The Living Wage is a term which has gained ground in mainstream politics over the past year or so. Ed Miliband has used it in attempts to forge his political identity. Boris Johnson has spokenof his support for the concept and would like to see it introduced in London and David Cameron has said it is an idea whose time has come.
According to the Joseph Rowntree Foundation, a salary of £14,400 is the minimum a single person needs [PDF] for an acceptable standard of living. This figure includes not only the basics in life, but covers what is needed to participate fully in society. This means spending on socialising and modern technology such as an internet connection and a mobile phone. Of course, to advocate this policy begs the obvious question – where will the money come from?
The Institute for Fiscal Studies has shown that companies which pay below the “living wage” cost the taxpayer between £5.9bn and £6.3bn a year. This is because low-paid employees are forced to top up their income with tax credits and benefits, resulting in the Treasury receiving less in tax revenue. Ed Miliband has argued that the heavy cost to taxpayers of subsidising the low-paid could be reduced by between £3.4bn and £4.1bn a year if companies instil the Living Wage and, if firms refuse to offer at least £7.60 they would not be eligible for lower levels of corporation tax. These savings alongside the announcement by the Institute of Directors in recent days that the 2010/11 deficit could undershoot OBR forecast by £10bn could provide the funds for the initiative.
For the long term strategy of the Coalition the Living Wage would be a good thing. Inequality rose under the last government even though spending soared. An attempt to reduce inequality whilst continuing on the overall path of austerity would undermine Labour’s arguments that the government cuts are the main obstacle to economic recovery. The Living Wage would increase the spending of the less well-off whilst reducing their reliance upon benefits, creating jobs and reducing the deficit, whilst providing an answer to those who say the Coalition has no plan for growth.
Politically, this could be an astute move for the Liberal Democrats. The broad support from across the political spectrum is an indication that the campaign would be likely to succeed. A campaign based upon consensus would highlight the role of the Liberal Democrats within the coalition, to unify the more liberal end of the Conservative Party, and to champion the ways in which the state can enable individuals to reach their full potential in an equal and prosperous society The introduction of the Living Wage would steal some of the thunder and purpose from Ed Miliband’s attempts to rejuvenate the Labour Party, as well as be a boost to activists attempting to woo potential voters.
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31 Comments
A perfectly good idea in principle. I would like to find out whether it is also viable as well. I have no doubt there will be plenty of people on LDV who will explain why it isn’t. Some can be discounted on the grounds that policies like these offend their ideology.
Excellent idea.
But we need to be able to answer questions about the effect on unemployment, particularly of young people who are likely to be the most effected.
And I wonder whether there should be a different rate in London and the SE to the rest of the country given that the cost of living is so much higher.
Great idea, cross-party support, the new politics?
“These savings alongside the announcement by the Institute of Directors in recent days that the 2010/11 deficit could undershoot OBR forecast by £10bn could provide the funds for the initiative.”
I have no issue with the idea of a living wage – it does not ‘offend my ideology’ – but the idea that because the deficit has been reduced by slightly more than anticipated, we can merrily adopt this sort of costly spending project deserves short shrift.
Surely, we are making a slow progress towards the principles of a ‘Living Wage’ with the increase in the tax allowance to £10,000. The JRF figure of £14,400 is before tax, so (and I am not an economist!) the very fact that no-one earning less than £10,000 will have to pay tax by the end of the current parliament must go some way to meeting this.
That figure of £14400 equates to about £6.90 for a 40 hour week. However a lot of the issues of people suffering “in-work poverty” will come from people working less than full time.so I’m not sure that just whacking up the minimum wage to that level totally addresses this issue.
@Tom – I wonder how much we already spend though things like Tax credits though? Hopefully the IDS approach to benefits can be extended to tax credits to roll them up into one Citizens Income style package. Some sort of “in work income guarantee” analagous to the pensioners guarantee might fit with that approach (a bit of a blue sky idea which might get shot down once someone things about it!)
Totally agree with Tom King that just because one month it looks like we might be adding £139bn to our debt pile this year rather than £149bn, it doesn’t mean we can suddenly open the spending flood gates.
