Debate | Is the Living Wage worth it?

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The Labour Party has stated that it would give tax rebates to firms that pay Living Wage. The Living Wage is based on the amount an individual needs to earn to cover the basic cost of living. It is currently set at £7.45 an hour and £8.55 an hour in London, in comparison to the national minimum wage for over 21s which is £6.31. LS Debate asks, should employers pay the Living Wage?

Yes

Tom Follett

Fourth year Politics

The Living Wage is one of a very few ideas whose usefulness hardly needs explaining. There are three parties that benefit from paying it: the individual, the employer and the state.

Firstly, the individual benefits from greater autonomy and some leeway to make financial decisions in their own life. For those on minimum wage, a pay rise to the £7.45 living wage would bring a much needed increase of income of up to £1,600 per year. The impact this makes should not be underestimated – a study in the journal ‘Science’ in August showed that constant financial worries can detrimentally affect people’s work by up to 13 IQ points.

Employers who have adopted the Living Wage report improved staff morale, a decreased turnover of employees and more conscientious work. This can all be attributed to the worker fearing a much greater drop in income if they get fired compared to if they are on the minimum wage. It also means that employers would be explicitly recognising the fact that everyone, from cleaner to CEO, has the right to live a decent life and should have the means to afford one.

The state gains because it has to pay out fewer benefits and receives more taxes. The Resolution foundation, an independent think tank, has calculated that the move would save the government £2.4bn every year, money which could go towards reducing the budget deficit. It also gains indirectly from reduced strain on public services due to the healthier lifestyles achievable with a higher income.

The main arguments against the Living Wage put forward by right wingers are that it encourages inflation and would eventually end up costing jobs due to rising prices of production. However, these rely on a vast oversimplification of the link between wages at the bottom end of the scale and the final cost of products and services. Employers can adjust to the living wage over a period of time to avoid a sudden hike and, while some sectors have only a relatively low number of low paid staff, the impact of the increased wage cost can be easily absorbed into the business as a whole. In fact, for many businesses, the Living Wage could actually improve their operation and reduce costs because investing in employees can cut out the negative consequences of underperforming staff, or frequently having to hire new workers.

Opponents of the Living Wage often declare that the problem of low pay could be solved by lifting the level of earnings at which people start to pay income tax, this ‘solution’ ignores the fact that those on the lowest wage already do not pay tax. It also ignores the fact that many of those who would benefit from the Living Wage are part time workers and would not earn enough in a year to be affected by income tax anyway. Lowering the tax rate would also cost the government a lot of money, something it can ill afford.

Opponents also often fail to understand that the Living Wage is not proposed as an immediate, blanket policy but something to be implemented over time, with some sectors and regions of course being able to achieve it sooner than others.

With the economy growing again, we must avoid the mistakes of the last decade and make sure everyone benefits from growth. Ultimately, the Living Wage presents an opportunity to make many people’s lives a bit better and our country a bit fairer. We must not pass it up.

No

Alex Crossley

Fourth year Politics and Parliamentary Studies

The Living Wage is one of those ideas that sounds fantastic but falls apart under serious scrutiny. No one can oppose the raising of living standards for those on low wages, we simply disagree on how to go about doing it. Companies increasing wages without comparable rises in productivity is a recipe for calamity and could precipitate a plethora of economic problems.

As ridiculous as it might sound, a higher income isn’t necessarily better than a low one. The headline level of income, which the Living Wage seeks to increase, is irrelevant. The important factor is the take-home pay those on low wages receive after tax and benefits. Increasing the headline rate of pay does relatively little to assist those on low incomes because it pushes their incomes into higher tax and out of benefit brackets, meaning they lose most of the benefit of the Living Wage in tax. The
solution to that problem is simple, lower the basic rate of tax and increase the tax threshold (which the government has already done). Today those on the lowest incomes pay a markedly lower relative tax rate than they did under the Labour government, but raising the tax threshold further would eliminate the need for a Living Wage with zero cost to businesses.

Proponents of the Living Wage will tell you that it boosts productivity and motivates workers. The truth is that it would cause an increase in unemployment and inflation. It’s all very well for big name firms like KPMG and Linklaters to pay their cleaners more and good for them if they can afford it, but the vast majority of companies cannot. If those on the left had their way, the Living Wage would replace the minimum wage. This would mean a hike of roughly 20 per cent in staff costs for employers at a time when the country is just starting to demonstrate strong growth. Small and medium size firms would be forced to choose between increasing prices (and selling fewer units) to meet higher wage costs or maybe even sacking some workers to pay others. With an unemployment rate above 7 per cent, we should be concentrating on getting people into employment and ensuring they keep the money they earn, rather than making hiring new workers prohibitively expensive.

Furthermore, the argument for a Living Wage falls apart when you look at how the figure is calculated. We’re told it represents the income needed to live a decent life but what does that actually mean? A calculation for living costs is averaged against a measure of poverty (60 per cent of the median wage), plus 15 per cent. The supposed ‘poverty’ measure, itself highly questionable, notably artificially inflates the final figure, as does the arbitrary 15 per cent. When taken together this produces a wage actually higher than necessary to live on. Although the London Living Wage is calculated at £8.55, the regional living wage, set at £7.45 fails, to take account of regional variations and could risk substantial localised inflation if brought in areas where the cost of living is very low.

The Living W­age is an economic white elephant and employers should only pay it if they can do so without compromising their wider business plan. Not only is it futile, but it would be directly harmful to our global competitiveness and would contribute significantly to unemployment. The idea of helping those on low incomes is righteous, but this is the wrong way to do it.

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