The cost of living wage crisis, or something like that.

I bemoan my bloody big mouth, explain why I’ve gone from ‘Woo!’ to ‘whatever’ on micro-wage policies, argue for gradual increases in the minimum wage, and say that if the Tories don’t steal Labour’s clothes on this, they’ll prove Ed Miliband right.

Ed Miliband has made his big speech on the living wage, and boy, am I wishing I’d kept my big trap shut.

A year ago, I wrote this:

.”..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.”

Today, that became Labour party policy.

By rights, I should be writing some sort of blog post claiming that I am a genius, everyone should listen to me, and I deserve great acclaim and praise (and subtly hinting that everyone should ignore Gavin Kelly, Anthony Painter and Sonia Sodha, who have all got equally good or better claims to have proposed this aaaaaaages ago).

But oh, no. I can’t keep my big mouth bloody shut, so last week, I said that the more I looked at the challenges of delivering the sort of micro-interventions Labour is talking about (sectoral wages, tax incentives and so on) the more I saw difficulties and challenges, and the more I favoured an economy-wide approach.

Just brilliant, Sen. Can you not just keep your damn mouth shut for once?

Anyway, I’ve zigged when politically it would have been smarter to zag, so I better explain why I’m a slow generalist, not an immediate specific-ist.

Let’s look at the micro-interventions we’re considering.

Sectoral wages I’m particularly unsure of, for two reasons.

One, how on earth do you define sectors anyway? Who does this? Who manages the appeals and restructures? Two, since low pay is far more prevalent in smaller, less profitable firms, how do you make sure you exempt them and make an appreciable difference to wages in the sector?1.

However, while the party seems keener on this than I am, Ed’s speech contained only the message that we would look at it. Looking at it is fine. Maybe someone brighter than me will think of a way of doing it that isn’t a fiddly, complex, mess.

On tax incentives, the question is not whether it’s a good or bad idea. It’s a nice, elegant idea. Paying higher wages represents a lower cost to the treasury so why on earth not pass that back? The question is really how many people will benefit and how effectively you can deliver the policy.

I’m guessing the answer is a) Not all that many b) Harder than you’d think.

Effectively we’d be trying to persuade employers who currently pay roughly the minimum wage  to move up to the living wage on the basis of lower tax (probably National Insurance) for a year. Obviously, the firms most likely to do this would be those who already pay close to the living wage, and of course, since it’s a one year hit, there’d be nothing to stop them freezing pay for the next two or three years. If I’m right about that,  then really the policy may make a small positive difference, so I’m not against it, but I doubt it’s going to change all that much.

So if specific sectoral or tax credits only have marginal differences, should we move to a statutory living wage?

Well, here the question is obviously to what extent can the economy bear higher wages.

If we were to introduce a statutory Living wage immediately, the most accurate modelling I’ve seen to date suggests a loss of Labour demand of some 160,000 jobs. This would obviously have some pretty big negatives. However, Howard Reed at Landman economics has developed a model that suggests lower, or even positive effects, on job growth, based on the multiplier effect of lower wages2. You can see his projections below.


Now, obviously I’d much rather Howard Reed’s projection was right than NIESR’s. If we can increase the minimum wage with lower employment costs this is a very good thing. But the best we can say at the moment is that the employment effects would be between -160,000 and a c+60,000. That’s quite a risky bet to take.

However, it’s not a bet to be ruled out entirely, especially if you can take it slowly, and carefully, and see what the market and labour demand reaction is.

All this means I think Labour’s policy should less focussed on the micro-intervention we’ve seen today, and instead on a longer term gradual increase in the minimum wage above inflation, perhaps over five years, with the Low Pay Commission asked to rigorously examine the Labour market for negative consequences, and having the power to either pause increases or recommend that sector, firm size, or age-group amelioration is needed.

This isn’t a new idea. The Government has hinted they’re looking at it (though only in the semi-detached shape of Vince Cable), and I understand the Resolution foundation is even now researching it, following up on Gavin Kelly’s proposal.

Of course, a gradual long term, careful increase in the minimum wage isn’t particularly sexy, or bold, or eyecatching. But still,  there’s a Merkel shaped hole in British politics, and this sort of dull, plodding worthiness would be a great way to fill it.

If the government was smart, they might see ‘forward guidance’ as a huge opportunity to steal Labour’s living wage clothes3.

If they’re not smart, they’ll do nothing, and in doing so, reveal that Ed Miliband’s central case against the Coalition, that they don’t care about the many,  is bang on the money. Luckily for Labour, I’m betting strongly that they’re not smart.

  1. Indeed, you could even end up in the odd situation where by setting a sectoral living wage that applies only to companies over a certain size, you make smaller companies more competitive, precisely because they can pay less []
  2. thanks to @joncstone for bringing the report to my attention and uploading it []
  3. If they wanted to be really cheeky, they could even offer to make the living wage tax free by 2025 or some such, though that would be madly expensive []

2 Responses to “The cost of living wage crisis, or something like that.”

  1. Dan Filson

    There are, of course, other perhaps unintended consequences of a dramatic increase in bottom end wages, even if mitigated by cuts in employers’ national insurance contributions or whatever.

    One is that if the gross cost to the employer of employing previously cheap labour rises, even if the net cost rises by somewhat less, the employer will look at ways of improving efficiency so as either to employ less labour or to get more productivity from them.

    The former option has acquired the sound of someone crying wolf in that whenever anything that might increase the cost of labour is proposed, you can be sure the Taxpayers’ Alliance, the CBI, and all the myriad group of supposedly independent think tanks and bodies purporting to represent employers come out stridently suggesting that it will cost thousands of jobs; but whether this is so is not always so discernible. In that sense I think they cry wolf too often.

    The latter is to me the more interesting. One way of achieving the latter would be to improve in-service training and so moving our economy slowly but surely from being a low wage cheap labour economy towards one with higher skills but where labour costs slightly more. I welcome this. We shall never compete with the low wage economies around the world even with the UK having the home advantage of not having to send container ships from Indonesia or wherever to transport goods to Hull or some other British port.

    I’m glad you have recognised that wages councils are probably not the answer. The labour market is no longer comprised of a small range of employment categories readily carved out between various wages boards.


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