The Living Wage

There has been quite a lot of discussion about encouraging employers to pay at least a living wage, rather than the minimum wage. The minimum wage is legally set to be £6.19 an hour, for those over 21. The living wage is an informal benchmark and is regarded as the minimum that someone needs to have a decent life. Currently it is set at £8.55 in London and £7.45 in the rest of UK. I accept that a living wage is not well defined, but it seems reasonable that a living wage might be somewhat higher than some legally mandated minimum.

There was someone on Radio 4 this morning talking about this. He pointed out that if everyone was paid at least a living wage, it would reduce the government’s benefits bill by £6 billion. This illustrates the point, that many make, that benefits sometimes act to allow employers to pay lower salaries than might be regarded as reasonable. On the other hand, it would apparently cost employers £12 billion if they were to pay everyone a living wage. Given that a living wage is about £1.25 an hour higher than the minimum, and someone in a full-time job works about 1750 hours a year, this suggest that the equivalent of 5 million people are in full-time jobs that pay less than a living wage. The commentator made a perfectly valid point that this money would have to come from somewhere and that employers were unlikely to increase the lowest salaries if this would harm their profits or if it might have a negative impact on employment. I completely accept that investors are unlikely to invest if they don’t get a decent return on their investments. It is, however, still somewhat amazing that people are comfortable with the view that it is better to leave 5 million or more people on less than a living wage just so as to protect company profits.

I, however, have a very easy to solution to the problem. We need to find £12 billion so that all employees can earn at least a living wage. Since about 1980, the top 1% of earners have increased their share of the income from about 8% to about 15%. The top 10% have increased their share from about 25% to about 31%. In today’s money this means that the top 1% have increased their share of the income from £64 billion to £120 billion, while the top 10% have increased their share from £200 billion to £248 billion. You could find the necessary £12 billion by reducing the income of the top 1% by 10% or by reducing the income of the top 10% by 5%. They would still have a higher fraction of the income than they did in 1980 and everyone could earn what is regarded as a living wage.

There are some other factors to consider. A recent report by a non-partisan Congressional committee has shown that reducing the top rate of tax does not improve economic growth. It primarily seems to allow a smaller fraction of society to accumulate an increasing fraction of the wealth (as might seem obvious if you gave it any thought). One could consequently assume that the increase in the wealth/income of the top 1% and 10%, in the UK, is not because they’ve done a great job of growing the UK economy. It’s really because they’ve done a great job of convincing the government to reduce how much tax they should pay. In fact, the current financial crisis might suggest the influence of the such people on government policy has done more harm than good. A book by Kate Pickett and Richard Wilkinson, called the Spirit Level, has also shown – quite convincingly – that countries with more unequal income distributions have more societal problems (health, crime, etc). It seems to me that by reducing the income of the top 1% and 10% to a level similar to – but higher than – that in 1980, we could pay everyone in the country a living wage, could reduce income inequality (which would have a positive effect on our society), could reduce government spending (something regarded as crucial by many), and we could do all of this without negatively affecting company profits. It really seems like a win-win to me. I wonder why someone else hasn’t thought of this sooner?

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2 thoughts on “The Living Wage

  1. Investor profit-expectations need to be managed downward. But if you want to improve wages at the bottom, it’s fairly simple. Put corporation tax on a sliding scale based on the ratio of the chief executive’s salary to the lowest earner. This would kill 3 birds with one stone. Investors wouldn’t only have profits to think about – they’d be a lot more interested in limiting executive salaries to reasonable levels, they’d have a vested interest in paying their lowest earners a better rate, and the reduction in tax take (if you calculated the sliding scale correctly) would be more than offset by the state’s savings in benefits to low earners who are now magically getting a living wage. Ethical companies would find themselves more competitive, too, which would impede the urge of the greedy to push up prices to customers.

    • Yes, that’s an interesting idea. As much as I realise that investor ultimately to gain from their investment, I tend to agree that their expectations need to be managed downwards. I certainly agree that bringing the top and bottom salaries closer together will help to reduce government spending and improve many aspects of our society.

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