Whilst the public perception of headline grabbing announcements regarding the level of the “living wage” is generally good, is it in fact as beneficial to the working populace as it at first seems?
According to research carried out by the Federation of Small Businesses, Small businesses are struggling to pay staff the new national living wage, with many taking a hit to profits to meet obligations.
After the introduction in April of a compulsory minimum wage for over-25s, of £7.20 an hour, the Federation of Small Businesses said that nearly half its members cited higher salaries as their biggest cost increase one in five saying that labour costs had risen “significantly” as a result of the policy. The lobby group warned that some had either reduced prices or cut investment plans “in order to stay afloat”, the majority reporting that they had absorbed the expense through reduced profitability. Apparently worst areas affected were the retail, wholesale, hospitality and accommodation industries.
The Low Pay Commission will no doubt recommended further increases, with a target of reaching 60 per cent of median incomes by 2020 and according to official forecasts, the living wage is projected to rise by £1.85 an hour over the next four years.
The government has told the Low Pay Commission that its objective is to have a national living wage of over £9 by 2020. The government wants wages to rise as it attempts to move away from a “low-wage, high-tax, high-welfare society”. It hopes that the move will encourage greater productivity. Question is, will it?
Many experts think not and for a number of reasons.
Most significant is who is the real winner arising from this policy? On the face of it, it is the government. Higher wages mean increased taxes.
It is certainly not the employer, they simply have added costs, reduced profits and arguably a diminished workforce. The real cost to an employer of a living wage increasing by £1.85 per hour is £2.11p per hour due to the increased employers NI which attaches to the increase. That is a significant cost and one which could well deter an employer from carrying a surplus in terms of staff. Thus the job market reduces.
Does the employee gain? Questionably that is marginal as the overall impact of the government policy must be to put up prices; it certainly puts up tax and NI. The poor old employee therefore is being giving it with one hand and having it taken back with the other by way of increased tax or prices for goods.
Does the government gain? They are certainly the biggest winner except that, if the labour force paying tax and NI is reduced, the cost of benefits increases. Unfortunately, small businesses ceasing to exist because of such arguably ill-advised policy, reduces their income yet further.
The overall answer is that there are probably some individual winners but generally, whilst improving living standards should be a laudable aim of any government, doing it by dictat rather than economic progress is not the way to go. Putting up costs here increases our prices in overseas markets and therefore what we sell overseas thus reducing our income into the UK.
The simple fact is that levels of wages should be set by economic forces and not by government policy which is what has happened. Far better for people to be in employment at a wage dictated on economic grounds than they be out of work or unemployable because of a government policy dictating that a job economically worth, say £5.00 per hour must be paid for at the rate of £9.00 per hour, the latter figure being the projected hourly living wage by 2020.
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