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Let’s have more work and lower costs to raise living standards – the Living Wage won’t help

24 June 2014

11:34 AM

24 June 2014

11:34 AM

In the latest in a long-line of Commissions or studies into the roll-out of a ‘Living Wage’, today the Archbishop of York Dr John Sentamu has called for the introduction of a wage rate of £7.65 per hour (or £8.80 in London) in sectors that ‘could afford it’. In reality this means the public sector and a host of other industries where there aren’t many low paid individuals, such as accountancy, consultancy, banking and construction. Though not as damaging as an economy wide roll-out, if adopted this could still have a host of unintended consequences.

For those who’ve been hibernating in Outer Mongolia for the last few years, the Living Wage is a campaign that presses for a wage rate such that the average household working full time (based on weighting of different types) has an adequate level of earnings for warmth, shelter, a healthy diet and social integration – hence the higher level for London. Unlike the National Minimum Wage (NMW), it is not compulsory, but merely part of the rich civil society means of influencing wage setting. So far a number of private sector employers have signed up voluntarily, as have some local authorities – but now campaigners have their sights on wider rollout.

Like higher minimum wages, the big danger of Living Wages are job losses or reduction in hours. Unlike the NMW, the Living Wage is not set with any reference of employer ability to pay and previous work by NIESR has suggested net job losses of 150,000 (with 300,000 fewer young low-skilled workers employed due to worker substitution) were there an economy-wide rollout. Certain industries, like bars, restaurants and retailing would see significant cost increases—of circa 5 per cent—were the Living Wage rate adopted on a statutory basis.

Sensibly then, John Sentamu’s Commission rejected the idea of setting the Living Wage on a statutory basis. Instead they merely want it adopted in the public sector and other industries where the effect on costs would be minimal. As always with these debates, the recommendations were framed in very moralistic terms – to paraphrase ‘how can it be right that someone works all hours and can’t afford to live.’

So, it’s worth facing some facts. Some people are struggling to get by in the UK at the moment, and that should be a policy concern. But three-fifths of those earning less than the Living Wage are actually part-time workers – this suggests they need more hours, not higher hourly rates which could reduce their hours. Furthermore, a large proportion of those on low pay are actually students, second-earners and other people with extensive family and support, i.e. not people who you’d consider ‘in poverty’. 44 per cent of those on low pay are in the top half of the adult income distribution, for example. Often low-paid jobs are entry-level and a means of getting a foot onto the jobs ladder.

Since all households circumstances are different, the Living Wage is thus little more than a campaigning soundbite in regards to ‘ability to live’ for many.  But implementation via the public sector and big companies in high-paying sectors will have consequences. Increasing public sector pay of low skilled workers relative to private sector opportunities will increase the existing public sector average pay premium – with negative consequences for private sector job creation in regions of high unemployment. It would increase costs for taxpayers, and also make it more difficult for smaller businesses to compete for public sector contracts. In the private sector, increasingly big corporates and those for whom the Living Wage doesn’t have many effects are joining the campaign and putting pressure on other industries and businesses where the effects would be much less benign.

Of course, some argue that there would be large fiscal savings from adoption of the Living Wage and requiring firms to pay more merely corrects for tax credits. To a certain extent this is fair, but the effect is exaggerated. Indeed, the Government found that the net savings from raising the NMW would be very small. As my colleague Len Shackleton and I argued in a recent paper, the tax credit concern could be more directly ameliorated by reform of credits such that they become a wage supplement (as initially intended) rather than a wage substitute.

Overall though, it’s important to remember that ability to ‘live’ is determined by both wages and the cost of living. In Redefining the Poverty Debate we outlined a substantial agenda that could reduce living costs through pro-market reforms in the housing, food, energy and childcare sectors. This would be a much more fruitful campaign, rather than pressing for higher wages – which without compensating improvements in productivity could have adverse consequences for employment by increasing the cost base of those providing opportunities for the people we want to help.

Ryan Bourne is Head of Public Policy at the Institute of Economic Affairs

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