Sean McHale’s assertion that: “The Living Wage would increase the spending of the less well-off whilst reducing their reliance upon benefits, creating jobs and reducing the deficit” is wishful thinking. While the minimum wage was one of Labour’s really good ideas and one for which it deserves praise, would a massive hike in labour costs that the living wage entails really encourage the private sector to create jobs? When has increasing the price of something (other things remaining equal) increased demand for it? If we tax low paying companies more, won’t they just employ fewer workers? And if we tax companies paying higher wages less, won’t the taxpayer still end up having to pay for this through lower corporation tax receipts?
In theory, the living wage is a good and just cause, but in practice, the problem of who pays for it remains a major obstacle.
I like using Corporation Tax as an incentive for a minimum wage, but many Government jobs currently pay less than minimum wage. We’d have to raise a lot of public sector wages. Maybe we could afford it by cutting down the highest wages that we pay – demand that no public servant be higher paid than the Prime Minister.
Shauny
If the £14,400 figure is before tax then our £10,000 income tax threshold reduces that minimum income figure to £13,588. Of course the increase in VAT will put that up a bit, lets say to £13,700. Thats £7.12 ph for a 37 hour week. A fair bit more than the current £5.93.
Thanks for your comments.
@Shauny – I agree wholeheartedly that the increase in the tax allowance and would actually see this as a better and perhaps more efficient way of reaching the living wage. It would allow the government to look to alternatives when considering tax intake – eg tightening loopholes, and would allow for a longer-term strategy in funding the policy.
@Tom King – I agree to an extent. I would hold the idea as something the Lib Dems would want to achieve. I see that it may be difficult in the short term
@Robert C – Again I would look at it as a long-term vision and suggest reducing inequalities in public sector pay as a way of doing it. Settting a ratio of lowest to highest pay and encouraging transparency in this area in private sector pay.
This is a brilliant post and I am pleased to see my fellow Lib Dems prepared to back a Living Wage. Let us not forget, it us who originally proposed a minimum wage. I think we should go one step further though and follow the spirit of our old policy – namely that the minimum/living wage should be done on a regional basis to allow for the difference in living costs.
The Living Wage is a very good idea – but I’m afraid to say you’re deluded if you think the Tories are going to agree to this, and even more deluded if you think Clegg or Alexander would ever attempt to put pressure on the Tories to agree with it.
“Surely, we are making a slow progress towards the principles of a ‘Living Wage’ with the increase in the tax allowance to £10,000. The JRF figure of £14,400 is before tax, so (and I am not an economist!) the very fact that no-one earning less than £10,000 will have to pay tax by the end of the current parliament must go some way to meeting this.”
Um… no. According to Clegg, the increase in personal allowance gives the lowest-paid an extra £150 a month; while, during the election, his anticipated “Tory VAT bombshell” of putting it up to 20% would take away £389 a month from those very same people – meaning that, if we assume Clegg was telling the truth both times (a stretch, I know), the poorest are going to make net loss of more than £200 a month in tax terms thanks to the coalition. And that’s before we even start to examine the effects of benefits cuts and public service cuts.
Dan – you’re wrong, mainly because the VAT figure was for a whole year and related to an ‘average’ household; not a low income one. The hypothetical low income household will end up much better off, but let’s not wait for the Labour Party to celebrate that fact.
The living wage sounds nice, but there will be unintended consequences which need to be looked at. The advent of unpaid internships on a grand scale has been partly caused by the minimum wage (since paying a very low wage to an intern would now be illegal) and that might be a very bad thing for equality of opportunity in a lot of professions and social mobility generally. Needless to say, it’s a lot harder to live on nothing than on a low wage!
The concern is that young people specifically find it hard to get a first paid job, without any experience, if they can’t work for less than other experienced applicants.
Sorry, I meant to say Clegg claims the increase in personal allowance will give lowest-paid an extra £150 a YEAR. So point still stands – net loss, even before you take into account tax credit cuts, housing benefit cuts (more than 50% of HB claimants are in work) and EMA removal.
“The living wage sounds nice, but there will be unintended consequences which need to be looked at. The advent of unpaid internships on a grand scale has been partly caused by the minimum wage (since paying a very low wage to an intern would now be illegal) and that might be a very bad thing for equality of opportunity in a lot of professions and social mobility generally. Needless to say, it’s a lot harder to live on nothing than on a low wage!”
Solution: make internships illegal, or atleast much harder.
It would help if certain politicians who can more than afford to pay people to do their work didn’t choose to advertise for unpaid interns (I’m looking at you, Simon Hughes).
I think a Living Wage is a policy for us to have at the next election. In the meantime we should be campaigning for an increase in the tax threshold to £14,000.
