From the TUC

Is the Living Wage the only answer to poverty pay?

14 Nov 2012, by in Economics

Living Wage week was a great success in drawing attention to the large number of low paid workers across the UK, and the importance of finding new ways to boost incomes above the vital pay floor set by the NMW. With over 40,000 workers now benefitting from the work of the Living Wage campaign success has been significant. With real wages continuing to fall our stagnating economy means that even as the jobs figures improve the risk of a low pay, low productivity recovery remains real – if we can’t secure strong growth (and only time will tell whether we can – under current management it doesn’t look likely) then low incomes are set to remain a significant issue for millions of households for years to come.

While it’s far better for people to be in work than out of it, a life on persistently low income is tough, and (particularly when work is insecure) can lead to outcomes that in the long-term are little better than for those who are long-term unemployed. And poverty is an economic as well as a social problem. If incomes aren’t rising, consumer spending remains depressed and we risk an over reliance upon debt – which, as recent events show, can create significant risks for both individuals and the wider economy.

So can the Living Wage alone can solve this problem – of course the answer is that it can’t (and of course no one is arguing that it is). So while the TUC is in full support of the Living Wage campaign, it’s also worth thinking about the wider change we need to boost living standards for low and middle income families.

What else needs to be considered? Firstly, in the immediate term we need to strengthen our recovery. Despite the labour market’s fairly exceptional performance the reality of the last five years of recession is that those in work have borne more of the pain than in previous downturns. While we are creating jobs without much growth, real wages have fallen for close to three years, under-employment remains at record levels and ongoing low productivity rates are a worry.  My view is that our economy does have the capacity to expand if demand increases, but that if we can’t generate stronger growth current labour market performance suggests that low pay and poor job quality are set to increase.  It’s a basic economic truth that we won’t see improving accross the board wage growth without an increasing demand for labour.

But there are also wider questions as to whether the Living Wage should be the sum of our aspirations on improving household incomes.  Firstly, even if workers do benefit from the improvements that the Living Wage can bring this will not necessarily mean they have enough to live on – family circumstances will determine what households need to get by, and the social wage (public services, support with housing and tax credits) will always have a vital role to play. As detailed analysis undertaken by GLA economics demonstrates, the Living Wage is set taking benefits and tax credit into account, and these have a huge additional impact on household incomes – for those at the minimum and living wage rates. Yes, we need wages to rise as well as benefits and tax credits – but we need action on both fronts if we’re to improve the lives of lower and middle income families.

But what else, beyond a booming economy and improved/retained tax credit (or Universal Credit) entitlements, will drive up incomes? Well we know that even when growth was strong, wages weren’t rising for everyone. Why was this? A range of different reasons: ‘skill-biased technological change’ (leading to the productivity of capital increasing at a faster rate than labour and to enhanced productivity among skilled rather than unskilled workers) and the fact that global capital markets make it easier for jobs to move across national boundaries are the traditional answers. There are important points here – not least the importance of focusing on continually boosting and improving skills provision – but these explanations don’t present the full picture. As forthcoming TUC research (thanks to Howard Reed and Jacob Mohun) shows, the increasing prominence of finance (over other sectors of the economy which create more better paid middle income jobs) and a decline in bargaining power among lower paid workers have also played a role.

This debate gets to the heart of how we can reduce low pay. Ken Mayhew’s team at SKOPE (power point) have done some excellent work in this area. They show that union bargaining coverage makes a significant difference to the prevalence of low pay across an economy, and that across a range of different countries there are discernible differences in pay rates but not in the productivity of low paid workers. In brief, they conclude we need stronger pay floors, fair and properly enforced employment protection legislation and improved corporate governance (as a means to increase workforce investment). 

The other, admittedly less specific solution, is to rebalance the economy towards sectors that create more better paid jobs. It would be naive to believe that industrial policy can simply get rid of low paid jobs (indeed, as SKOPE’s work shows, even Denmark has cleaners) but we can focus on supporting sectors which create fewer of them – if manufacturing and high value services rose as a share of the total economy job opportunities would improve. And of course we could do more to reduce excessive pay at the top – as our event tomorrow will discuss – and, as Resolution have shown, to increase employment participation rates (especially among women).

Extending the reach of the Living Wage is an important part of the livign standards agenda, and if more Government Departments committed to pay it, and if government procurement required it, the numbers benefitting could improve significantly. But it’s hard to think about wider policy levers that might work at extending its reach. Naming and shaming employers who aren’t paying the legal minimum is vital, and BIS should be doing more of it. But we can’t assume that employers who aren’t paying the Living Wage are bad ones – large retailers with union recognition agreements, quality pension schemes and good progression opportunities should be recognised for their good employment practice, not criticised for failing to pay above their negotiated rates. And tax breaks for employers who pay the Living Wage rate risk large deadweight costs (as well as failing to acknowledge the important role that collective agreements play in boosting pay rate). Enforcement also remains an issue – where unions are present they can actively enforce rates but where they aren’t, enforcing pay above the legal minimum relies on individual workers coming forward.

In current tough economic times finding ways to boost household incomes isn’t easy.  There are around 8 million workers across the UK whose terms and conditions are set by collective bargaining, and around 2 million who have their wages set by the NMW. So, achieving fair pay needs more employers to pay the Living Wage, but we also need to make sure the NMW is enforced and that the benefits collective agreements bring for employees across the workforce continue to be recognised and supported. Along with an economic policy which seeks to secure a strong recovery and rebalance towards jobs rich sectors, strong skills provision and action to tackle pay at the top, these measures can help distribute the rewards of growth more fairly. But the answers are complex – and even as we progress tax credits will continue to have a vital role to play in boosting family incomes. I hope more employers pay the Living Wage – but I also hope the policy debate around boosting household incomes continues to recognise the multiple ways in which economic and social policy need to interact to achieve meaningful change.


One Response to Is the Living Wage the only answer to poverty pay?

  1. James Oliver
    Nov 15th 2012, 8:51 pm

    The Living Wage – Miliband opens his mouth and words fall out – what a henious monster he is