Since You Asked

Everyone can pay lip service to living wages

‘London’s “living wage” will rise by 25p to £8.55 an hour, Boris Johnson, the capital’s mayor said on Monday, as Labour was set to announce proposals to give businesses tax breaks for paying the wage.’

Financial Times, November 5

Living wage?

The minimum wage, £6.19 an hour for those 21 and over, is a legal obligation. The living wage, £8.55 an hour in London and £7.45 an hour elsewhere, is the result of a very successful publicity campaign and can count Ed Miliband and Boris Johnson among its advocates. There are no legal sanctions for paying less than the living wage, although Mr Miliband did announce plans to “name and shame” those companies who didn’t. Apparently that is helpful, because “name” rhymes with “shame”.

Why do campaigners say that you can’t live on the minimum wage?

Try living on £6.19 an hour and see how you get on.

For an economist you’re getting very high-minded all of a sudden.

I think it’s perfectly reasonable to point out that £6.19 an hour isn’t a lot of money. £8.55 an hour isn’t a lot of money, either, but a lot of people have to get by on less. Unfortunately we economists have to ask awkward questions – for instance, whether these campaigns are likely to help people without much income.

And are they?

There are two separate issues here. One is whether we should be relying on a public relations campaign instead of legislation. The second is what a good floor on wages might be.

Start with the PR.

Fine. Campaigns based on reputation have a singular advantage, which is that because compliance is voluntary, their costs are naturally kept in check. Companies value their reputations but not to the exclusion of everything else. An excessive minimum wage could put companies out of business; an excessive living wage will be ignored.

Sounds great.

It does, which is why so many politicians have paid lip service to the idea. It has something to appeal to everyone from the Marxists to the libertarians.

And it will save money for the Treasury – we’ll have to pay fewer tax credits.

The Treasury also profits when millionaires enjoy salary increases, so I am not sure why this is an interesting argument. Remember that tax credits were designed, in part, to address the following problem: some workers, perhaps because of childcare costs, need chunky wages to tempt them into the labour market, but they lack the skills to command those wages. Saying the living wage would save money on tax credits seems to just assume away that problem.

Fine. Are there any downsides to a reputation-based campaign?

It relies on companies having a reputation to protect. Not all of them do. You can boycott a restaurant chain or an airline if you don’t like what they do. Try boycotting a cement manufacturer and you’ll see that not everyone cares what you think.

But the campaign says that employers have recruited better staff by paying higher wages.

Obviously, but it’s absurd to conclude that the same thing would be true if the living wage was universally adopted. These employers reduced turnover because they offered better wages than their competitors, not because they reached some benchmark for living costs.

Perhaps we should just raise the legal minimum wage to the same level as the living wage.

Perhaps. Perhaps we should raise the legal minimum wage to a £100m an hour. I think if we did we’d find unemployment might rise. A minimum wage does two things. It will shift money from employers in an imperfectly competitive market to low-paid workers and it will induce some employers to sack workers, even if both employer and employee would prefer a deal struck at an illegally-low wage rate. There’s a case that for the good of low-paid workers, there should be no minimum wage at all. There should be one but it needs to be modest if it isn’t to cause too much unemployment.

Is there any evidence on the right level?

There’s lots, and it is mixed, but on balance it’s in favour of the idea that if you raise the cost of employing people, fewer people will be employed. It is worth bearing in mind that, for a lowly paid worker shifting from job to job, having less work available but at a high hourly rate, isn’t a bad deal. The concern has to be that certain types of people – especially young unskilled workers – will be shut out completely and denied the chance to learn on the job.

Also published at ft.com.