And fortunately, increasing the minimum wage at a time when the economy is just about bumping along the bottom, and about to be hammered by a big increace in the oil price, is a policy that can have no negative consequences whatsoever.
“According to the Joseph Rowntree Foundation, a salary of £14,400 is the minimum a single person needs for an acceptable standard of living.”
Liberals, on the other hand, would hopefully allow single people to determine for themselves how much they need for an acceptable standard of living…
“…companies which pay below the “living wage” cost the taxpayer between £5.9bn and £6.3bn a year. This is because low-paid employees are forced to top up their income with tax credits and benefits…”
Liberals, on the other hand, might say that our State of Welfare forces wages down by subsidising labour costs – then penalises workers by taxing their productivity in lieu of the unearned wealth of the asset rich, exacerbating inequalities further.
Sorry, but this whole “Living Wage” nonsense is predicated on the fallacy that productive work is an appropriate basis for raising tax revenue. Liberals (on the other hand) have long held that we need to shift tax from work to wealth – from value added to value removed. Until and unless we address these fundamentals, ideas like the “Living Wage” can, at best, only offer sticking plaster solutions whilst, at worst, widening the wealth gap through the continuing enslavement of workers within a tax and benefit system which maintains the transfer of wealth from poor to rich.
Wake up and smell your fair-trade coffee!
1) What is the effect on unemployment? If it leads more people to remain unemployed for longer, then it is not clear this policy would help the people we rightly want to help. Clearly there has to be a point at which raising the min wage leads to job losses.
2) Do we prefer this policy to one of taxing firms more, and then using that money in a progressive way? For example, from a firms point of view, having to pay workers more than they need to and having to pay more tax both come to the same thing. Do we prefer higher wages, or higher corp tax and use that money for a higher tax allowance, or for better schools that might allow the next generation to earn a real living wage. (or do neither if we think firms are under pressure)
3) Some MW employees are in the public sector, or quasi public sector (eg care homes under contract). Raising the MW has a direct cost to govt. Is this the best use of govt money, given progressive ends?
If we force firms to pay the living wage to all their employees, they will simply not hire so many staff, particularly at the lower end, and the resulting unemployed will end up getting more benefits from the state.
So why not instead ask the state to pay a minimum amount to all UK-resident UK-domiciled citizens – a universal benefit/citizen’s income set at the pensions credit of £140 a week say, and scrap all the complicated tax allowances etc instead of means-testing it?
It is always striking that high earners (such as bankers) claim they need tax cuts and massive bonuses to increase their productivity and help the economy. Strangely, when it comes to the less well-off, we are told by the Right that increasing their low rate of pay is unaffordable and will harm the economy!
I agree with the policy and with Sean’s sentiments, but also agree with Dan – there is no chance of the Tories introducing this or of Nick Clegg pressuring them to do so. If anything, their direction of travel (witness the talk about reducing labour rights and making it harder to organise strikes) is to make it harder for working people to seek better pay and conditions.
Living wage is a nice idea, and in an ideal world everyone would be paid a living wage, but in the real world in would cause probably cause unemployment. There is another alternative, we can fund a real wage in the UK by exploiting workers in Africa and Asia. It is socialism and Liberals should have nothing to do with it because it does not work.
As much as it sounds like an awesome plan. It will just just push up unemployment. Especially at the moment when unemployment is already high we want to put as few barriers in place of creating jobs, even relatively low paid jobs, as possible. Not to mention the effect this would have on inflation.
This is an idea that deserves serious consideration.
While in theory (increasing) the minimum wage reduces employment the evidence that it does so in practice is a bit more equivocal (and, it has been argued, subject to publication bias). An alternative narrative is that placing a floor under wages stops firms maintaining competitiveness through increasing exploitation of workers, rather they have to look to make genuine efficiency gains through reorganisation and/or changing the input mix in favour of capital.
Is there any mileage in a regulatory argument along the lines that a living wage is preferable to taxing corporations more rigorously because even if they could achieve the same objective in principle the living wage is to be prefered in practice because avoidance is more difficult?
@ Alex M. – You are confusing the ‘Minimum Wage’ with the ‘Living Wage’. Both are state enforced minimums, but the Living Wage is set at a much higher level. Liberals should have no problem with the state setting minimum standards, but the living wage goes beyond this to redistribute wealth. It is the usual Labour well meaning wishful thinking.
