With £12bn of working age welfare cuts expected in this Budget, Conservative voices are clamouring for the “living wage” to be used as a means of reducing in-work poverty. In the past week, two celebrity former advisers to the Prime Minister, Steve Hilton and Rohan Silva, have argued the government should boost the national minimum wage (NMW) to £7.85 an hour, £9.15 in London.
Regular readers will know that I think such demands are dangerously misguided. The living wage, unlike the NMW, is set by a pressure group funded by unions and faith groups, and does not consider employers’ ability to pay. Much academic evidence shows that significant rises in minimum wages reduce demand for low-skilled labour, and young workers in particular. Contrary to living wage advocates, there is little evidence that “tax credits subsidise employers”. Further, upwards of 40 per cent of those earning between the NMW and living wage are in households in the top half of the income distribution (many are part-time second earners or young people). A living wage is an untargeted weapon for reducing poverty.
Rather than making rigorous economic arguments, Hilton and Silva use facile moralistic language to push their case. Two arguments in particular stick out as economically misguided. The first can be paraphrased as: “if my small firm can pay the living wage, so can major international companies”. Why? Because “a living wage is not just the fair thing to do, it’s good for business”.
Wrong. This is motivated reasoning. The claim that imposing a living wage is good for all businesses just doesn’t stack up. To believe that, you’d have to think that firms paying less than the living wage are being completely irrational. This seems less reasonable than assuming they make decisions acknowledging the competitive and cost realities of their companies and industries, for example in the retail and pub trades.
Certainly, individual companies can see beneficial results from paying more, perhaps by attracting better motivated workers compared to competitors or reducing turnover. But such benefits are not scalable to the level of the whole economy. If all employers are forced to pay a living wage, no employer gains a competitive advantage.
Hilton goes further and claims that the mere existence of high profits shows that many firms “can afford” to pay their workers more. Yet labour is a business cost – a reality that many find uncomfortable to acknowledge. It is no more economically interesting to assert that a firm making profits can “afford” to pay more than it is to say firms can “afford” to spend much more on expensive offices, extravagant awaydays, or executive jets.
Firms make hiring decisions, as economists say, “on the margin”. The decision to employ someone entails comparing individuals’ likely productivity and worth to the company against the cost of employing them. Raising the NMW to the living wage will mean that, for some current minimum wage workers with low levels of productivity, a business will now be making a loss on them, despite still being profitable overall. Even if existing employees keep their jobs and/or hours, there will be little motivation to replace them when they leave, let alone take on extra staff.
Not all businesses profit maximise at all times. Some even find it beneficial from a reputational perspective to increase wages. But using hand-picked examples and shallow moralising to urge enterprises to make decisions which worsen their short-term financial outcomes, and calling for the government to force them if necessary, is no basis for sound policy.
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