Last week Ed Miliband suggested that a new Labour government could introduce a requirement for all government contractors to pay a ‘living wage’ well in excess of the national minimum wage. This is part of his approach to what he calls ‘pre-distribution’ – higher pay for poorer workers before tax – rather that redistribution through the tax and benefit system
Mr Miliband was endorsing, not for the first time, the aims of the Living Wage Campaign, dating back to 2001 in this country but also having equivalents in other countries – for instance the USA, where New York mayor Michael Bloomberg recently incurred campaigners’ venom by vetoing a city council proposal to implement a living wage scheme.
In the UK the proposal is for a Living Wage currently set at £8.30 per hour in London and £7.20 outside the capital. This contrasts with a national minimum wage which is currently £6.08, rising next month to £6.19.
Where do these figures come from? The London and national living wages are calculated by two different bodies – GLA Economics, a hangover from Ken Livingstone’s day, and the grandly-named Centre for Research in Social Policy, in reality a small congregation of sociologists at Loughborough University.
The London figure has attracted most attention as a result of Boris Johnson’s continuing support, the endorsement of some leading financial service companies such as J P Morgan, Goldman Sachs and KPMG, and a rather unpleasant campaign by students which forced University College London and some other London universities to sign up.
The figure, if not exactly plucked out of the air, is reached by an arcane process. First, the GLA Economics team estimate a ‘Low Cost but Acceptable’ budget for four stylised households with different working patterns and family commitments. The wage which academic experts say suffices for ‘an adequate level of warmth and shelter, a healthy palatable diet, social integration and avoidance of chronic stress for earners and their dependents’ differs between households, so a weighted average is taken. This gives the ‘Basic Living Cost’.
The second – ‘Income Distribution’ – approach takes a figure which represents 60 per cent of the median income for London for each household type. These are again weighted.
In London the Basic Living Costs approach gives a figure of £6.85 per hour and the Income Distribution approach gives a figure of £7.65 per hour.
The average of these two figures (now called the ‘poverty threshold wage’) is £7.25. In order to protect against unforeseen events a margin of 15 per cent is added to the poverty threshold wage. Thus we have the figure of £8.30.
Numerous criticisms could be made of this arbitrary methodology. However I prefer to concentrate on the implications of trying to implement this up-till-now voluntary approach more widely.
For one thing, the whole approach is based on ‘needs’ and makes no concessions to the affordability of the rates set. In this it contrasts sharply with the relatively cautious approach of the Low Pay Commission, which for all its faults has recognised that pay does affect the demand for labour. Its most recent report, based on good-quality research from some of the UK’s best labour market economists, recommended an increase in the adult national minimum wage (NMW) which is well below the rate of inflation - and no increase at all for youth employees. By contrast the Living Wage methodology virtually guarantees that the wage will increase over time in real terms whatever the state of the labour market.
Paying these higher wages to workers on government contracts would mean higher costs directly to the taxpayer. Moreover, the Living Wage is so much higher (more than a third) than the national minimum that it would almost certainly trigger higher pay for other workers as well. The NMW is paid to those who, for various reasons, display low productivity. Those who are currently paid £8.30 an hour are more productive, perhaps because they are more experienced, or work in more difficult environments. They need to be paid more than NMW people to compensate for this, and the implementation of the Living Wage would ultimately shift their wages up as well.
These substantial pay hikes, particularly in a recession, would almost certainly lead to job losses.
They would also privilege those who kept their jobs at the expense of ‘outsiders’ who would be forced into parts of the economy where the Living Wage would presumably not apply – small businesses, self-employment and the black economy. This would force down pay in these areas.
They would be a blunt instrument in tackling poverty even on their own terms. The GLA Economics methodology, with its stylised examples and simple weighting cannot provide the sort of sophisticated microsimulation modelling which the Institute for Fiscal Studies, for example, might bring to this issue. The GLA people really do not know what the consequences of the Living Wage would be. Hazarding an informed guess, I expect the main beneficiaries of the £8.30 an hour, assuming that they kept their jobs, would be part-time workers and young people. These are the major groups (they overlap of course) which currently earn less than the proposed Living Wage. Part-time workers usually have some other source of income or financial support (such as other family members, while the needs of young people are rather less than those of prime-age workers).
The real poverty in our society lies with those who are not in work at all, and the implementation of the Living Wage will do nothing to improve their chances of a job – rather the reverse. Mr Miliband (and Mr Johnson) really need to think about this more carefully.