Living Wage UK

Readers Question: I have a question: what are the pros and cons of setting and enforcing a living wage in the uk?

A living wage is an hourly wage rate considered the minimum level to provide the basic essentials of modern living.

A living wage takes into account average expenses a household is likely to face. Therefore, in a city like London, the living wage is likely to be higher than the north. This is because in London living costs tend to be higher due to higher rents and transport costs.

  • In London, there is currently a voluntary ‘living wage’ set at £8.30 (set by GLA)
  • Outside of London, the living wage is set at £7.20
  • Living Wage Campaign

Low Pay Threshold

A similar concept is the low pay threshold. The low pay threshold is set by the Joseph Rowntree Foundation – A Minimum Standard for the UK in 2010. It is £6.75 an hour for a single person in 2010. (living wage)

Minimum Wage

The Minimum wage is a legal level that firms must pay. The current minimum wage rates are:

  • Workers aged 21 and over – £6.08
  • the 18-20 rate –  £4.98
  • the 16-17  –  £3.68
  • Apprentice rate, – £2.60.
  • See: minimum wage rates

Should Living Wage Rate be Compulsory?

Enforcing the living wage rate, would effectively be increasing the minimum wage rate from £6.08 to £8.30. This would have a profound effect on both income of low paid workers. It would also significantly increase the costs for business, potentially leading to unemployment.

Arguments For Enforcing a Living Wage

  • Helps to reduce inequality in society
  • Firms can afford higher wage rates for lowest paid workers by reducing wage rates of top paid workers.
  • Higher pay can help to increase labour productivity, motivation and reduce labour turnover rates. Guy Stallard, head of  Management at KPMG Europe,(who voluntarily use living wage rate) said: “We have found that paying the living wage has benefits on both sides, as increasing wages has reduced staff turnover and absenteeism, whilst productivity and professionalism has subsequently increased.”
  • Firms have a degree of monopsony power in employing workers. This enables them to pay wages lower than marginal revenue product (see: monopsony theory)

Arguments Against Enforcing a Living Wage

  • Minimum wage rate is already quite high £6.08. There is a danger setting a minimum wage rate significantly higher could cause unemployment. Although some firms like KPMG and Tesco might be able to afford higher wages, other firms like hairdressers, and cafes may find a 20% increase in wages could be difference between survival and bankruptcy in current recession. See: Problems of minimum wages
  • Greater campaign to encourage voluntary uptake may be a better alternative. Firms who pay higher wages may benefit from improved public relations and better labour productivity.

Conclusion

There is a strong case for a regional minimum wage in London. Higher living costs mean the national minimum wage rate is less effective than in other parts of the country.

The living wage campaign has many benefits for highlighting how many low paid workers struggle to make ends meet. It is also interesting to see positive feedback from firms who have voluntarily implemented living wage. For banking firms who have been in headlines for excess bonuses, a living wage pledge would help to make company more aware of wage inequality issues.

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