A sensible proposal. Even more sensible is a citizens income that guarantees a basic income for each British citizen and is topped up by the state if necessary. This policy would take account of the fact that there simply are never going to be enough jobs to go around in Britain. Unemployment of millions (far higher than the official figures) is here to stay in a post-industrial Britain. Millions more citizens are underemployed and will always remain so. Sadly, neither of these policies will ever be implemented by a ConDem coalition. In fact, through “The Big Society” policy, CamoClegg are seeking to undermine minimum wage and equal pay legislation.
The problem with the Living Wage, as with the problem of the Minimum Wage, is that – despite how it is presented – the choice is not between employing somebody at a low wage and employing them at a higher wage. It is a question of employing them at a low wage or not employing them at all.
Wages are not based on people’s worth or their human dignity, but on the value of the labour services they provide. If your work will make another person £6 richer, they will be willing to pay you £5 to work. However, if the government insists of a minimum wage of £7, then the employer will not employ you because to do so would make the employer poorer.
Another factor to consider is mechanisation. If you cost £5 an hour, and an machine costs £5.50 per hour (calculated as the average cost of buying a machine divided by its lifetime and factoring in running costs), an employer will employ you. If the government insists your wages have to be £6 an hour, the employer will employ a machine to do the job instead.
So put simply, any legislation that pushes wages above the market rate will simply increase unemployment – which, to echo the IFS, will put even greater burdens on the taxpayer.
I may be one of the “people on LDV who will explain” whom Geoffrey thinks can be “discounted on the grounds that policies like these offend their ideology”. The alternative from Geoffrey, however, is to offer support of a policy he cannot even explain!
If done, it SHOULD be regional. It costs more to live in London (or commute in), it SHOULD cost firms more to employ people there. Maybe this would start firms thinking about moving to other parts of the country again, which in turn would slightly help the housing shortage in the South – do you remember when that was Government policy, and indeed seemed to be happening? (I think Wilson was PM at the time…).
The lower paid having more disposable income would increase demand and help end the recession – but on the other hand if labour gets too expensive, a lot more jobs could be lost to countries with lower wages, making things here worse. How do we achieve the first without the second?
@Tom Papworth
“I may be one of the “people on LDV who will explain” whom Geoffrey thinks can be “discounted on the grounds that policies like these offend their ideology”. The alternative from Geoffrey, however, is to offer support of a policy he cannot even explain!”
Yes you probably are, and there is little need for Geoffery to explain.
These objections were raised many times when Labour put forward the idea of a minimum wage. The statistics have shown that this move did not relate causally to a rise in employment.
Part of the problem which leads your views to fly in the face of these facts is your ideology. You suppose that the alternative to exploitation is joblessness. The truth of the matter most of the time is between more or less profit for the employer. If an employer can get away with paying as little as legally possible whilst retaining workers who will do the job they will do so- that is what your ideology seems to blind you to. An employer can often afford to pay their workers more but simply will not do so. Forcing them to pay their employees £1 and hour more will likely not have a crippling effect on the vast majority of businesses, and those that it would have such an effect on must be in dire straights anyway (but, note, corporation tax would be lowered for a business which adopted the living wage).
Most workers who are paid below the proposed living wage in this country don’t work in businesses which could be easily outsourced, so that argument doesn’t hold uch weight. They tend to work in service or in retail.
Of course we’re all going to like the idea of getting paid more (except perhaps the employers who may struggle to do so) but a minimum annual salary of £14,400 is going to make it very difficult for small companies to take on more staff, particularly inexperienced staff to do unskilled work.
When I was a teenager I did a range of unskilled jobs just to get some money at the weekend, for about £5ph (in todays money). If that company had to pay me £7 by law, chances are it wouldn’t be worth hiring me at all, and the jobs I did would just be incorporated into somebody else’s brief.
We currently have a jobs crisis for young people – lots of school leavers / students / unemployed teenagers can’t get any work at all, not even 8 hours a week in a supermarket. Young people cost businesses a lot – training isn’t cheap, mentoring/supervision isn’t cheap and part-time workers need the same training as full-timers but contribute significantly less time to the company.
So whereas my 17 year old self would be jumping for joy at the idea of getting a 40% pay rise because the law said so, my slightly older self worries that I’d have never been employed in my teens at all if this ‘living wage’ had been adopted.