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

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  • rate this
    0

    Comment number 936.

    934. LUFCAT

    That said I think the system that we have gives everyone a chance. In my experience employers only care about what you have to offer, not where you came from.
    +++
    Most employers don't care, thats why people get dropped off under railway arches in the middle of the night with no food or shelter and pension funds get raided. Thats why basic health & safety has to be enforced by law.

  • rate this
    +1

    Comment number 935.

    "Should every employer pay a living wage? What would it cost?"

    It would cost: decency,humanity, logic and a soul everything 90% of people today don't have.

  • rate this
    -1

    Comment number 934.

    933.Name Number 6
    Hmm, a level playing field vs the right to leave stuff for your kids. Mostly I try and leave my kids good values / experiences but when me and Mrs LUFCAT give up the ghost I want my kids to have whatever we have left. That said I think the system that we have gives everyone a chance. In my experience employers only care about what you have to offer, not where you came from.

  • rate this
    +1

    Comment number 933.

    932. LUFCAT

    If market economics is no good how do you think we improve things?
    +++
    A more level (42) playing field for a start, no inherited wealth and definitely no inherited land, land to be used for the maximum benefit for the population as a whole. ( I'm not talking a Pol Pot scenario), fixed prices for commodities not speculative futures, 400 characters not enough.........

  • rate this
    0

    Comment number 932.

    931.Name Number 6
    Well ok re big hair and big shoulders, but not Level 42!

    If market economics is no good how do you think we improve things?

  • rate this
    +1

    Comment number 931.

    930. LUFCAT

    I disagree, no reason why we can't acheive full employment, and this shoud be our aim.
    +++
    When in the history of the world has this ever happen?

    Free market economics is a discredited concept and should be consigned to the dustbin of history along with big hair, big shoulders and Level 42.

  • rate this
    -1

    Comment number 930.

    929.Name Number 6
    How can you have full employment when capitalism requires high unemployment in order to keep wages down?
    +++++
    I disagree, no reason why we can't acheive full employment, and this shoud be our aim.

  • rate this
    +1

    Comment number 929.

    928. LUFCAT

    The only way I can see to make those at the bottom of the ladder better off is to get full employment.
    +++
    How can you have full employment when capitalism requires high unemployment in order to keep wages down?

    Henry Ford got rich by paying his workers enough money that they could buy cars.

  • rate this
    0

    Comment number 928.

    925.Name Number 6
    I think the way out of a recession is to get the finances on a firm footing and the rest will follow (to quote Mrs Merkel). The only way I can see to make those at the bottom of the ladder better off is to get full employment. The market will then drive up wages. As individuals we can influence our earnngs by what we have to offer

  • rate this
    -1

    Comment number 927.

    The government could perhaps pay all wages, and recoup a fair amount from business, which could benefit in several ways from the arrangement. The employment arrangement should be universal and one of our greatest problems is overcome. We all hate snobs. Do what you want to do - at government rates. I'm sure this offers the answer, bosses run their business and DC negotiates wages based upon his.

  • rate this
    -2

    Comment number 926.

    Re 918 BdV - But that's when competition between employers comes into play.

    An employer may pay 25p, 24, 23, 22 until another employer thinks "Hang on. I'll employ him for 23, maybe 24" and the person's 'market rate' is established at say 23-24.

    And that's why without govt intervention we'd have no (involuntary) unemployment, with wages rising and falling according to mkt strength/comp'n etc.

  • rate this
    +3

    Comment number 925.

    923. LUFCAT
    the higher you set the minimum wage the more unemployed you have.
    +++
    So the way out of a recession is to pay those at the top more and those at the bottom less?

  • rate this
    +1

    Comment number 924.

    3 options:

    1) Have living wage
    2) Don't have living wage and let the state subsidise the employer (ever-lasting austerity)
    3) Don't have living wage and let people die

    We've not quite descended to 'hate thy neighbour' (option 3), option 2 is clearly not a long-term solution, so guess we will have to halt the ever widening gap (a gap which is also clearly unsustainable long-term).

  • rate this
    0

    Comment number 923.

    921.Name Number 6 state
    I don't try and justify it, the market works out the worth of jobs. This does seem a bit of a bit arbitrary, but the alternative is a command economy which seems in the long run to make everyone poorer except the party bosses. I don't have an answer, the higher you set the minimum wage the more unemployed you have. Maybe we just have to go with the least worst option.

  • rate this
    -1

    Comment number 922.

    The game played and partaken of by a majority was asset price inflation and that inflation has a significant drain on real world income and investment decisions. The bubble remains, awaiting growth in the real economy to catch up. Don't pop the bubble.

    It isn't just property which over-priced, and financing the inflated assets distorts the economy. We have had a free and unregulated market place.

  • rate this
    +3

    Comment number 921.

    919. LUFCAT
    But if Gordon had kept our government finances strong (whatever happened to Prudence?) we could have ridden out this storm much easier.
    +++
    And if employers had paid a living wage Gordon would not have had to borrow so much money to prop up cheapskate owners and shareholders. How to you justify G4S paying minimum wage? How do you justify top 20 FTSE co's paying minimum wage?

  • rate this
    0

    Comment number 920.

    870's - score

    It never cease to surprise me that there are people on here who hate and despise half the human race so much as to begrudge their existence and see their contribution as worthless.

    Why are you guys so blind as not to see the contribution made by women and further see that they ought to be paid for what they do, but there is at least one person who hates women even their own mother!

  • rate this
    -1

    Comment number 919.

    917.Name Number 6
    Of course News International have no influence at all do they?
    +++
    Not with me they don't.
    Sub prime - yes, a big part of the banking problem, along with over leveraging. But if Gordon had kept our government finances strong (whatever happened to Prudence?) we could have ridden out this storm much easier.

  • rate this
    +2

    Comment number 918.

    @911.Franco(re BdV)
    "If it's illegal to offer a job below a certain level, that job disappears from the market, the person is unemployed and what's more taking your taxes in unemployment benefits."

    "Oh my God!" ² !!!
    Yep, you're right ! Get 'em working in 'jobs' for 25p / day, then 24p, 23p etc...
    So sad to see this type of 'logic' still exists ... Well, every dictator has had his day ... ;^)

  • rate this
    +1

    Comment number 917.

    914. mattmatt81

    912 name number .
    But the types of unions ,especialy public sector , allow for a far more effective strategic platform than ever before .

    916. LUFCAT
    +++
    Of course News International have no influence at all do they?

    Personally I lay the blame for our current problems at the feet of the last government for spending more money than we earned.
    ++
    Nothing to do with sub-prime?

 

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