From the TUC

The Living Wage, Median Earnings, Tax Credits & Predistribution

22 Feb 2013, by Guest in Economics

Labourlist are reporting a new poll (commissioned by Unions 21) showing widespread support for the living wage, even if it led to job losses:

The poll of 1004 employed people shows that 71% of Labour voters, 66% of Lib Dems and even 44% of Tories (60% overall) say we should increase the Minimum Wage to a Living Wage – and that the government should make the Living Wage the legal minimum. There is majority support for such a move across all regions of the country and all social class groups. Interestingly, the group who most agree that a Living Wage is needed (even if it costs jobs) are the D/E social class group – working class voters who are more likely to be paid the minimum wage, and know how hard it is to live on the poverty line.

At the New Statesman blog George Eaton argues that:

The public, as is often the case, are ahead of the politicians on this debate. At the very least, the arguments above deserve to be heard in Westminster. 

Some the best economic work on a living wage in the UK has been done by NIESR for the Resolution Foundation & the IPPR.  It found that a move from a minimum wage to a living wage would not only boost the incomes of the low paid but save the Treasury around £2bn per annum. Although as Hopi Sen noted at the time, as these research also suggested a living wage would increase unemployment by  160,000 and could be spun in some fairly unfair ways.

For myself, the most interesting part of the NIESR/IPPR/Resolution work was the discussion on higher wage floors and productivity:

US evidence also supports the view that living wages can help boost productivity (Chapman and Thompson 2006). Moreover, the productivity gains in these US cases do not appear to come from firms substituting higher-skilled employees for lower-skilled ones, but from current employees responding to higher wages by raising their work effort (Brenner 2005). In the case of San Francisco airport, staff turnover fell by up to 80 per cent across several low-paid occupations following the introduction of a living wage (Hall, Jacobs and Reich 2003).

Given the TUC’s own recent warnings that the UK risks a low wage, low productivity recovery, anything could push up the wage floor and potentially boost productivity is worth considering. But, as Nicola has blogged before, there are also reasons for caution – we mustn’t fall into the trap of thinking that the living wage alone is a panacea for Britain’s wages problem. As she wrote last year:

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.

For me there are two important elements to bear in mind when discussing the living wage. First, as Nicola has pointed out, it is important not to think about the living wage as some form of substitute for tax credits.

For too long poverty reduction focused only on taxes and benefits, and no where near enough attention was paid to the types of jobs our economy creates, to opportunities for in-work progression or to rates of pay (and rates of pay increases). But while it is welcome that more people are waking up to the reality of life in low pay Britain, and to the destructive impact that insecure, badly paid work can have for individuals, their families and the wider economy, that doesn’t mean we can forget about the vital impact redistributive policies need to continue to play if we are to create a fairer country. If we are to avoid making the lives of low paid workers far worse, we need to protect their tax credits.

And secondly, living wage policies could do a great deal to boost the incomes of the low paid but we still have the pressing issue of how to boost the incomes of those in the middle.  Here the data is fairly stark, as the Resolution Foundation have calculated (based on OBR forecast), median real wages are set to be at 1999 levels in 2017. Pushing up the pay of the lowest may have some upward impact on median pay levels but it is unlikely to be significant. There is of course a vital debate to be had about how we help those at the bottom of the earnings ladder but we shouldn’t forget those in the middle either.

rf real wages

If ‘predistribution’ policies are to succeed they have to encompass more than support for the living wage and skills policy. As Tim Page has argued they need to recognise the role of collective bargaining in wage setting and protecting living standards.  

What is really needed is a set of policies aimed at both raising productivity more generally and ensuring that the gains from this higher productivity flow to those in the middle and below, not just those at the top. A living wage goes some way towards helping here, but it not enough.

2 Responses to The Living Wage, Median Earnings, Tax Credits & Predistribution

  1. Wilfred Bengazi
    Feb 22nd 2013, 1:11 pm

    Unless you are using a matched sample (which you aren’t) average annual earnings don’t tell you much about earnings growth because composition effects could offset increases for staff in post i.e. more new low paid jobs would reduce average earnings but employees already in work could be getting pay rises that match inflation. Comparing the average wage to RPI is therefore a bit meaningless.

    The median pay award in the private sector was 2.8% (IDS) in 2012 and the average increase for staff in post was 3.8% (ASHE). In the public sector where there was a ‘pay freeze’ the in post figure was 2.8% largely due to automatic service-based incremental progression (e.g. 8% annual pay uplift for teachers in first 5 years, 3-4% for NHS employees).

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