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Charles Orton-Jones: Arguments against the Living Wage

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Our editor at large asks: is the GLA’s quest for a London Living Wage necessarily a sound business investment?

Small firms might be struggling to pay their wage bill but that hasn’t stopped our esteemed mayor backing a call for a massive hike in the minimum wage.

Boris has endorsed a report by the Greater London Authority’s Economics Unit demanding £8.30 be the new “Living Wage”.

This is well above the £5.93 national minimum wage.

Boris says in the introduction to the report: “Paying the London Living Wage is not only morally right – with the potential to massively reduce child poverty in London – but also it makes good business sense. What may appear to a company to be an unaffordable cost in a highly competitive market is more appropriately viewed as a sound investment decision. I believe that paying decent wages reduces staff turnover and produces a more motivated and productive workforce.”

He can cite significant support. In addition to the usual cadre of trades unions and lefty newspapers, there is a long list of firms that have agreed to use the Living Wage as a minimum fee per hour.

These include UBS, JP Morgan, Goldman Sachs, L’Oréal, Linklaters, Slaughter and May, Norton Rose, Eversheds, KPMG, Freshfields and Accenture.

And opposed?

A wall of silence.

So let me brave the wrath of the mob by voicing concern at this new rate.

Let’s start by examining how the GLA arrived at £8.30.

Two approaches to calculating a Living Wage are considered in this report. The first, developed by the Family Budget Unit (FBU), estimates the costs of a ‘Low Cost but Acceptable’ (LCA) budget for a selection of households and calculates the wage required to meet these costs. This is termed the “Basic Living Costs” approach. The second – the “Income Distribution” approach – takes the figure as 60 per cent of the median income for London.

In London the Basic Living Costs approach gives a figure of £6.85 per hour and the Income Distribution approach gives a figure of £7.65 per hour.

The average of these two figures gives us the “poverty threshold wage”. Hence the poverty threshold wage used in this report is £7.25 per hour (when rounded to the nearest five pence).

To protect against unforeseen events a margin of 15 per cent is added to the (unrounded) poverty threshold wage. This gives a figure of £8.30 per hour (when rounded to the nearest five pence) as a Living Wage for London.

 

Already it looks pretty arbitrary. An extra 15 per cent has been bunged on top of the average of two other living wage measurements “to protect against unforeseen events”.

This is generous. Why 15 per cent? Why not 20 per cent. Or 40 per cent? Since the money won’t come out of the pockets of the reports’ authors, why are they so parsimonious?

And there’s the utterly nonsensical idea that increasing the wage for the same job could improve productivity. Mathematically it must reduce productivity.

We can cavil at the notion of “child poverty”. After all, children don’t go to work. They have no wage income. It illegal for them to earn a wage. And the methods used to determine child poverty are absurd. In London, child poverty is defined as “children living in households below 60 per cent of contemporary median equivalised household income”.

This has led to claims that four in 10 children live in poverty in London – something that would astound children in Lagos.

Just look at the amount on offer. The wage of £8.30 is exclusive of benefits, which will add an extra £2.10. So a worker paid the Living Wage doing 40 hours a week for 50 weeks a year will be grossing £20,800.

That’s a hell of a salary for no-qualifications manual labour. It’s more than a newly promoted lance corporal in the Army.

These, however, are technical quibbles. The biggest reason to reflect on the Living Wage is Boris’ claim that it is a “sound business investment”.

Says who? Surely not the man who said: “We used to compete on tax and on labour market flexibility, and the danger at the moment is that we are losing our edge on both.” And “the great yammering constituency that demands ever more state regulation, protection and control” (© Boris Johnson 2007 & 2011).

Small firms may like to point out to him that wages are a cost, not a benefit, to firms. If paying higher wages always produced a return on investment then why stop at £8.30? Why not a tenner an hour?

The answer is that wages must reflect productivity. With the Living Wage any worker producing output worth £8.30 or less immediately becomes unemployable. Firms which can only make a profit using labour paid less than the Living Wage will go bust. Many cafes, social clubs and cleaning contractors fall into this category.

The worst thing of all is that these small firms will now have to compete with the over-generous packages funded by the taxpayer. All GLA employees and contractors will receive the Living Wage, contracts permitting. At a time when lowest-paid workers in the public sector are paid 27 per cent more than their counterparts in the private sector, the private sector workers who pay the salaries of public sector workers via tax may reflect on the justice of this.

The Living Wage has many virtues. I am not arguing that it is a bad thing. For firms such as KPMG or Goldman Sachs it is a moral act to pay cleaners a little more. They can afford it.

But many London businesses cannot. To pay it will slash their profit levels, damage their ability to grow and threaten their viability. If the GLA refuses to deal with firms that don’t pay the Living Wage, then the consequences could be profound.

We could see an end to “bottom-rung” businesses that offer immigrants their first chance at earning a wage.

It’s just a shame that with an election in 2012 to fight, Boris won’t discuss this.

Charles Orton-Jones is editor-at-large of LondonlovesBusiness.com




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