In Defence of Liberty

Driven by data; ridden with liberty.

On the Living Wage

What's in a name? (Edited: British Cleaning Council)

What’s in a name? (Edited: British Cleaning Council)

A surprise component of the first Conservative Budget since 1996 was a raise in the national minimum wage [1]. Delivering his seventh Budget [2], Chancellor George Osborne said:

Because let me be clear: Britain deserves a pay rise and Britian is getting a pay rise.

I am today introducing a new National Living Wage. We’ve set it to reach £9 an hour by 2020. The new National Living Wage will be compulsory.

Working people aged 25 and over will receive it. It will start next April, at the rate of £7.20.

The Low Pay Commission will recommend future rises that achieve the Government’s objective of reaching 60% of median earnings by 2020.

It is estimated [3] that, by 2020, this higher minimum wage for over-25s will be £9 an hour.

A higher minimum wage was a surprising part of the Chancellor's Summer Budget. (Source: BBC)

A higher minimum wage was a surprising part of the Chancellor’s Summer Budget. (Source: BBC)

Calculations

Campaigners for the ‘living wage’ highlight that millions of people in Britain are paid below what they determine is the acceptable wage to pay for basic living costs for a person working 37.5 hours each week, given the nation’s current tax and benefit policies.

For the living wage outside of London [4], the Centre for Research in Social Policy at Loughborough University calculate the supposed minimum income standard for nine household types, based upon costs of renting, childcare and council taxes. These nine minimum hourly incomes are then weighted according to the prevalence of each household type, providing the single ‘living wage’ figure.

This research is funded by the Joseph Rowntree Foundation. A similar methodology is used for the London figure, calculated by the Greater London Authority.

The Chancellor’s proposal is not, by definition, a living wage: the level is determined relative to median incomes, rather than reflective of living costs.

Price Floors

Despite its laudable intentions, the living wage is a flawed idea.

Price floors reduce the quantity of the good demanded, leading to a surplus. This surplus is a price phenomenon, and does not mean there is an excess of a product relative to its purchasers. The buyers simply do not have enough money to purchase every unit of the product available at the artificially high price [5].

Campaigners for the living wage wish to believe that human labour — unlike Venezuelan toilet paper or American petrol —can be set according to desires for cosmic justice without deleterious consequences, rather than the supply and demand of market exchange.

The existence of the Low Pay Commission [6] is reflective of that trade-off between minimum wages and unemployment. A meta-analysis [7] by David Neumark and William Wascher stated:

Firstly, we see very few — if any — studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.

An economics paper by Jonathan Meer and Jeremy West [8] found, looking at the United States:

Using three separate state panels of administrative employment data, we find that the minimum wage reduces job growth over a period of several years.

Gross and Net

It is rarely elaborated how government policy can affect the living wage calculation.

As defined by the Living Wage Foundation, it is the gross amount a person must earn to receive an acceptable net income.

Hypothetically, if the government ceased to tax the incomes (through either income tax or national insurance contributions) earning the present minimum wage, the minimum wage and the living wage would nearly align [9].

Also, reducing tax credits — an in-work welfare benefit — will increase the living wage.

Moreover, the minimum wage itself can have an effect on living costs. In a working paper for the Centre for Economic Performance [10], Jonathan Wadsworth found:

However over the longer term, prices in several minimum wage sectors — notably take-away foods, canteen meals, hotel services and domestic services — do appear to have risen significantly faster than prices of non-minimum wage sectors. These effects were particularly significant in the four years immediately after the introduction of the minimum wage.

Government policies can also influence living costs in a broader context, such as facilitating competitive markets for important goods and services.

Moral Duty

Fundamentally, the living wage rests upon the idea that employers have a moral duty to provide their employees with enough money to live on, regardless of state taxes and subventions.

Whilst we would all like to see higher wages, raising the statutory minimum wage means affecting the calculated risk that employers take with younger employees, or those returning to the workforce with degraded skills, and encourages automation.

Furthermore, the living wage is a single figure: it is paid to individuals, but people live in households.

If the primary earner’s income is sufficiently high, then secondary workers in a household have a living wage of zero: two people living together can support each other, teenagers can live comfortably off their parents.

The spread of unpaid internships suggests that young people desire experience and expertise in their chosen professions, even whilst foregoing pay [11].

By its own definition, the living wage is a meaningless number for part-time workers, and the determined needs of larger households are still unmet.

The current unemployment rate is historically low. (Source: ONS)

The current unemployment rate is historically low. (Source: ONS)

Chancellor George Osborne’s Summer Budget was politically sanguine.

Given low unemployment, the disemployment effects of heightening the minimum wage are likely to be drowned by confounding factors. The living wage has become a moral crusade, and the Chancellor mimicking its language demonstrates the campaign’s political success.

References

[1] BBC, 2015. Budget 2015: Osborne offers country ‘new contract’. Available from: http://www.bbc.co.uk/news/uk-politics-33456160 [Accessed: 12th July 2015]

[2] Osborne, G., 2015. Chancellor’s George Osborne’s Summer Budget 2015 Speech. GOV.UK. Available from: https://www.gov.uk/government/speeches/chancellor-george-osbornes-summer-budget-2015-speech [Accessed: 12th July 2015]

[3] Stewart, H., 2015. Has George Osborne really introduced a living wage? Guardian. Available from: http://www.theguardian.com/society/reality-check/2015/jul/08/george-osborne-budget-national-living-wage [Accessed: 12th July 2015]

[4] LWF, 2014. Calcuation. Available from: http://www.livingwage.org.uk/calculation [Accessed: 12th July 2015]

[5] Sowell, T., 2011. Basic Economics. 4th Edition. New York: Basic Books. Available from: http://samples.sainsburysebooks.co.uk/9780465022311_sample_269511.pdf [Accessed: 12th July 2015]

[6] Low Pay Commission, 2015. About us. GOV.UK. Available from: https://www.gov.uk/government/organisations/low-pay-commission/about [Accessed: 12th July 2015]

[7] Neumark, D., and Wascher, W., 2006. Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research. NBER. Available from: http://www.nber.org/papers/w12663.pdf [Accessed: 12th July 2015]

[8] Meer, J., and West, J., 2013. Effects on the Minimum Wage on Employment Dynamics. NBER. Available from: http://www.nber.org/papers/w19262 [Accessed: 12th July 2015]

[9] Worstall, T., 2012. Stop taxing the poor so much. Telegraph. Available from: http://blogs.telegraph.co.uk/finance/timworstall/100018511/stop-taxing-the-poor-so-much/ [Accessed: 12th July 2015]

[10] Wadsworth, J., 2009. Did the National Minimum Wage Affect UK Prices? CEP. Available from: http://cep.lse.ac.uk/pubs/download/dp0947.pdf [Accessed: 12th July 2015]

[11] Target Jobs, 2015. Unpaid internships: are they worth it? Available from: https://targetjobs.co.uk/internships/275017-unpaid-internships-are-they-worth-it [Accessed: 12th July 2015]

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This entry was posted on July 13, 2015 by in Economics and tagged , , , .
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