Why not pay the living wage? The cost to employers could be minimal
To mark tax freedom day on Tuesday, the Adam Smith Institute called for ”lower taxes… to ease the tax burden on London’s low and middle-income workers…” instead of mandating a “job-killing living wage”.
At first glance, it may seem intuitive to reduce poverty and stimulate demand by cutting taxes rather than pushing up wages. It would probably be simpler but there are many reasons why it would not be effective.
Prime amongst them is that low pay is effectively taxpayer subsidised. The Institute for Fiscal Studies estimates that sub-living wage pay costs taxpayers £6 billion a year (due to the costs of in-work benefits etc). But this is only a fraction of the real cost.
Once the indirect impacts of poverty and inequality are factored in, the figures are staggering. These include the Joseph Rowntree Foundation’s estimate that child poverty costs the taxpayer £25 billion each year, despite the fact that 57% of children in poverty have at least one working parent.
As for the cost to businesses, recent research by the IPPR and Resolution Foundation suggests that in many sectors it would be minimal. For banking, construction and computing companies, paying staff a living wage would add roughly 1% to the total wage bill (even the notoriously low-paying retail sector would only see a 5% rise).
Some employers, such as the London Borough of Islington, have implemented a living wage without increasing their costs.
In addition, the introduction of a living wage has tended to improve productivity in businesses by reducing absenteeism and improving motivation.
Those who think that decent pay is bad for business tend to forget that business suffers from the reduction in consumption brought on by stagnating wages. As Chris Huhne pointed out yesterday:
“When I talk to businesses at the moment, the overwhelming issue that they have is that there aren’t enough customers spending enough money to get the economy going.”
In the decade before the recession, consumer spending made up 63-64% of GDP in the UK so a boost to disposable income is essential if we are to find our way out of recession. This is particularly important in low income households which consume a greater proportion of their income than wealthier ones.
There are always siren voices warning that any increase in pay will lead to job losses. Those voices were raised when the national minimum wage was introduced (and subsequently increased) but these concerns have proved to be unfounded. The Low Pay Commission concludes:
“Despite the deepest recession since the 1930s, aggregate employment (whether measured by the number of jobs or the number of workers) and total hours worked have grown since the introduction of the minimum wage in April 1999.”
If we are to move away from poverty pay and reduce the cost of its consequences to the taxpayer, the only sustainable answer is raising wages.
As Adam Smith himself pointed out:
“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”