Critics of the living wage must stop exaggerating, as research shows the cost to employers could be minimal.
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Larissa Hansford is a campaigns assistant for One Society
Critics of the living wage must stop exaggerating, as research shows 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).
• Hotel group leads the way in granting London living wage to hospitality staff 23 May 2012
• Will consumers support Living Wage products and services? 10 May 2012
• To end inequality without redistribution of wealth, we should pay a living wage 8 Dec 2011
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.”
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41 Responses to “Why not pay the living wage? The cost to employers could be minimal”
Anonymous
Completely untrue propaganda – It’s housing, followed by food. Utility bills are also starting to crowd out tax.
You’re quite happy to raise housing, food and utility costs, of course.
JC
Tax credits are a very expensive bureaucratic way of making the poor dependent on more government. They are in my experience a nightmare when your income fluctuates (probably just the way they were implemented), and almost impossible to get out of.
I wouldn’t like you to consider me a scrounger if I paid no tax, but I don’t see the point of a minimum wage unless it is also the point at which taxation starts.
Blarg1987
Youv’e misrad my post, profits do matter ina company, however the mentality of large comapnies now is make a saving so the CEO can have a bonus at the cost of the long term viability of the company.
Employment taxes cover costs such as health care, use of public services such as roads infastructure etc.
I think you are wrong about the biggest cost to minimum wage earners is taxation asmost are being taken out of tax through the raising of the tax threshold, which I agree is a good idea.
The trouble is that we have trickle down economy which does nott work, it is better to give a thousand people at the bototm of society a thusand oiund pay rise then a person at the top a million poiund pay rise as that would generate more employement and economic prosperity locally then the other way around.
patrick
Why do you hate people who run businesses so much? According to you, everyone who runs a business is ‘evil’ and ‘greedy’ or one of the ‘1%’ dedicated to stealing the wealth of honest, hard-working people by exploiting them. It really is the most simplistic, juvenile view of the world. Do you actually know anyone who runs their own business? Might I suggest instead of thinking of businessmen as these homogenous, Dickensian characters with suitcases stuffed full of money or City whiz kids plundering the nation’s wealth you actually get to know some people in your local community who run businesses, and speak to them about how they got started, and the challenges they face.
You will find that they are ordinary human beings often struggling to make ends meet like everyone else. Most startups fail within two years. 80% are gone within 5 years. By fail, I mean, they go bust, they lose all the money and time they’ve invested. And of those that survive, most of them provide the proprietor with little more than an average wage. They’re not coining it in on the back of cheap labour. I know this because I used to work as auditor for small businesses.
I know you have this black-and-white view of the world of ‘evil business owner vs noble worker’ but that isn’t the reality. The small business owners I know are just as motivated to provide jobs and wealth for the community as they are to create wealth for themselves. It’s probably because you work in the public sector that it’s easy for you to demonise a group of people because you never come into contact with them and don’t understand what it is they do. I’m genuinely interested: how many business people do you know?
Anonymous
I don’t disagree, but the fact is that the Government are out to harshly punish non-taxpayers.