How to ensure a living wage or better without increasing prices

I sometimes wonder at the lack of imagination shown by many of our politicians on key issues, and the ensuing willingness to accept the status quo. Or perhaps it’s that they like the status quo or are afraid of the consequences of challenging it, and therefore ‘dumb down’ their imaginations. Either way, the consequences for ordinary people tend to be bad – and sometimes very bad.

So it is with the discussion on the ‘living wage’ – about which David Cameron said, in the run-up to the last General Election, that it was ‘an idea whose time has come’, and yet once in office he hypocritically decided it wasn’t workable. The living wage is currently estimated at £8.55 per hour for London and £7.45 elsewhere – substantially higher than the legal minimum wage for adults of £6.19.

The one real problem with the idea is that companies, if forced to pay a living wage (a wage sufficient to allow a decent standard of living without requiring state support, e.g. housing benefit), are likely to simply put up prices to maintain profits, creating inflation and cancelling the benefit of the improved income for the lowest earners.

But not creating a living minimum wage is not an acceptable option – UK taxpayers are currently subsidising private profits to the tune of around £20 billion in the form of working tax credits.

Of course, the underlying problem is one of excessive profit expectations by investors, who want to squeeze every last percentage-point of profit from every enterprise, enriching themselves at the expense of the vast majority. But there are ways to discourage that, if we’re just a little bit creative and bold enough to implement them.

Here’s a way to achieve a living wage – or better – without necessarily legislating one. It would also help to manage investor expectations downward to a realistic level and curb the scandal of ridiculous pay packets for top executives (who usually receive entrepreneurial rewards for managerial performance, as economics commentator John Plender put it). And it would do it with little if any impact on prices, while favouring small businesses. Here’s how:

Any government that wants to achieve the good of a decent living wage with minimal adverse consequences needs to pass a law putting corporation tax on a sliding scale based on the ratio of the chief executive’s salary to the lowest earner.

This would kill several birds with one stone. Investors would then have more to think about than just profits – they’d be a lot more interested in limiting executive salaries to reasonable levels and they’d have a vested interest in paying their lowest earners a better rate.

The differential in the tax rate would only need to be small (there are people far better-qualified than me to work out exactly what the minimum, maximum and intervening steps should be), and the reduction in tax take (if you calculated the sliding scale correctly) would be more than offset by the state’s savings in benefits to low earners who are now magically getting a living wage or better.

Ethical companies would find themselves more competitive, too, which would impede the urge of the greedy to push up prices to customers. Small businesses, if they were genuinely unable to afford to pay a better wage, would also be paying the owner-CEO a lower salary – leading to a low top-bottom wage differential and a lower tax rate. When the small business starts to thrive and the owner wants to increase his own salary, he also has to factor in a pay increase for his staff or else face a rise in tax – so small businesses could compete and survive without providing an excuse for the greedy to pay poorly, and could offer the current minimum wage (probably to employees who are the 2nd earners in a family and can afford to accept them).

The cry from the right will be that limiting wage differentials in this way will prevent companies attracting the ‘cream’ (usually sour, in my opinion!) of executives, but executive salaries have climbed constantly without any link to improved performance. And if those executives don’t want the jobs, guess what – someone else will, who’ll be just as competent, more concerned with the welfare of others and a lot less likely to be psychopathic. Similarly, if businesses don’t want to operate under conditions that will help achieve a decent society, others will see the opportunity their departure creates and come – or else real entrepreneurs will see the opportunity and form companies to fill the gap – and we’ll have a more balanced economy with a wider spread of wealth. It’s simple supply and demand – and it can work without exploiting and impoverishing people.

I think it’s a good solution – it may not be perfect but far better than we have now – and if there are better ones, great. They’ll be there to find if we just apply a little creativity, and have the courage of our convictions to do so.

This government’s narrative for all our problems is that there’s nothing we can do about the real issues in a globalised economy, and that we therefore have to try to solve problems created by the rich (although what they’ll actually say is they were created by Labour, which is simply untrue) by penalising the poor: capping benefits, reducing the number of people eligible for them, slashing wages. making pensions more expensive, making us work longer an so on.

That’s because their paymasters (they’re very fond of that word, the Tories – ‘union paymasters’ especially) are those who are very fond of the status quo and want to get even richer. And actually articulating, let alone addressing, the real issues would mean the Tories couldn’t continue their habitual demonisation of those they want to rob in favour of those who are already wealthy. And they wouldn’t want that, would they?

5 responses to “How to ensure a living wage or better without increasing prices

  1. The simplest and most straight forward way of implementing the living wage is to stop the low paid having to pay any tax. This is done by raising the income tax threshold to £12k which is what someone on the minimum wage earns if working full time. By magic, their take home pay would raise to within pennies of the living wage because they would not be paying tax and then getting the same money back as tax credits in a money-go-round. However progressives don’t seem to like this simple solution because it gives the middle income earners a small cut in tax and that is just not ‘fair’.

    The reason companies don’t pay people the living wage is because some jobs don’t add enough value to a company to demand it and the local job market does not push up the rates. A very unskilled job in a poor area of Britain might not demand a rate of £7/h, especially if there aren’t loads of other companies wanting similar unskilled people and willing to pay a little bit more to get them. Now there is nothing to stop a company paying above minimum wage even for an unskilled job if they want to and they can afford to, but forcing them to do so will always result in unforeseen consequences.

    The national minimum wage doesn’t work either. All that it does is stop a company from employing more people because jobs are a cost and they only have so much to pay their staff. It also stops them employing people on a low wage. Such people will typically be in a family environment where their salary tops up the family’s income. People who take such a low paid jobs would not necessarily be the sole earner, and if they are they can take on a multiple jobs.

    Oh, and another reason why the national minimum wage doesn’t work – it’s national, not regional. You acknowledge that a regional pay system must exist by accepting that a London weighting exists for the living wage. So why not go a bit more regional and acknowledge that someone in Manchester has a different cost of living to someone in the far north east.

    And stop bleating on about “executives”. 99% of the companies in this country are SMEs and they employ a large proportion too (60%). The owners of such companies typically are not on top wack wages. If they are anything like mine, they sometimes go without taking any money from the company to ensure that their staff get their salary first. There is no point in having staff leave as it will cost more to hire new ones.

    • I’d be all in favour of a tax threshold of £12k, but it doesn’t replace a decent wage.

      I’m sure there are plenty of small-company bosses who are not making a mint, but my proposal takes that into account – because of the very small top-bottom differential, they’d pay the lowest rate of corporate tax, which would help get them established.

      But there are plenty of SMEs whose owner-bosses make a fortune and have no qualms about it while paying peanuts to staff. I used to work at a company employing 60-odd people. I had done well for them and asked for a pay-rise. The owner said he couldn’t afford it – on the same day he decided to buy himself a new Ferrari for over £100k.

      Regional pay in a national organisation is a bad thing. Areas with lower average wages tend to rely heavily on public-sector employment, and reducing pay in, for example, the north-east would such dozens of £millions out of local economies that are already struggling desperately.

  2. And/or make it illegal for a company to distribute a dividend if they employ anyone who is paid below the living wage level. If you need a tax payer subsidy in the way of housing benefits etc for your employees do you really have a viable business?

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