Ed Miliband continues to set the political agenda with his championship of the Living Wage, counterpoising the Tories’ race to the bottom on wages. But there are still important lessons to be drawn on how it is handled. First, it is not enough, as is being proposed at present, to encourage employers ‘voluntarily’ to pay the higher wage of £7.45 an hour (and £8.55 an hour in London) as an 18% rise on the present national minimum wage of £6.31 an hour. A few will comply for good PR prospects, but most will not. In all other countries it is mandatory, and so it must be here. Second, it is of little use unless it is properly enforced. It is well-established that hundreds of thousands of workers in Britain today are paid below the legal minimum, either because they are unaware of their legal rights or because they’re fearful of being sacked if they complain or in the case of illegal immigrants they fear being reported to the authorities and then thrown out of the country. The number of inspectors has to be sufficient to root out the vast majority of under-paying employers, and then the penalties imposed have to be a sufficient deterrent to ensure the law is respected.
Some have claimed £7.45 is too high to avoid resultant unemployment. But even Boris Johnson supports it (if that’s not a complete put-off). More seriously, the new German coalition government have just agreed an across-the board hourly minimum wage of £7.06 (€8.50) from 2015. And Obama is currently seeking a 40% minimum wage increase from (the extremely low) £4.42 an hour to £6.20, and more than three-quarters of Americans back him. It should be recalled that Michael Howard, when leader of the Tory party when Labour introduced the minimum wage in 1999, solemnly intoned that it would lead to 2 millions losing their job. Not one anywhere was reported as doing so in the event as the result of the higher wage floor, though it aided nearly 3 million workers, two-thirds of them women.
Once settled at the Living Wage floor now proposed, the level in future should not be left to politicians, technocrats or academics (let alone businessmen, as Blair did with the chairman of the first Low Pay Commission). There should be a formula for its steady increase over the years. The present £6.31 minimum wage is 47% of median income, though marginally under 40% of the nation’s mean income. The relevant comparator is the national mean income, and the Living Wage should be raised annually by an agreed formula (which might be 1% each year above the average wage increase) till it reached a targeted 60% of mean income. Another interesting index which should be published each year is the relationship between the Living Wage floor and top pay (the average remuneration of FTSE-100 chief executives) which is currently £4.4m a year, or £84,615 a week. By that index the proposed Living Wage is 0.28% of top pay.
Having said all that, the most effective way of pulling up the lowest pay, and not just below an arbitrary line, is by a robust policy to promote full employment. A much tighter labour market would work wonders: it would drastically reduce the need for payment of unemployment benefit, it would significantly increase demand within the economy which is now massively lacking, and it would begin to redraw the balance of power which has now swung far too far in the interests of employers. That’s another thing that Labour should now be saying forcefully.