Why we can't afford not to pay the living wage

Happy workers: Higher minimum wages boosted productivity and worker retention
Happy workers: Higher minimum wages boosted productivity and worker retention
Ian Dunt By

Today's Living Wage Commission report, spearheaded by Archbishop of York John Sentamu, comes with some depressingly lightweight demands. He wants the government to make it a "goal" to cut the number of low paid workers by one million by 2020. But he's resolutely opposed to legislation.

 

Even a toothless effort like this one brings them out the woodwork though, with pro-business groups shouting dire warnings about the effect of a living wage on employment.

They have no evidence to back them up. In fact, the evidence suggests higher wages have no effect on employment, boost staff retention and productivity, and would help cut the deficit.


In 1992 academics David Card and Alan Krueger conducted a landmark study of minimum wage on employment, with research into the fast food industry in New Jersey and neighbouring Pennsylvania. The US is great for studies like this, because most other economic and cultural factors are the same, so a change in policy in one state can be directly compared with its absence in a neighbouring state. Card and Krueger found no negative change, despite the introduction of a minimum wage in New Jersey. In fact, employment in New Jersey's fast food industry actually rose slightly.

It went against all the principles of classical economics - if price goes up, surely the quantity demanded must fall. But classical economics is the fairy tale of the educated. Its premises are built on sand and presumption.

Economists desperately tried to show the Card and Krueger study was nonsense, but to no avail.

It appeared firms found other ways to absorb the cost of higher wages, usually by raising prices. Because this was happening across the board, it did not negatively affect individual outlets. Others may have cut non-wage benefits, cut working hours (there is some evidence of this from studies) or found other cuts.

A 2010 paper by researchers at the Centre for Economic Performance at the London School of Economics found the long-run effect was negligible or positive. A 2012 paper by the Institute for Social and Economic Research at the University of Essex studied the minimum wage and "found almost no evidence of significant adverse impacts on employment".

Those studies that do show an impact on employment tend to show a minor one for teenagers and unskilled workers.

Most studies find benefits instead. Turnover of staff falls, reducing hiring costs. Workers tend to become more productive. The fact they are decently paid makes them more committed to keeping their job. Morale is higher.

That's just the microeconomics. But consider for a moment the bigger picture. Since the decline of trade union power under Reagan and Thatcher in the late 70s and 80s, wages have not risen with productivity. Instead, we relied on benefits and private credit to maintain demand. Mortgages to families who could never really afford them were just the spark, not the cause. It was indicative of the illusionary economic model we had developed.

As Marx pointed out, this is what capitalism does: on the one hand, the system relies on consumers having enough money to actually buy things and keep an economy afloat. On the other, it's in the interests of individual bosses to hammer down wages as far as possible. Of course, you don't need to turn to Communism for a solution. Just having basic wage and employment standards will do the trick. Henry Ford realised this when he decided he should pay his employees enough to buy the products they were making.

But Ford is a rare example of an enlightened employer and for years political intrusion in the economy has been unfashionable. Employers have been allowed to keep hammering down wages and this is where we find ourselves: a consumer economy in which people can't afford to buy, a private sector subsidised by tax credits to the cost of the national economy and the moral catastrophe of people working and in poverty.

Expecting employers to take up the living wage themselves is like waiting for Godot. Take-up has been patchy at best. David Cameron and Ed Miliband support the living wage, but not legislation to enforce it. Sentamu is clearly of the same persuasion.

It is a fantasy to presume they will adopt it without being forced to.

We have 5.2 million people currently earning less than the living wage. This is why the majority of people in poverty in our country are in work. Taking one million of them out in six years' time is not enough.

We need consumers who can afford to consume without relying on tax credits, benefits and private credit. We need the increased tax receipts from national insurance contributions. The argument for legislation is clear. The argument against it has crumbled to dust.

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