The Living Wage: A welcome increase or simply a fantasy?

Many of us are infatuated with the idea of making money. The issue of how much we earn affects us all at some point or another in our lives.  It is to some extent, inevitable. After all, money does make the world go round ! This is why the Living Wage has become such a major issue in the current political climate, leaving us with the question : Has the idea of moving to a Living Wage, from our current National Minimum Wage, made many people think of their own selfish needs over the good of the British economy as a whole?

In recent years, much pressure has been placed on the Government to increase the National Minimum Wage. We were reminded of the concept of the Living Wage during the last General Election when Jeremy Corbyn announced that if Labour were to be voted into power, they would move the Minimum Wage up to £10 an hour, soon to be known as the “Living Wage”. This increase ( from the current £7.50 for over 21s),  would occur over a period of 3 years leading up to 2020. (This is £1 is more than Conservatives plan for the Minimum Wage in the same period.) There is little doubt that on the surface, what Labour have promised seems to be more beneficial for the average working person. But, as this paper seeks to explain, in actual fact, the implications that come with increasing the National Wage actually hinder the reasoning behind the much-desired increase in the first place.

In real terms, we must view an increase in the National Minimum Wage as a whole economic issue, rather than a potential small increase of £1 for the individual. A primary side effect that results from increasing wages is that it may affect many businesses negatively in the short term, particularly small businesses. Trying to find the extra funds to increase employees’ salaries would affect the cash flow, which itself,  is the major cause for the closure of businesses. (In fact, 80% of small businesses are failing in the UK for this very reason.) Many claim that if a business doesn’t have the funds to pay employees then it shouldn’t be in business,in the first place . However, it is important to note that these businesses could afford to pay staff this new wage, but it would simply take a lot of time to account for the extra money needed. The increase to the Minimum Wage by 50p an hour in 2015 led to the Association of Convenience Stores predicting  that £166 million would be the direct impact of the increase in wages. This clearly demonstrates the real impact of increasing the minimum wage.

Another side effect that the average person would soon suffer from a relatively short period following the implementation of such a policy, is the increase in the cost of products and services. As Lord Wolfson observed in 2015, we would soon inevitably witness an increase in general prices by 1% to offset the need to pay employees.Although it seems that people have a more disposable income to encourage spending, the consequence is that, we see this being offset by increasing Product and Service Costs. Ultimately, this could lead to an increase in inflation, even at a minor scale.

Therefore, this actually proves to be contradiction when we take into account that this is the very thing the increased wage is trying to offset. The Resolution Foundation, through their research on living standards, found that the Living Wage could actually result in low paid workers being £1000 worse off by 2020. This is the reason that the Federation of Small Businesses encourages small, gradual increases rather than Labour’s planned move to £10 an hour over a such short period.

Indeed, there are in fact more pressing matters when it comes to the issue of wages. A key example is the need for increasing fairness with regards to pay. By this, I am not alluding to the typical way we often discuss discrimination stemming from gender or race. When discrimination in pay is discussed, it is very rare that the difference in pay for the different age brackets is ever mentioned. While it is often  true that with age comes experience,  typically  “Minimum Wage” jobs are also low skilled with little need of experience. At 16, one can legally live independently and have a home to support, yet some employers still pay a mere £4.05 an hour[6] to their employees at that age.

An older co-worker carrying out the same role and responsibilities with the same job title may even earn as much as £3.45 more an hour. This has often led many people to the question whether the reason behind paying lower wages is because some companies and sectors intentionally employ a younger workforce making it more difficult for them to move away from job of this very low pay. Indeed, this simply makes it a coincidence that many of these younger employees lack skills; it is as if the two go hand in hand. Labour proposed that the Living Wage would also apply to 16 year-olds for this very reason, under the pretext that everyone would be paid equally. Nonetheless, it was found that 85% of people believe that under 25’s are the ones most in need of a pay rise. Therefore, the logical solution would be to decrease the pay gap between age groups, before continuing to increase the Minimum Wage any further. (This is because it is a complete contradiction to the Equality Acts which aim to reduce socio-economic inequalities.)

Even so, we are led us back to the key question: Is the Living Wage a correct move, economically speaking? We can all agree that wages should and must increase with inflation. Indeed, this is why the Minimum Wage is reviewed every April. Yet, if we take a closer look, £10 an hour in the short term seems drastic. It was calculated by leading protesters of the introduction of the Living Wage, that the feasible figure should be £8.48 an hour. This leads us to the question as to why Labour has inflated this figure a great deal. The implications of the Living Wage increasing so rapidly over a short period of time would be detrimental in the short term. As long as Minimum Wage continues to stay in line with inflation, there appears to be no reason for the increase which has also been suggested by the Federation of Small Business.

In an idealistic world then, it would make more sense to move away from cash-based targets. But given the current economic climate and the fluctuation of the economy, an increase in wages isn’t always possible. Although Labour’s Living Wage does still seem appealing to the average worker, this does not diminish the reality that it appears to be moving faster than the economy can support for the time being.

 

Katie-Louise Marvin hold the position of PC President of Business & Economics at King’s Think Tank. 

 

 

 

 

Reference List:

[1] http://www.labour.org.uk/index.php/manifesto2017/fair-deal-at-work

[2] http://www.simplybusiness.co.uk/knowledge/articles/2015/08/business-fail/

[3] https://www.theguardian.com/small-business-network/2015/sep/16/business-community-warns-living-wage-could-hit-employers-staff

[4] https://www.theguardian.com/business/2015/sep/10/next-chief-says-national-living-wage-could-drive-up-inflation

[5] http://www.resolutionfoundation.org/media/press-releases/backsliding-on-the-national-living-wage-could-leave-low-paid-workers-up-to-1000-worse-off/

[6] https://www.gov.uk/national-minimum-wage-rates

[7] http://www.independent.co.uk/news/business/news/living-wage-85-of-people-think-under-25s-should-get-a-pay-rise-a6956271.html

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