From the TUC

The National Living Wage: a defence

20 Apr 2016, by in Labour market

This morning’s labour market release told a similar story to what we’ve seen previously: insipid wage growth and slowly rising employment. Yet some commentators have assigned a special weight to today’s figures, take this piece in the Evening Standard on Monday for example. This is because that whilst these stats are for Dec-Feb, they are the first numbers to be released since the National Living Wage came into force.

On the 1 April the minimum wage increased by 50p per hour to £7.20 for employees over the age of 25. This National Living Wage is projected to increase over this Parliament, and should be over £9 by 2020. Many have claimed it will cause unemployment to rocket, others that it is merely a political manoeuvre which will not benefit the poorest. This is my attempt to offer a defence of the national living wage, and celebrate it despite its many flaws.

1: Concerns about mass unemployment are greatly exaggerated

A number of doom mongers have come up from the shadows. Employers such as John Lewis, JD Sports, Next, Costa, Whitbread and JD Wetherspoon have all said that there will be consequences to the introduction of the national living wage, such as lower employment, price increases or business failure.

The TUC position, based on experience, is that these claims are unfair, and partly political. If we look back to when the National Minimum Wage was first introduced, and when it has subsequently increased, these accusations come up time and time again, and are refuted time and time again. Every time the minimum wage has gone up, employment has increased and the new rate has turned out not to be “the last straw” before business collapse after all. For example, see this BBC report before its introduction, and this report after the evidence had been evaluated.

One reason for this is that although the web/hive/whatever-analogy-floats-your-boat of economic activity is complex, it is important not to forget demand. Individual employers tend to see national minimum wage increases as all cost, but this is simply not the case. People who are paid the least have the highest “marginal propensity to consume out of current income”, which means that if they get a pay rise they are likely to spend most of it. Extra consumer spending = extra demand, which supports employment and the revenue of firms.

Threats have been made that companies will try and circumvent their responsibilities by cutting other benefits, such as paid breaks or good overtime pay. Yet this also may well be a case of companies’ bark being bigger than their bite. This was certainly the case in 2003, when the minimum wage increased by 7.1%. At that time 10% of employers told the Low Pay Commission that they would reduce terms and conditions, but very few actually went through with it – clearly valuing positive relationships with their workforce over short term gain. (Check out the LPC report of 2005 page 219 for evidence).

Furthermore, whilst B&Q initially said it planned to cut Sunday and Bank holiday rates, their plans were forced to change after nearly 140,000 people signed a petition against the cuts. Surely such negative publicity will force any employers considering similar action to exercise far greater caution?

2: Many people ARE benefiting

Well-intentioned organisations who do want the best for everyday people have also struggled to be enthusiastic about the National Living Wage. In this blog from the Joseph Rowntree Foundation, Helen Barnard argues that its introduction won’t do a lot to solve poverty, partly because many workers with low hourly pay live in households with quite high overall incomes. Similar arguments have been put forward by the Resolution Foundation.

Look, we know that the minimum wage is a very blunt instrument. It’s only going to benefit employees, and it will not discriminate between the challenges workers face – there is no ‘lone parent’ minimum wage, for instance.

Yet we also know that the introduction of the National Living Wage is likely to raise the wages of 1.8 million employees this year, over 5% of all workers.  Even more will see their wages grow as it approaches £9/hour. A pay increase means something real to people – fewer agonising choices between food and heat and other necessities, and possibly the option to give the kids a treat every now and again. Trade unions have campaigned for a more substantial increase for years, so now it’s arrived let’s be enthusiastic in our welcome.

3: It’s not perfect

I’m not saying the National Living Wage is perfect.

In fact, I even have an issue with its name. The actual Living Wage is needs-based, it is calculated to be the minimum for a full-time worker to earn enough to afford a decent standard of living. The current rates are significantly higher than what those on the national living wage are now offered – it suggests employers should pay £9.40 in London and £8.25 in the rest of the UK. The National “Living” Wage is invariant to the cost of survival – the objective is to raise the minimum wage to 60% median earnings. For those 2,334 employers who have adopted the actual Living Wage to signal their good employment practices, they must be pretty hacked off that this concept has been hijacked.

And beyond the fact that the National Living Wage is nothing more than a minimum wage top-up for older workers, I have several other concerns:

a: Younger workers are falling behind

I have argued before that the decision not to extend the National Living Wage to over 21s is a disgrace. In brief I think that:

  • Young adults are generally highly qualified and very hard working. Being paid less whilst being equally productive undermines and mocks the principle of a fair day’s work for a fair day’s pay.
  • Young people often live independently and have families of their own to care for, and so face the same expenses as older workers.

As such, this policy is unjust and will serve to demotivate younger people. The TUC believes the National Living Wage should be extended to all those aged 21 and over, and the minimum wage for workers under 21 should grow at least as fast as the National Living Wage.

b: The accompanying cuts to in-work support are unjustifiable

The minimum wage hike, and an increase in the personal allowance, will not compensate the cuts to Universal Credit. The IFS found that the introduction of Universal Credit means 2.1m working households are set to lose an average of £1,600 a year. The government is giving with one hand and taking with the other, which means that a large number families will be worse off by the end of this Parliament.

c: Britain still needs a pay rise

A minimum income standard is never going to be enough. This country has experienced an unprecedented pay slump and people are still £40 a week worse off than before the crisis. Britain urgently needs a pay rise, across all sectors and occupations. This policy provides no support to the “squeezed middle” and no protection against pay compression; as Paul Sellers writes here this cannot be mistaken for an integrated pay policy.

Inconsistency in Conservative pay policy is evidenced in the 1% pay cap in the public sector and the unfair, unnecessary and undemocratic Trade Union Bill. If passed this bill would make it harder for unions to win decent pay rises for their members. This government cannot be trusted to provide Britain with the pay rise it needs.

2 Responses to The National Living Wage: a defence

  1. Quick Employment UK
    Apr 21st 2016, 8:40 am

    Great article, it is good that you share your point of view while paying attention to the main pros and cons of the new National Living Wage scheme. After all, this situation is both beneficial and not that advantageous at the same time, it is important for the business whether it will make it work for it and for the employees, or not. It is a personal choice rather than generally valid.

  2. HRM
    Apr 22nd 2016, 8:24 pm

    So fabalabalos Flowsiewozzie