Published on February 6th, 2014 |
by Vittorio Trevitt
Image © union-news.co.uk
Improving the minimum wage: the social and economic imperatives
The national minimum wage was one of the most innovative policy measures of the last Labour government, as it provided for the first time a wage floor under which no employees could fall. During its time in office, the minimum wage was credited with bringing about reductions in wage inequality, with almost 50% of the fall in the pay gap between low-paid and average workers attributed to its introduction. In addition, while the minimum wage directly increased the wages of only 5% of the workforce, its “spillover” effects have meant that the wages of up to 25% of the total workforce have also been improved.
Over the past few years, however, the effectiveness of the minimum wage as a tool for tackling poverty and inequality has been weakened as a result of the Coalition Government’s failure to consistently increase the minimum wage at or above the annual rate of inflation, with its real value having fallen back to the level reached back in 2004. Such a shocking development has taken place in the backdrop of a rise in the incidence of in-work poverty, with a recent poverty report finding that (for the first time) more working households live below the poverty line than workless and retired households; 6.7 million compared with 6.3 million. Such depressing findings serve as an indictment of the Coalition’s promise to “make work pay,” with many finding work to be no guarantee of a decent life.
Although the United Kingdom stands out as one of the richest countries in the world, low pay remains a scandalous reality for many people in Britain today, with 21.6% of full-time workers earning a low wage, according to one estimate. Increasing the minimum wage to a more adequate level, taking into account what the public regards as a good amount to live on, and index-linking it to inflation to maintain its purchasing power (as has long been the case in France), would go some way towards tackling this problem. In a speech made in September, Ed Milliband noted that the minimum wage would be 45p an hour higher than at present if it had kept up with the cost of living, further adding feasibility to the idea of such an innovative measure being adopted in the future.
A major solution for tackling the problem of low pay could be the extension of the Living Wage (an alternative basic wage higher than the minimum which businesses are encouraged to pay) to more companies as a means of not only reducing in-work poverty, but also increasing the propensity of lower-income households to spend as a result of higher earnings in the workplace. There is also an economic incentive for the government to encourage such a development, as paying more employees the Living Wage would save the Treasury more than £2bn a year by reducing welfare expenditure and increasing income tax receipts, partly as a result of fewer employees having to claim tax credits to top up their earnings. The extension of such a policy, therefore, is not only beneficial to the encouragement of what one may call “the real economy” (with increased wages stimulating consumer spending and economic activity), but is also one that would contribute to deficit reduction through increased tax receipts and lower welfare spending.
Studies on various countries have also found that paying workers higher basic wages has a positive impact on productivity growth. Available data on six major economics/economic blocs showed that there was a 0.38 % productivity rise for every 1% increase in wages. As noted in a study by Anthony Painter, higher pay levels encourage demand while also encouraging investment “in labour-saving and operations-improving technologies and techniques.” Providing a more adequate minimum wage is therefore not only socially just, but is economically beneficial.
It is immoral that many working people today continue to struggle living on low wages in one of the world’s wealthiest nations. There exist both social and economic reasons for improving the adequacy of the minimum wage and broadening the application of the Living Wage to tackle the scandalous reality of low pay in 21st Century Britain. The time for government ministers to act is now.
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