study is correct, far more - around 20% - earn somewhere between the minimum and a living wage.

Some, possibly many of those 4.89 million people could probably be paid more, saving the government money without hurting jobs or bankrupting their employers. But a free pay rise - for the government and for workers - is unlikely to be available for all of them. Is there such a thing as a free pay rise?

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 196.

    180.Some Lingering Fog
    Ultimately you are correct, the only way our standard of living can improve is to increase the housing stockand drive down rents/house prices. The private sector won't mass build (excess supply will drive down profits) so the government needs to do so. Social housing should then be rewarded to workers earning under the national average.

  • rate this

    Comment number 195.

    Increasing NI thresholds would mean those on the lowest levels of pay would have less taken from them, therefore need less in tax credits, and the admin costs associated with tax credits would be saved. For good measure companies could then be expected to pay workers more, using the money they saved on employers' NI contributions.

    Unlikely anything that reduces the size of government will heppen

  • rate this

    Comment number 194.

    KPMG & BBC have conveniently forgot to mention that by 2010 there were 4.8 m British households in 'fuel poverty' in the UK & despite the introduction of the minimum wage.
    This was after Labour govt allowed in a minimum of 5 million immigrants between 2020 and 2010.
    UK wages for those in poverty got worse under Labour & mass immigration is the prime cause
    Apologies please - Labour, KPMG & BBC

  • rate this

    Comment number 193.

    Companies paying more will not save the Government "a shedload of cash". The Government dispenses money it collects from taxpayers. The beneficiaries of such moves should be taxpayers as well as the low paid.

  • rate this

    Comment number 192.

    Why should the tax payer subsadise business. I don't think people working for buttons is the solution to this global recession. Let the bosses take a cut in wages, they can afford it the rest us can't.

  • rate this

    Comment number 191.

    172. lithography -
    you're so right on this and i love the "couldn't run a bath"!
    Many years ago i worked for a british firm taken over by a Finnish concern - the difference was as night to day; a moribund firm became market leader in two years. The subsequent British management buyout drove it into the ground in 18 months.

    Macho Management's bastard daughter Miss Management.

  • rate this

    Comment number 190.

    If you combined encouraging firms to pay people more with raising the tax and NI thresholds you could have a multi win situation. From the employers point of view happier staff for a small extra cost when taking into account reduced NI contributions. More take home pay for workers. Governement needing to spend a little less on benefits, probably outstripping loss of tax..

  • rate this

    Comment number 189.

    The labourer is worthy of his hire. It is in The Bible, so the atheists are at fault.

    The tax credit which is nothing more than a reinvention of the Speenhamland system which caused employers to expect the wages of the employees to be subsidised by the taxpayer.

    It is an economic absurdity and should end immediately as it pushes down wages and creates poverty. Work should be rewarded not taxed.

  • rate this

    Comment number 188.

    Anyone remember the Clash's ' White Riot'. There's an awful lot of discontent in this country.We're now told by Cameron that we have to aspire to be so called 'Top People', remember them....didn't they get us into this mess!Maybe we need to be ourselves and live with integrity...but treated fairly.Why expect anyone to live on less than a ' living wage' !

  • rate this

    Comment number 187.

    Do they still allow the wheeze of contracting out a job, for example building, to a foreign firm who then bring in their Staff paid at home country wage rates to Britain to do the job ?
    So much for minimum wages !
    So long as out sourcing continues abroad, Britains economy will continue in its Downward Depression Debt Spiral.....

  • rate this

    Comment number 186.

    It's wrong to pay tax credits to people who work for large companies, if those companies are then paying dividends to their shareholders. If the Govt considers the company is not paying a living wage (otherwise why would they pay tax credits), then the Govt should reclaim that money from the companies profits before dividends are paid. Otherwise, the taxpayer is subsiding the rich yet again.

  • rate this

    Comment number 185.

    For three years now companies have used the excuse of "economic recession" to squeeze pay. It is not a "pay rise" if pay does not keep pace with the rate of inflation, it is in fact a cut.

    Now, we are seeing the effects of that policy.

  • rate this

    Comment number 184.

    Fed up with subsidising business, banks and landlords. If a business is unable to pay a living wage it shouldn't be in business. Let it go, like the banks.

  • rate this

    Comment number 183.

    Lets call it " Increased taxation on the rich"
    At last the light is shining.
    Let also pass a law that says they cannot put up prices to cover it.

  • rate this

    Comment number 182.

    If employers can't raise the salaries of those of us post redundancy now HAVING to take on short term (in my case-management) roles at £6.10 p/h (!), where are the employers going to get the money to pay into the *new* pension pot everyone is soon to be offered? After 20 years of working a full-time career, I am now poorer than 20 years ago. As a working woman, I am VERY upset about this issue.

  • rate this

    Comment number 181.

    We could give a boost to genuine low paid British workers eg cleaners by capping the wages & salary & perqs of BBC staff to £'s GDP per capita (£37K) & use the savings to top up the wages of low paid British workers.

    Allowing BBC staff to buy their own copy of the Guardian - the cost savings would be significant & be handed out in food parcels & represent a good gesture in time for Christmas!

  • rate this

    Comment number 180.

    Anyone who works full time should not have to be subsidised by the state (i.e. the taxpayer) and they certainly shouldn't have tax taken off them only for the state to give it back to them in benefits.

    The biggest problem is housing costs and unless we find some clever way of rolling back New Labour's reckless property boom between 1997 and 2007 it will always remain so.

  • rate this

    Comment number 179.

    I see all this doom and gloom from the left and the BBC.
    I see a different world.
    This weekend, I honestly have never seen so many people in the shops spending.
    I think things are not as bad as made out.
    On the other hand I went into a NHS hospital and of the auxiliary staff I only saw one British.
    Just observations....

  • rate this

    Comment number 178.

    One of the key challenges is in the cash in hand environments like catering and farming where minimum wage has ripped out a whole generation of starter jobs. Where gang masters rule the roost and foreign nationals work for much less than £6 per hour. This is a major part of the reason for high youth unemployment. Many of those first jobs arnt open to British kids

  • rate this

    Comment number 177.

    "Profit" in the capitalist sense , is simply unpaid labour. The capitalist`s can only make their "share" by exploitation of human labour alone. If there is ever to be real fairness for the great majority, then capitalism has to go. One way or another, the capitalists will always end up the winners, and everybody else the losers,whatever clever reformist "wheeze Is tried.


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