The living wage
Sense and nonsense about minimum wages
What unites Ed Miliband, the Labour leader; Boris Johnson, London’s Tory mayor; and Barclays Bank? All are keen on the “living wage”, the hourly rate needed to pay for the items people reckon they need for an acceptable standard of living. On November 5th researchers paid by the Joseph Rowntree Foundation uprated it to 7.45 pounds ($11.90). A separate calculation by GLA Economics, a research unit that advises Mr Johnson’s government, put the living wage in London at ￡8.55. Mr Miliband suggests naming and shaming those who pay less. Business folk warn darkly about the cost in lost jobs. Who is right?
A mandatory national minimum adult hourly wage of 3.60 pounds was introduced in April 1999, and has been regularly uprated since. In October it rose to 6.19 pounds. The wage floor seems not to have cost jobs. A 2010 paper by researchers at the Centre for Economic Performance at the London School of Economics found the long-run effect was either negligible or positive (ie, jobs increased). That finding is echoed in studies of minimum wages in America.
Such results might seem puzzling. If the price of something is forced upwards, demand for it should fall. Why might this not be the case for low-paid workers? The answer is that firms find other ways to absorb higher wage costs. The simplest is to raise prices. Fast-food restaurants in New Jersey did so when the state’s minimum wage was raised in 1992, according to a landmark study by David Card and Alan Krueger of Princeton University. Firms may also skimp on non-wage benefits, trim the number of hours worked by low-paid staff, or cut other costs. Even the best-run firms can find savings when pushed.
They may even find benefits. Turnover of low-paid staff often falls in places where minimum wages go up, reducing hiring costs. Higher wages might also make workers more productive. The theory of “efficiency wages” says that well-paying firms can induce staff to work harder by improving morale or by making it costlier for them to risk being sacked. The well-heeled firms that have signed up to the living wage report a better standard of work. Bosses in less cosy workplaces know this, too. A study of prostitution in Chicago found that pimps paid above-market wages to retain the best street workers.
These are comforting arguments for those who think firms should be cajoled into paying the living wage. They apply only up to a point. Efficiency-wage theory was devised to explain high unemployment. Wage floors in America are low by European standards. Britain’s minimum wage is carefully set to avoid demolishing jobs. When it was introduced it affected fewer than 2 million workers. But the national living wage is 20% higher, the London rate almost 40% higher. If applied to all those currently in work, they would raise the pay of around 5m employees. It is hard to believe that would have no effect on jobs.
Indeed, large cuts in real wages help explain why the jobs market has hummed along in an otherwise sluggish economy. Employment growth has been stronger in low-paid industries—in shops, hotels, bars, office services and so on—than in higher-paid work. The law firms, banks and accountants who have embraced the living wage can afford it, as they employ few low-paid workers.
A living wage implies a wage level that keeps up with prices, at least in part. But British workers have had to settle for a lower standard of living in recent years, because of a weaker pound, the rising cost of oil across the world and higher taxes. As a result, surprisingly few have lost their jobs. Brits, it seems, much prefer the hardship of low wages to the misery of no wages.