The Living Wage

Assess the case for and against the setting and enforcement of a living wage in the
United Kingdom.

The living wage is supposed to be set high enough to allow people to be able to afford the basic costs of living. The basic costs of living are defined by “an adequate level of warmth and shelter, a healthy palatable diet, social integration and avoidance of chronic stress for earners and their dependents.”[1] In many areas of the UK, minimum wage is not high enough to meet these standards especially in areas of London where costs of living are much higher than other areas of the country. The current minimum wage in the UK for people aged 21 and over is set at £6.19[2] whilst the current living wage rate in the UK is set at £7.45 and £8.55 in London[3]. The living wage is set at a higher rate than the minimum wage and set even higher in London as the basic costs of living in London are much higher. It is calculated according to the basic cost of living in the UK and so should make sure that people can afford the basic necessities and not be in poverty.
The living wage is a very important issue as the minimum wage is not set high enough for some people to maintain a normal standard of living. Many families earning the minimum wage are living in poverty as they can’t afford to pay the basic cost of living.
When the minimum wage was first introduced in 1999 it was set at £3.60 for workers aged 22 and over. It has increased every year since. In 2010 the minimum wage was set at £5.93 for workers aged 21 and over and currently sits at £6.19 for workers aged 21 and over. However the increases in the minimum wage will leave it lower than it was in 2004 in real terms when inflation is taken into account. When the national minimum wage increased to £6.19 in October it had increased by a lower percentage than inflation 3 years in a row leaving it 6% lower in real terms than it was in 2009[4].This shows that the minimum wage is not adequate enough to pay the basic cost of living. This also adds to the argument that the living wage is extremely important, as in real terms the minimum wage is becoming less sufficient as a policy to reduce poverty.
There are important arguments for and against the living wage. The living wage will provide higher wages for workers if employers decide to pay it. Independent studies have shown that the living wage has caused an increase in the quality of the work of staff and also a fall in absenteeism. Also, firms that have opted in to pay the living wage felt a positive reception from customers who are aware of the organisations commitment to be ethical employers[5]. The living wage also provides households with a higher income, this provides families who work more than one job and spend little time together the chance to work less, see an increase in their standards of living and spend more time together. The living wage should help households to afford the basic cost of living, leading to a decline in poverty, better standards of living and many other benefits both in the short term and the long term. However there are no exact figures to show much more productive the workers are. If workers are more productive because of the living wage that isn’t to say that the workers are being productive enough to cover the extra cost caused by the living wage.
A living wage however means any firms who adopt the living wage will see an increase in costs of production to the increase in wages. For many larger firms this may not be as much of a problem but it may be difficult for small firms or firms just entering the market to afford the living wage. Customers may then choose not to shop there and take their custom elsewhere because of the social and ethical factors behind the living wage. Also because of the increase in wages, firms may have to increase prices to cover the rise in costs. This can lead to cost-push inflation. The living wage can also lead to a fall in employment. Many firms would not be able to afford to increase the wages of all their staff from their current wage to the living wage and so may have to reduce the number of workers they employ. On top of this due to an increase in wages and costs of production, there may be a fall in demand for new workers also adding to the rise in unemployment. Illustrated by the following diagram.

Wage Rate (W)
Quantity of Labour
Supply
Demand
W1
Q1
W2
Q3
Q2

The diagram shows that when a minimum wage is set, the wage rate increase from W1 to W2. This causes two things to happen. The demand for labour decreases from Q1 to Q2 because firms may be unwilling to pay, or unable to afford the higher wage rate. At the same time, the supply of labour increases from Q1 to Q3 as the higher wage rate works as an incentive to workers making those who were unwilling to work for the lower wage rate more willing and those who may have worked elsewhere to move to the job offering the newly increased wage rate. The extent of the fall in demand and thus the fall in employment depends on a few factors. One being the difference between the wage rate previously paid, and the minimum wage to be paid. If a firm already pays relatively higher prices to other firms, there would be less of a problem further increasing the wage rate to meet that of the minimum wage, and fewer consequences would arise. Also the elasticity of demand in relation to the wage rate also plays a large part of the effect on employment levels.

