The Living Wage: Killing business?

Happy Living Wage week! How are you celebrating? You’re not? What a surprise. Whilst most people could probably have a guess at what the Living Wage Foundation is lobbying for, thanks to its largely self-explanatory title, let’s just take a moment to clear up what it actually means. The Living Wage is a minimum wage that aims to provide a level of income that accurately reflects the cost of living, currently £8.55 in London and £7.45 in the rest of the UK (why it is fair to have different wage rates in and out of London, but regional pay in public services is a no-go for the left is a baffling hypocrisy that will not be examined here). For the purpose of this blog, we will be using non-London figures for a 21 year old worker doing 35 hours a week in the current tax year.

On the face of it, who could be against a Living Wage? I like living, and I like wages, so combining the two seems like a darn good idea.  Even Ed Miliband has reiterated his support for the wage as part of his well thought out predistribution policy – and as we know, Ed Miliband doesn’t just jump on any old bandwagon *cough* EU budget negotiations *cough*. So, it’s fairly safe to assume that if we see a Prime Minister Miliband in 2015 the Living Wage will hit the statute books.

But is it a good idea?

No. I don’t think so. The aims are laudable but the means are, quite simply, wrong. But before I show why, a brief history of the UK experience with minimum wages is required.

The national minimum wage was introduced in 1998 under the surprisingly named National Minimum Wage Act 1998, a flagship policy of the incoming New Labour government. At the time, many critics – including the Conservatives and Liberal Democrats, economists and business leaders – argued that the introduction of a minimum wage would increase unemployment and destroy the viability of many businesses by increasing the cost of employing workers. This wasn’t the case in reality.

So why would a living wage be different? It’s all about context. The national minimum wage was introduced nearly midway through a 16 year economic boom. Consistent growth in the UK economy meant that the increased costs of hiring or keeping workers could be safely either absorbed or passed onto customers. We are in no such situation now – just out of a double dip recession our economy is balanced on a knife edge, with the Eurozone threatening to push us back into the red at any moment – this is despite the promising recent economic news, including a record rate of almost 30 million people in employment. Even by 2015 the economy will still be on dodgy ground, with consumption still weak and many small and medium businesses struggling to survive.

‘Hang on Chairman’, I hear you cry, ‘wouldn’t increasing the minimum wage boost the amount of money people have to spend, thus boosting the economy?’

That’s a good point, but it assumes that people won’t a) save the money, thus providing no boost to the economy, or b) use the money to pay off debts , which although not a bad thing in itself, would do nothing for boosting consumption.

Even if people did spend their increased wages, the majority of workers (54.1% in 2000) were employed by small or medium sized enterprises (SMEs), rising to 60% in 2006. It is thus fair to say that adopting the Living Wage would put disproportionate pressure on SMEs – the beating heart of the economy – to fork out higher wages, only to see workers to spend it in Boots, Tesco, Asda or Primark. The dangerous, and very real, possibility is that the government would essentially be robbing an SME called Peter to pay the multi-national corporation Paul. Increasing SME business costs to boost MNC profits is a perverse reversal of the Robin Hood philosophy and should not be allowed to happen under any circumstance.

So, it is clear that the economic situation could not be any different – the buoyant economy that allowed the potential negative impact of the minimum wage to be absorbed is nothing like the economy we have now. The introduction of a Living Wage would be a terrible drag on the performance of businesses and on the potential for hiring new workers in uncertain times.

Thus it is fair to say that the Living Wage is a bad idea – especially in the current economic climate. But that does not mean hope is lost. As I said before, the aims are laudable, it is the means that are problematic. So, this begs the question – is there a way to achieve the aims of the Living Wage, without imposing a 20% increase on the cost of employing a minimum wage worker on businesses? Yes, there is.

The Living Wage Foundation’s basic aim is to increase the take home pay of workers to a level it deems acceptable through an increase in wages. So, at a rate of £7.45/hour, the post-tax pay (including NI) of a full time worker would be £11,752.16. [1] Let that be our target.

The current minimum wage £6.19. A current full time worker on the minimum wage would take home, post-taxes, £10,192.78. So there’s an annual difference of £1,559.38 between the Living Wage and the national minimum wage – quite significant.

The method I propose is to link the basic rate of income tax and NI to the national minimum wage, so those working full time pay no income tax at all. Removing income tax and NI payments would raise the take-home pay of a minimum wage worker to £11,265.80. which leaves just £486.20 gap between what the Living Wage Foundation is pushing for and what the minimum wage could deliver. This increase in wages would boost workers income and thus (hopefully) consumption without imposing massive costs on businesses – the only loser is government coffers, but I guess you could just make Starbucks pay some bloody tax to cover the loss to the Treasury. And if they do bugger off, I’m sure there are plenty of coffee chains who would happily fill the gap in the market /rant.

I understand there are some zealots who would not see this as good enough, state that the £486.20 difference is significant enough to warrant attention. Ok! But that doesn’t mean we have to hike the minimum wage up to £7.45. Instead, what we could do is continue to link the income tax threshold to the minimum wage, and increase the minimum wage to £6.46/hour. This would represent an 4% rise in the minimum wage, and is really still too high a wage cost increase in the current circumstances in my opinion.

So really, the point is this – if politics is anything, it is the art of compromise. The Living Wage is a good idea, in theory. But there are more stakeholders in this than just the employee – businesses would be the ones having to deal with these extra costs, at a time when we need them more than ever – and the economy is nowhere near as able to absorb the added costs as it was in the late 90s/early 00s.

Linking the minimum wage to the basic rate of income tax and NI contributions is a good compromise. It raises the take-home pay of the minimum wage workers by £1,073.02, bringing in an income that is 96% of the Living Wage, without the unnecessary costs on businesses. Once again, Boris Johnson has it right – let it remain a voluntary scheme for businesses or public bodies that can afford to pay it. Lead by example, not by force, and don’t let the Living Wage kill the beating heart of our economy.

[1] – I am using the handy iPhone ‘UK Tax Calculator

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