Making the Living Wage happen: A modest, and possibly stupid, suggestion

Higher wages for people on low incomes are A Good Thing, right? We can pretty much agree on that one?

(I here insert the mandatory phrases about how pleased I am that my party and our leader, etc etc One Nation etc etc setting agenda etc etc)

Better pay for a day’s work encourages work itself, helps people avoid poverty, extends demand in the economy, and so on. So we should try to do it.

Now, there are arguments against forcing higher pay on employers. The first is that it has undesirable negative consequences. It can make particular types of work less economic, thus theoretically increasing unemployment, though the data suggest that this is a smaller impact than many projected. Second, it can make the costs of doing business in the UK higher than in other areas of the single market.

These are not unreasonable objections, but if the evidence is that in the UK at least, the introduction of a minimum wage had little or no impact on unemployment rates*. In part, this was due to a judicious setting of the minimum wage, but it follows from this that if some sectors or industries can ‘afford’ to pay more without reducing employment, then it would make sense to encourage this.

However, if we want to increase wages, it’s important to understand why employers might be reluctant to do so.

Let’s assume for a moment that low paying employers are not heartless monsters extracting as much money from their peons as possible in order to build bathrooms made of gold, but instead trying to operate in a market which is competitive and in which Labour costs represent a significant share of their costs.

(It is noticeable, after all that most of those who have found it easy to join the Living Wage campaign are not affected by these factors, being either public bodies or large corporations for whom a marginal increase in low pay represents a relatively insignificant increase in overall cost)

If my “Low pay employers are not monsters” theory holds, they pay low wages, at least in part, because paying higher wages costs them a great deal in competitive ability. They are bidding for contracts, or making sales, on the basis of a high overall Labour cost.

In that case, making a Living Wage happen should address different sectors very differently. For the public and corporate sectors, the sort of moral pressure that has been led by Citizens UK can suffice (This will have an impact of raising tax rates and passing some costs onto consumers, some of whom will be poor themselves, but this is acceptable, as it will likely be an overall redistributive effect).

However, this doesn’t make life much easier for those firms who really are having to compete on cost. Sure, state procurement will help, but given that a lot of these businesses are small and relatively informal, I’m not sure how many are involved in such programmes (Indeed, you might find an unintended consequence of living Wage implementation in the public sector would be to favour larger companies in procurement decisions)

Here, the two options are either amelioration or compulsion. Compulsion would involve some sort of return to sectoral wage councils, and personally I think that in an increasingly free economy this is unlikely to work. Apart from anything else you’d need to define what each sector was, which is getting harder and harder**.

An alternative therefore would be offer incentives to low pay employers to exceed the minimum wage. These could include – a reduction on NI contributions, a share of the tax credits the state would expect to make, privileged access to certain loan support programmes and so on. Employers would need to declare their wages were above the Living wage to qualify, and employees would be notified of this on their payslips so they could complain if the employer was lying.

Such a mechanism might be overly bureaucratic (or open to fraud), so it might be more effective to simply manage the tax burden of employing someone in the Minimum-Living wage bound so the taxation cost to the employer of paying more than the minimum wage is negative (think of it as a sort of employer tax credit paid on National insurance!).

If we operated a system of employer tax credits, you’d need to find some way to ensure that the benefits went to the ‘right’ businesses, so you might need a gradual increase in the NI contributions above say £8 an hour so you didn’t give the benefit to employers who are paying high wages anyway.

I expect there are lots of problems with the sort of approach I’m discussing, and I look forward to people who know a lot more about it than I do ripping this idea to shreds. However, I think if we want to make the Living Wage a reality, then finding ways to help employers increase wages is an important part of the plan?

The piece-work problem:

One issue I expect will come up with implementing the Living wage is that many of the sectors where low pay is prevalent are likely to operate a piece work pay model. The NMW has a mechanism for dealing with this. For Piecework employers to qualify for any state return on taxation, you would need a similar model for the Living Wage

*I assume there is an argument also about inflation, but let’s discard this for the moment.

** Of course, you could just increase the minimum wage, but I’m assuming we don’t want to do that, because we think it would lead to less job creation.

2 Responses to “Making the Living Wage happen: A modest, and possibly stupid, suggestion”

  1. Romford Dave

    Speaking as an SME and someone involved in competitive tendering where our cost base directly impacts on how keen our prices are, very little legislalation truly has a negative impact (from a cost perspective obviously) when all competitors are subject to the same legislation.

    That lack of impact on cost impact between producers doesn’t however prevent a reduction in economic activity caused by the cost of goods sold becoming uneconomically viable for the consumer and causing further problems for the businesses involved.

    An easy solution is to set the level of employers NI at or around the living wage level thus reducing the impact on the SME and pushing it back on the introducer, in this case the State.

    The State of course, rather than increasing other taxes or duties to pay for such largesse, could ensure that no one enjoyed a pension greater than what the equivelant of a £1.25M pension fund could purchase.

    Obviously I’m thinking of a particular set of State funded beneficiaries in saying that, who you routinely come into close contact with.


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