Wage Rate (W)
Quantity of Labour
Supply
Demand
W1
Q1
W2
Q3
Q2

In this diagram the demand for labour in more inelastic than in the previous and this has decreased the extent of the change in demand for labour following an increase in the wage rate because of the implementation of a minimum wage. If the elasticity of labour demand is perfectly inelastic, there will not be an increase in unemployment as the firm would pay any wage to keep the certain labour employed. As the elasticity of labour demand becomes more elastic, smaller increases in the wage rate will produce greater effects on the level of unemployment causing it to increase by a proportionately larger amount. Contrasting to the standard model is the efficiency wage hypothesis. This hypothesis states that the productivity of workers rises as the wage rate rises[6].The hypothesis provides a different explanation for how wages are determined other than the standard model. There are benefits to firms paying a wage higher than the market-clearing wage. In many cases the benefits of the boost in productivity caused by a higher wage outweigh the costs to the firm of paying the higher wage. Because of this many firms set employees wages at a higher rate than the market-clearing wage and so the living wage may not have as greater effect. There are many similarities between the arguments for and against the minimum wage and the living wage. Both policies are very similar and the consequences that arise due to these policies are also similar. Both policies are set in place to try to increase the wages of those working in unskilled low paid employment. Both the living wage and the minimum wage have issues associated with them as some negative consequences are caused by the implementation of these policies. Both are found to cause market failure in the form of unemployment. Due to the fact that the living wage and the minimum wage both push the wage level up artificially about the market-clearing wage, they are both causes of unemployment. There are differences however as the living wage is not enforced by the government but is a decision every firm has the choice of making. If a firm opts in they receive accreditation and a licence to use the living wage employer mark. This may reduce the chances of the living wage having severe consequences in the form of a large fall in employment as it is not compulsory for all firms to pay. Therefore in many instances only the firms that can afford to pay the living wage will opt in, consequently having the option to increase wages without increasing prices or reducing the number of workers they employ. This way, cost push inflation and a rise in unemployment may be avoided. The living wage is obviously beneficial to workers and firms as workers will earn more money and firms should see a rise in productivity. An increase in the wage rate would be an incentive to workers to work harder, possibly increasing productivity and morale of staff. This would increase the output of the firm and possibly cover the increased costs of production cause by increasing the wage rate. Following an increase in wage rates comes a fall in shirking due to workers feeling more appreciated by employees and so workers tend to work harder. One of the main benefits of the living wage is to decrease poverty in the UK as many families are still suffering even with the minimum wage in place. The living wage could help to lift people out of poverty and help them to be able to afford the basic cost of living. The living wage may be more beneficial if it is left down to choice by firms. The idea of enforcing the living wage so that all firms have to comply seems like the wrong way to go about is it would lead to more unemployment and inflation than is necessary. If it is left down to the firm to decide whether or not they can reasonably afford the higher costs of production and not be forced to reduce the quantity of staff they employ then that seems like a more beneficially route to take. However problems may arise with enforcing the living wage. Workers who are currently earning wages similar to that of the living wage may feel disadvantaged and feel a disincentive to work harder at their job when they could move to an easier job and fall back on the living wage. Enforcing the living wage can lead to an increase in unemployment and cost push inflation, both of which are bad for the economy. There is not much point in trying to increase the wage rate for workers if it means that other workers may be forced out of a job and have to seek other ways of earning money in the form of benefits such as job seekers allowance. This will put more strain on the economy being very costly to the government. If the living wage is enforced it doesn’t guarantee that workers productivity will rise. Workers whose wages increase may see it as an opportunity to earn more for putting in the same quantity and quality of work as they previously did. This will lead to firms losing money and being forced to increase prices leading to cost push inflation. Consequently, the living wage acting as a charity will still bring about beneficial consequences but if it is enforced by government legislation, the costs may outweigh the benefits as it will no longer be optional and will bring about negative externalities previously explained.

1. Definition of ‘basic cost of living.’ Available: http://blog.practicalethics.ox.ac.uk/2012/11/a-living-wage/. Last accessed 15th Feb 2013. 2. National minimum wage data. Available: https://www.gov.uk/national-minimum-wage-rates. Last Accessed 15th Feb 2013 3. Living wage rate data. Available: http://www.livingwage.org.uk/home. Last accessed 15th Feb 2013 4. Information on real value of minimum wage. Available: http://www2.lse.ac.uk/newsAndMedia/news/archives/2012/04/Minimum-Wage-Press-Release.pdf. Last accessed 16th Feb 2013 5. Information on the living wage independent study. Available: http://www.livingwage.org.uk/about-living-wage. Last accessed 17th Feb 2013 6. John Sloman (2012). Economics, 8th Edition. Essex. Pearson Education Ltd. Page 266. Accessed 18th Feb 2013.