Is a Compulsory “Real” Living Wage Really a Good Idea?

British political attitudes to compulsory minimum wages have undergone an astounding transformation.

A generation ago, any sort of minimum was viewed with suspicion not just by free-market economists but also by many in the labour movement. The former argued that unaffordable wages would cost jobs. The latter knew that negotiation through collective bargaining had a better track record in improving pay for groups of workers than relying on public bodies to set minimum rates. Some trade unionists also feared a narrowing of differentials in a “levelling down”.

But by 1999, when the National Minimum Wage (NMW) was introduced by the Labour government, the decline of unions and collective bargaining made this a valuable win. The Tories still vigorously opposed it, and arguments that it would cost jobs caused it to be set at a very cautious, low level, policed for any sign of economic unsoundness by the Low Pay Commission.

Seventeen years on, and politicians are involved in an unexpected bidding war. First, Ed Miliband’s Labour Party started to make a big increase in the NMW, to £8 by 2020, a key plank of the 2015 election. A few months later, George Osborne stole Labour’s clothes by promising £9 and calling it the National Living Wage, even though it was not calculated in relation to living costs like the real, accredited voluntary living wage. Now John McDonnell is trying to steal them back by promising a compulsory “real living wage” of at least £10, again by 2020.

So what is going on? One reason that these wages promises seem so attractive to politicians in a time of austerity is that they can make people better off without obviously requiring extra public money (although how to fund additional taxpayer costs when care workers are paid properly remains an unanswered question). Crucially, the Low Pay Commission has found that so far, raising the Minimum Wage has not cost jobs as the economists predicted. There’s a wealth of evidence from the US to confirm this.

But hang on a second. Just because cautiously set minimum wages have been affordable so far, this doesn’t mean there’s scope for unlimited increases without some negative impacts.

The calculation of a living wage, based on our research at Loughborough, helps both to put the national minimum in context and to show employers who can afford to what is an adequate benchmark. But making such a minimum compulsory, with no reference to the Low Pay Commission’s assessment of labour market impacts, could be seriously risky.

Imagine that a government went doggedly ahead with such a policy, drawing on moral arguments and ignoring any economic evidence. At some point, major layoffs by businesses citing excessive wage costs may ensue. Eventually, the link with living wages would then be modified or abandoned by the government, and the reputational damage to setting wage floors would affect such policies for years to come.

It may seem slightly perverse that I am therefore cautioning against recklessly imposing a standard that is the product of my own research about what people need to live on. But I would argue that there are two ways in which you can start to integrate the concepts of minimum wage and living wage that is not reckless.

The first is to integrate the aim of moving to a “real living wage” into policy, while retaining an emergency brake if job losses do result. This would involve retaining the Low Pay Commission and its focus on labour market effects of the NMW, but requiring it to move in steps towards the living wage unless clear evidence of harm was emerging.

The second way this could all be made more feasible is by committing to set policies for living wages and tax credits in a joined-up way. The living wage is set to be enough to cover minimum living costs once any top-ups such as tax credits are taken into account. In a scenario where living wages are too high for the market to bear, more generous family benefits of this kind would help bring its level down. This involves working out a fair division between the state and employers in assuring family living standards.

John McDonnell is therefore right that we can think of the role of the state in living standards in a new way. The important point in doing so is to devise a sustainable strategy of combining wages with other incomes to ensure that workers have a decent living, and to be cautious of rash promises that will be hard to keep.

PROFESSOR DONALD HIRSCH IS DIRECTOR OF THE CENTRE FOR RESEARCH IN SOCIAL POLICY AT LOUGHBOROUGH UNIVERSITY. HIS BOOK, THE LIVING WAGE, WRITTEN WITH LAURA VALADEZ-MARTINEZ, WILL BE PUBLISHED BY AGENDA IN APRIL 2017.