Is it time to increase in the minimum wage to a real living wage?

13 November 2020

The real living wage is a term that most Brits are familiar with, it’s significance increasing with the launch of the campaign of the same name in 2001. Since then, it is estimated that around £1bn of additional wages have been back paid to those who were paid less than the amount it requires to live a safe and healthy life in our modern society.

Nevertheless, the problem persists on a national level almost twenty years later. according to figures from the ONS, there were approximately 2,043,000 jobs where employees aged 16 or over were paid below the legal minimum in April 2020, more than four times the 409,000 jobs a year earlier.

Now, a new petition that has gathered over 50,000 signatures so far is calling for an increase in minimum wage to the real living wage. But will bowing to this request have a negative impact on employment, and could this potentially harm the very workers its looking to protect?

The real cost of living in the UK

According to their latest announcement, the Living Wage Foundation has said the real living wage in the UK is now £9.30 per hour, and £10.75 per hour in London. These rates are independently calculated based on the realistic amount that people need to live on, taking into account the rise of rental costs and childcare.

The good news? There are now over 6,000 UK employers paying the Real Living Wage this year including 40 per cent of the FTSE 100 and household names such as Ikea, Hiscox, Crystal Palace Football Club and London City Airport.

The business benefits of the Real Living Wage

As well as being good for the workers themselves, there are also considerable benefits to businesses paying the real living wage. With more security and less financial distress inevitably comes worker satisfaction and, in turn, productivity. Even in the current climate, worker retention is key to the long-term success of businesses, and suitable remuneration is a cornerstone to this. A prime example is BrewDog, who saw staff turnover at their retail sites fall by 40 per cent after introducing the Living Wage. In one site, staff churn fell from 240 per cent to 60 per cent. With the increase in staff retention rates naturally came a drop in the spend on recruitment, with the total amount spent on staffing agencies falling from a £130,000 in 2015 to £10,000 in the first four months of 2016.

The current state of salaries in the UK

While the ripple effects of the pandemic on business and the subsequent furlough package that followed can be attributed to a large volume of those paid under the minimum wage, these figures do serve highlight the scale of the damage for the poorest in society during the first lockdown.

As such, the same report from the ONS confirmed that the lowest paying jobs were more than five times more likely to be furloughed with reduced pay. What’s more, even when not including furloughed workers, this number increases from 2019 to 751,000. In a labour market characterised by a decline in trade unions and the growth of low-paid service sector jobs (many that we relied upon in the first Covid-19 UK lockdown), a call for the increase in minimum wage is wholly understandable.

While the Government intends to announce an increase to the minimum wage in April 2021, it’s unlikely to be an amount that truly covers the cost of living in the UK. Most workers receiving £8.72 per hour or less in cases where the minimum wage is not being met will tell you it’s simply not enough – that workers shouldn’t have to claim benefits despite doing a hard day’s work five days a week is not something that should be up for debate. But as we know, upping the minimum wage isn’t without its own consequences.  Free market economists would argue that an increase to the minimum wage would cause employment levels to drop – and they would be right. But at what point does a rise to minimum wage begin to affect employment?

The employment conundrum: does raising minimum wage decrease employment?

In the US, soon-to-be President Biden intends to raise the federal minimum wage to $15, the equivalent of just over £11 in the UK. His critics claim that doing so during a period of economic downturn would harm already suffering small businesses who would not be able to afford the increase in pay to staff. Yet, research on the subject has proved inconclusive, and evidence of job losses has not been consistent. Certain studies indicate that some state and city-wage increases in recent years have not set back the ability of employers to hire more workers, but as automation becomes more widely available, the theory is that employers would opt for technology to replace workers on the minimum wage to keep their costs low.

The non-partisan Congressional Budget Office (CBO) produced their own report on the subject in 2019 titled “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.” The report aimed to determine the outcome of raising the minimum wage in annual increments from 2020 to 2025, at which point it would reach either $10, $12, or $15.16. According to their predictions, the $10 minimum wage would raise salaries for up to 3.5 million workers and have little to no effect on employment or the number of people in poverty. However, when raised to $12, their report estimated that up to 11 million workers would benefit from the wage increase, but that overall employment would be reduced by around 30,000 jobs. Finally, at $15, approximately 27 million workers would benefit but at the cost of an estimated 1.3 million jobs. At the same time, 1.3 million people would see their annual incomes rise past the poverty threshold.

The conclusion is as you might expect – a proposition that involves considerable trade-offs. While raising the minimum wage to a certain point does not result in greater unemployment, a jump from $10 – $15 means significantly fewer jobs. The difficult task that both the US and the UK government have in the current landscape is determining what that certain point is.

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