The case for and against setting and enforcement of a living wage in the uK
In this economics essay I am going to analyse and discuss the impact of enforcing a living wage in the UK. “A living wage is a wage that is high enough to maintain a decent standard of living”. The enforcement of a living wage is very important and also a very controversial issue. This is an important issue because a living wage is needed so people can maintain a decent standard of living. This issue is also controversial because unlike the minimum wage which is set by the law, a living wage isn’t. Therefore the controversy is over whether a living wage should be enforced by employers when there is already a minimum wage.
Firstly, in this essay I am going to be talking about the minimum wage in the UK. “A minimum wage is the lowest hourly wage an employer is required to pay an employee”. This wage is also dependent on the age of the employees. The national minimum wage was first introduced by the labour government on the 1st of April 1999 with a rate of £3.60 which had to be paid to workers aged 22 and over. When this was announced many people were against this policy. One of many reasons against this policy was it was argued that a minimum wage would result in cost push inflation. This is because as firm’s costs would increase they would pass on this extra cost to the consumers. The current minimum wage for employees in the UK for adults (workers aged 21+) is £6.19. In 2010 the minimum wage for adults was £5.93. So as you can see the minimum wage from 2010 to 2012 has only risen by 4.3%. The living wage in the UK for 2012 is £7.45. As you can see from the figures above the living wage is higher than the minimum wage by £1.26. This is a huge difference between the two and therefore it can be seen why there is an argument to enforce a living wage in the UK.
There are many arguments for and against the living wage and in this paragraph I will discuss some of these points. Firstly, I will start by discussing the reasons why a living wage should be enforced in the UK. One of the reasons why I think a living wage should be enforced is so people would at least have the ability to buy the basic necessities of life such as food and better sanitation. The effect of this would be that people’s health would improve. The result of this for firms would be absenteeism from work would decrease and therefore firms would become more productive. Another reason why a living wage should be enforced is because it will increase the disposable income consumers have available to them. This would not only benefit the consumers but also the economy. This is because if people have more disposable income they would be more likely to spend more on goods and services therefore businesses would be likely to make more profits. With these profits businesses may invest more in technology to become more efficient and hence costs would be reduced, therefore becoming more internationally competitive which would benefit the economy. Also the firm could employ more workers. Either one of these options would stimulate growth and also could help reduce unemployment. An additional reason why a living wage should be introduced by employers is because of the positive impacts it would have not just on people but on the firm. “A study by the Greater London Authority into the benefits of a living wage found that more than 80% of employers believe that the living wage had enhanced the quality of the work of their staff, while absenteeism had fallen by approximately 25%”. These results show why a living wage should be enforced however, things are not as simple as this as I will discuss now. One of the most obvious reasons why a living wage shouldn’t or can’t be enforced in the UK is because simply firms cannot afford it. An additional argument with not introducing a living wage for employees is the opportunity cost. The main aim of this policy is to increase the incomes of the low-paid workers. These are the workers who generally have the unskilled jobs. The problem employers have is would they rather increase the wages of their low paid workers such as cleaners or use that money to invest in new machinery which would help the business become more efficient and therefore more competitive.
Now I am going to illustrate a standard market model of supply and demand and show how it may cause unemployment.
This diagram shows that at the equilibrium wage rate of W the quantity of labour demanded is at Q. After the introduction of NMW (Wx), it has resulted in an extension in the supply of labour but has also resulted in a contraction in the demand for labour resulting in a shortfall of labour shown from QS-QD. Even though more workers are willing to work at the new wage rate the demand for labour is way below supply resulting in unemployment. Also the degree of unemployment will depend on how elastic the demand and supply of labour is. If the demand and supply of labour is elastic which is the case in low paid jobs such as waitressing where many skills are not needed and workers can easily be replaced then the unemployment effect will be greater.
Now I am going to compare this model which I have drawn above to the efficiency wage hypothesis. The efficiency wage hypothesis is “A hypothesis that states a worker’s productivity is linked to the wage he or she receives”. A reason to explain this would be morale would increase. By paying a wage above market clearing wage, employees may feel that their employers care about them and therefore may motivate them. As a result workers would be willing to work harder for the firm and therefore productivity would rise. This theory in my opinion only applies to jobs which are highly skilled such as brain surgeons, doctors etc. This is because firms would be willing to pay a higher wage rate to those workers in occupations which are low in supply and where a business has invested a lot of money in training them. For the question which I am discussing, a living wage would be most likely for people who are in low skilled jobs and where workers can easily be replaced therefore, I don’t think the efficiency wage hypothesis would help an employer in deciding to give a living wage to its workers.
With regards to enforcing a living wage in the UK it could be argued that this would make firms inefficient. This is because it would raise costs and if the efficiency wage hypothesis doesn’t prove to be correct then costs would rise higher than productivity. On the other hand, it could be argued that a living wage would provide equity. This is where firms would be confronted with an ethical decision. The question would be that would they as a firm be willing to promote social justice and fairness?
In this paragraph I will consider the role of trade unions. The power of trade unions has decreased significantly over the past 25 years mainly because of government legislation. Trade unions main role is to promote the interests of their members, mainly in negotiating the pay and conditions of their members. Depending on the market structure trade unions would either have a positive or negative impact when trying to increase the wage of their members. In a market structure of perfect or monopolistic competition, if trade unions tried to force wages up it would result in unemployment as these firms only earn normal profits in the long run. However, in a monopsonistic labour market, union action could raise the wage rate without causing unemployment. I will show this in the diagram below:
This diagram shows that without union action the wage rate will be at W and quantity of labour will be at Q (where MRPL=MCL). After a union helps to push up the wage, the wage rate will be at W1. This will become the new MCL1. As a result of this the quantity of labour will also increase from Q-Q1. However, when employing more workers the firm would pay them the same flat rate as everybody else (MCL1).
In conclusion, the role of trade unions could be significant in helping to enforce a living wage in the UK. However, this would also depend on the type of market structure which the trade union is involved in and also the degree of government legislation affecting trade union power. As shown by a study by the Greater London authority, the figures show significant reasons why a living wage should be implemented. In reality as a living wage is an optional thing for employers to give to its workers it is not going to be implemented by majority of the firms in the UK. For this reason I personally feel the UK should scrap the minimum wage and pass a law which states that all firms have to pay their workers a living wage in order for social justice and fairness to be achieved. Finally, as explained in my essay above, a living wage would help stimulate growth and provide an overall positive effect on our economy.
Alison Doyle, Living wage definition, Minimum wage definition, Electronic source available from: http://jobsearch.about.com/od/salaryinformatio1/g/living-wage.htm
Unison fact sheet: the living wage, electronic source available from: http://www.unison.org.uk/file/Living%20Wage%20Factsheet%202012.pdf
Minimum wage figures from: http://www.lowpay.gov.uk/
Sloman K, Hinde D, Garratt D, (2010) Economics for business 5th edition, Prentice Hall, pg 375
Diagrams from: Grant S, Bamford C, Walton S, (2008) OCR Economics A2, Heinemann, pgs 81, 82
Sloman K, Hinde D, Garratt D, (2010) Economics for business 5th edition
Grant S, Bamford C, Walton S, (2008) OCR Economics A2, Heinemann
Bibliography: Sloman K, Hinde D, Garratt D, (2010) Economics for business 5th edition Grant S, Bamford C, Walton S, (2008) OCR Economics A2, Heinemann