More needs to be done to raise the living standards of Britain’s five million low-paid workers. Yet so far, rather than addressing the problem of low pay directly, policy responses – whether it is Labour’s pledge to reintroduce a 10p tax rate or the coalition’s flagship policy of raising the personal allowance – have centred on using the tax system to compensate those who are struggling.
It is not hard to understand why. Despite their cost, lowering taxes is easily understood by a sceptical public and has an immediate impact. But, just as with tax credits, a strategy of reducing taxes for low earners is not, by itself, sufficient. Tax reform needs to be supplemented by ambitious efforts to raise productivity and boost wages if the underlying problems of our low-wage economy are to be addressed.
The living wage (currently £8.55 in London and £7.45 elsewhere) has already secured its place in any future agenda to tackle Britain’s endemic levels of low-paid work. Yet precisely what form this will take remains open to debate. Those who have organised and fought for living wages over many years (including the community activists that first revived the notion of living wages in London’s East End a decade ago) remain wedded to a voluntary approach – seeing a role for government but one that complements rather than erodes the campaign’s civic roots. Others believe government should simply legislate to make the living wage the legal minimum in the belief it will eradicate poverty pay at a stroke.
Government certainly has a role to play in advancing the living wage, as an employer, a procurer of billions of pounds of services and by putting measures in place that support campaigners. But there are sound reasons to think that the government should not legislate for a national living wage.
First, as our recent report Beyond the Bottom Line made clear, the employment effects of raising the minimum wage to the level of the living wage are uncertain and could be large. Our estimates suggest that if a mandatory living wage were introduced across the private sector overall, employer demand for workers would drop by around 160,000. Furthermore, there would be demand for 300,000 fewer young people with intermediate or no qualifications because many employers would want to substitute older, more experienced, workers for younger ones if the wage floor was higher. Labour demand isn’t a predictor of actual jobs losses, because employers can often find ways to raise productivity in response to a higher wage floor. Similar analysis would have predicted a fall in labour demand following the introduction of the minimum wage but there is no evidence that the minimum wage has been associated with job losses. Nevertheless, this analysis should serve as a caution for those calling for the imposition of a statutory living wage in a weak labour market, particularly given its potential impact on the young and low-skilled.
Second, if adopted by government the living wage would inevitably change. Recommendations about the minimum wage are made by the Low Pay Commission (LPC) and are the product of negotiation between employers, unions and experts. The minimum wage rate that emerges each October is therefore a compromise between boosting the wages of the lowest paid workers and what low-wage employers can afford without shedding large numbers of jobs. What’s unique about living wage rates is that they are set by academics purely on the basis of calculations about standards of living and prices, and take no account of the health of the labour market or the wider economy. Calculating a living wage through a consensual process like that used to set the minimum wage would fundamentally alter the character of the living wage by introducing employment considerations into the process. Such a process may produce a state-backed ‘living wage’ but one that is likely to be lower than at present and not recognised by civil society organisations fighting for a living wage.
Third, living wage campaigns are about more than wages. At their best they empower low-paid workers in sectors and occupations largely untouched by traditional union structures, shifting power and resources to those who typically lack both. This is one reason that Citizens UK and other longstanding living wage activists remain opposed to the introduction of a statutory living wage.
We should also remember that ensuring everyone is paid at least a living wage would not, by itself, solve our living standards crisis. No single wage rate can guarantee a decent standard of living for all family types, which is why both living wages rates are premised on a full take-up of tax credits and other in-work benefits. A strong wage floor is vital but we should also work to tackle the wider inequalities in our labour market, which may require more radical solutions.
The living wage is a rare success and it is clear that government needs to do far more to advance coverage across the country. But this does not mean simply pulling levers from Whitehall – as appealing as that quick fix may seem to those who desire a reduction in low pay. Instead, governments at local and national level must think creatively about the role of the living wage as part of a wider and more ambitious agenda to tackle low pay and weak wage growth in Britain.