Coffee House

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

24 June 2014

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.

Claim your gift

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

Give the perfect gift this Christmas. Buy a subscription for a friend for just £75 and you’ll receive a free gift too. Buy now.

Show comments
  • Guest

    1st of this dude makes his living off of donations from the working class. What the heck does he know about business? Why doesn’t he start a business and pay his employ “a living wage.”

  • Ian Walker

    Reduce immigration – unskilled labour is a buyers market at the moment due to oversupply. In fact, the minimum wage compounds the issue by setting an artificial floor on price.

    If employers were forced to compete for workers, wages would rise automatically.

    • El_Sid

      The other way to reduce the supply of unskilled labour is education.

      Another way to increase the wages of those in work is to make it easier to sack them so they’re not working when they’re not needed.

      Qv Denmark, where they don’t need the government to set a minimum wage, but there’s an agreement between employers and unions to not pay less than ~£12/hour.

  • Tom M

    What surprises me about this is what would anyone expect the Bishop to say when considering the level of wages? Does anyone think he would have said anything else other than pay people more?

  • Mike Barnes

    Conservatives eventually conceded the argument on national minimum wage after a long and futile struggle. It showed them to be on the wrong side of normal people and they had to back down eventually.

    Now they agree with a state regulated cost of labour, the argument is over, we’re merely disputing the numbers. Osborne’s insistence that the minimum wage rise this year is a sign the war is over. A living wage will be with us in the next parliament one way or another, I’d put my house on it.*

    *I don’t have one.

  • The Masked Marvel

    Where is it written that everyone has a God-given right to a wage for the simplest, most un-skilled labour which will be enough to pay for a large flat and family? Once such a precedent is set, what will be the “living wage” in ten years’ time? Who is to decide it?

    • itdoesntaddup

      Where is it written that government must impose expensive forms of energy and pump up property bubbles?

      • The Masked Marvel


        • itdoesntaddup

          No, actually. It’s precisely the key point.

          • The Masked Marvel

            No, that’s a different point about government’s negative influence. The topic here is about the concept of a “living wage” and the extremism lying behind it.

  • La Fold

    Reducing VAT and various other taxes such as the fuel duty would go much further on reducing the so called “cost of living” crisis whilst stopping the irresponsible electronic creation of money to shore up the government bonds market would mean the value of our money would stop being eroded. Bet that’ll never happen.

  • alabenn

    We have low wages because Labour imported millions of low skilled immigrants, until that is reversed wages will continue to decline, as they have since 2004 onwards.
    All the rest is so much chaff.

  • goatmince

    Piketty is absolutely everywhere nowadays.

  • James S

    Areas that can afford the living wage – like the public sector? Do we still have a massive deficit? Thought so, in which case we can not afford a rise in public sector salaries.

  • Mukkinese

    This argument might have more clout if the very same people were not demonising those in work and having to claim benefits in order to get enough to live on…

    • Makroon

      Every other “charity” has long since deserted it’s raison d’etre to follow some trendy left pamphleteering agenda, so why should the Anglicans be any different ?

  • telemachus

    telemachus has been denied his free speech rights on the next post
    All he was going to say was that when Henry the second started using judges to adjudicate in his Assizes he could not have envisaged that they would get things right, even onto this day

    • Inverted Meniscus

      That would be the free speech you and the Fascist Labour Party are seeking to deny everybody else.

      • telemachus

        The freedom to comment on the behaviour of Murdoch and his toadies

        • Inverted Meniscus

          I see you get to decide who can and cannot express an opinion. Typical Fascist Labour.

          • telemachus

            If it benefits the people….

            • Inverted Meniscus

              The very essence of Fascism.

  • mark

    We also have a strong currency problem, which helps Primark clothing and the pound shop, but a problem for local business’s that want to compete. There is only so much more you can make for less.

  • Blindsideflanker

    I don’t remember that argument being brought out when the FTSE directors are cranking up their remuneration packages by 40 or 50% a year.

    No low wages are not always good for the economy, which is exactly the bad circumstances we have got at the moment. . Wage growth is an incentive to employers to invest in productivity, this is not happening here, for along with a low wage problem, we have a low productivity problem, and a low capital investment problem. They are all connected. Why should an employer invest in productivity when they can get some cheap immigrant labour, where many of the social costs of these low wages will picked up by the tax payer with the likes of Tax Credits.

    With a low wages economy we are robbing the good high valued added companies to subsidise the bad. Has no one thought when a politician boasts about having more people in work than ever in our history, how come we have a £100billion budget deficit?

    • Alex

      Great, so let’s pay everybody £50,000 a year and productivity will soar and the government saves money and everybody wins and we can all have a free puppy. Yippee. If only we had all realised sooner that economics was that simple.

      • Blindsideflanker

        After the Black Death when we lost a third of our population, productivity soared as people went into higher value added work, which also forced change on the low value agricultural sector they came from, which led to the mechanisation of agriculture.

        • Alex

          Er yes, I’m sure that removing 30% of the population will increase investment in mechanisation. Is that your proposed policy? If not, if you increase productivity with increasing population then unless you get very rapid economic growth you get lots of unemployment. Particularly as firms flee to lower-wage countries.
          And it you cheerfully assume that public sector pay can be bumped up because the government can cheerfully pass the bill to the long-suffering taxpayer then you also increase inflation and taxes, things not generally associated with healthy economic growth.

          • Alex

            … and of course if you increase inflation then the increasing ranks of the unemployed, who don’t benefit from the higher pay, get even poorer. And therefore the benefits bill rises.
            And so on.

            • Tom M

              Reading your posts make me think you do not understand that wage fixing is a subsidy and all subsidies distort reality.
              As someone below here said “…Where is it written that everyone has a God-given right to a wage for the simplest, most un-skilled labour which will be enough to pay for a large flat and family?” So true.

              “Yet it ought to be clear that a minimum wage law is, at best, a limited weapon for combatting the evil of low wages, and that the possible good to be achieved by such a law can exceed the possible harm only in proportion as its aims are modest”
              Quote: Henry Hazlitt.

              What you do Alex is create more jobs. Not the government’s business. The government has no facilities for creating jobs (apart from the public sector) or businesses they can only make it easier or more difficult for businesses to operate in the UK than elsewhere.
              Something that gets mentioned from time to time is the net level of immigration. I would like to point out that it is generally very skilled people who leave and very unskilled people who arrive. The unskilled arrivals need unskilled jobs. In the UK we worked hard one way or another at getting rid of unskilled jobs many years ago. The then workforce had to up it’s skills game to stay in employment. Looking at the working population at the moment we are back where we started some 30 years ago. Fiddling with vote catching gimmicks like fixed minimum wages won’t solve that.

              • Alex

                Er, I think you are having a go at the wrong guy; I already agree with everything you say.
                Maybe I expressed myself badly.

                • Inverted Meniscus

                  Irony can be a dangerous tool but I thought your point was well made.

              • Inverted Meniscus

                Er I think you have missed the point Alex was making through the medium of irony. It is a point well made because socialists are so thick they believe that raising the minimum wage to £1,000 an hour would actually make everybody rich.

Can't find your Web ID? Click here