Why talk of The Living Wage both helps and hinders policy debate on low pay

The Living Wage is all the rage but mostly honoured in the breach. Around 1 in 5 UK employees (5 million people) at present earn less than the rate of pay its reckoned an individual needs to cover the basic cost of living – currently estimated at £7.85 per hour (£9.15 in London where living costs are higher) roughly a fifth more than the statutory hourly National Minimum Wage (NMW) of £6.50. As of yet, however, only around 1,000 organisations (that’s less than 1% of employers) have voluntarily signed up to be accredited as Living Wage Employers, benefitting less than 0.2% (35,000)  of employees.

Not surprisingly therefore campaigners want many more employers to voluntarily pay their lowest paid staff at least the Living Wage and are increasingly supported in their efforts by politicians across the political spectrum. Last week Prime Minister, David Cameron, encouraged employers who can afford it to pay the living rate and if we ever get the much pondered televised Leaders’ debates ahead of the UK General Election in May politicians of every stripe will doubtless join him in calling upon bosses to do the decent thing.

The Living Wage campaign is laudable - aside from any success in raising hourly wages it helps focus public attention on the related problems of low pay and in-work poverty. But Living Wage rhetoric also has a tendency to mislead or oversimplify policy debate on these problems, with the public hoodwinked into thinking that positive talk about the Living Wage necessarily implies we are about to see a big hike in the NMW, which would guarantee a pay rise for at least 1.2 million employees.  It’s thus helpful to consider the Living Wage in its proper economic and policy context.

Advocacy of the Living Wage, which has echoes of the concept of the Just Wage often discussed within the realm of Catholic Social Teaching, sits within a long tradition of what one might call ‘real world economics’ that parallels orthodox labour market theory.

Orthodoxy concludes that absolute and relative rates of pay are determined by the interaction of supply and demand for labour of given productivity, the observed outcome reflecting the market rate or value of that labour. There is no reason to assume that workers whose productivity places them toward the bottom of the resulting pay structure will earn more or less than what is deemed the Living Wage, nor any reason why a profit maximising employer should pay more than the market rate. Affordability is relevant only insofar as an employer must be able to meet at least the market rate since otherwise employees will go to work elsewhere. The corollary is that competition between employers ensures that the pay of workers of given productivity will always be tending toward being the same across all employers of all types, size and profitability, certainly within local labour markets and, if market conditions are sufficiently fluid, across regions and nations too.

The real world view, by contrast, is that pay rates for workers of seemingly similar productivity are often found to differ across employers, even within local labour markets. Although this can be interpreted within the orthodox framework – for example, individuals who to all intents and purposes look the same in terms of skill or experience as co-workers who are paid differently might differ in terms of personal drive or ability which affects their market value – it is normally taken to suggest that there is an element of indeterminacy in pay setting. In other words, when it comes to pay, who you work for can, at least to some degree, matter as well as how productive you are.

Such indeterminacy is sometimes explained by the relative product market power or success of some employers, which enables them to pay ‘over the odds’, sometimes by their bargaining power relative to their workers which enables them to pay ‘under the odds’, sometimes simply because they are either ‘good employers’ or ‘bad employers’. But whatever the explanation, the possibility of employer discretion in pay setting opens up the potential to make efforts to change employer behaviour.

For example, where some low paid workers are thought to lose out because less powerful than their bosses the state can step in by setting a minimum wage to even things up, as we do in the UK with the NMW. But the minimum wage confronts the problem that some workers really are of low market value, in which case requiring employers to pay too much more will mean fewer workers are hired. This explains why the independent Low Pay Commission normally exercises a degree of caution when advising government on raising the NMW, leaving the minimum well below the estimated Living Wage. In this situation the only way to further raise the pay of workers of low market value – other than increase their productivity by way of education or training – is to encourage those employers who can afford it to pay over the odds, thereby providing the impetus for Living Wage campaigns.

         

The trouble is that ‘affordability’ is a vague concept and is just as likely to be deployed by employers as justification for maintaining the status quo as for signing the Living Wage pledge.  This is precisely why even the best run campaign faces an uphill struggle to attract more than a minority of private sector employers to the cause (many of those in the initial crop of signed up employers being charitable, faith based, not-for-profit and public sector organisations). Indeed, what’s normally presented as the business case for the Living Wage – enhanced corporate reputation and a positive employer brand that aids recruitment and lowers costly staff turnover - implicitly assumes limited adherence. If all employers were Living Wage employers any relative competitive advantage would disappear.   

Consequently, although emphasis on the Living Wage adds a useful dimension to debate on low pay one should not exaggerate its role in tackling the problem. By far the most important element is and will continue to be the level of the NMW, which the economic consensus suggests could be significantly higher than the current rate without cost to jobs albeit remaining below the estimated Living Wage. Whenever politicians talk about the Living Wage what they should really be quizzed on therefore is what they intend to do about the NMW.

If a higher NMW is still considered inadequate to provide a de-facto Living Wage or income the only efficient market based solution is to increase the productivity of those workers – thereby raising their market value – the only alternative policy option being to use the tax or benefit system to top-up earnings so that the incomes of the low paid reach a minimum accepted level. In this context the principal focus of political debate should be on the relative balance of the NMW and fiscal top-ups in the policy mix, in particular to ensure that top-ups do not act as an excessive subsidy to low wage employers. Living Wage campaigns, supported by government, including adherence in all public sector bodies, should continue in tandem with this policy but as a valuable adjunct rather than the key component.   

This policy mix undoubtedly may seem rather mundane to those excited by the current widespread Living Wage rhetoric. But far better to focus on this - especially the level of the statutory NMW - than pin hope on unrealistic goals or the goodwill of a tiny minority of employers.