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Social justice
5 November 2012

Would a living wage kill the economy?

First there was the minimum wage, now there’s a growing campaign for the ‘living wage’ – which is defined by the Living Wage Campaign as follows:

  • “The Living Wage is a number. An hourly rate, set independently, every year (by the GLA in London). It is calculated according to cost of living and gives the minimum pay rate required for a worker to provide their family with the essentials of life. In London the current rate is £8.30 per hour. Outside of London the current rate is £7.20.”

It isn’t just the usual suspects pushing for the living wage, the campaign also has the backing of big business names like KPMG and Barclays, not to mention the Mayor of London, and Conservative pin-up boy, Boris Johnson.

On her BBC blog, Stephanie Flanders looks at arguments both for and against:

  • “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’.”

All well and good, but someone still has to find the money to pay the living wage:

  • “…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).”

KPMG argue that, even from an employer’s viewpoint, the living wage can pay for itself by improving employee motivation, performance and retention.

Blogging for the Spectator, Ruth Porter says it isn’t that simple:

  • “It is great that KPMG and many other companies are doing well enough that they can afford to pay their employees well. But some companies are barely surviving. In industries such as electronics manufacturing there are huge success stories, but there are also plenty of tiny family run factories that have struggled to survive offshoring –for companies like this paying their staff more simply isn’t an option.”

She also points out that, apart from the separate rate for London, there’s no regional variation in the living wage – which is odd given that its whole raison d’etre is to reflect the real cost of living.

And yet, one also has to remember that through the top-ups provided by tax credit system (not to mention housing benefits), the taxpayer effectively subsidises low wage employment. This might be justified in places where the choice is between small local employers and the dole queue. But does the same really apply to wealthy corporations? Couldn’t they, for instance, afford to pay those who clean their shiny offices a living wage?

There is, perhaps, a grand bargain to be had here: A living wage in return for the localisation of benefit rates and public sector pay – with the savings to the public purse recycled into lower taxes and better infrastructure for job creators. How about that?

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