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Will the new national living wage hurt business?

Nick Ansell / PA Wire

Will the new national living wage hurt business?

Nick Ansell / PA Wire

From April 1 a new “national living wage” will become law in the UK. Working people over the age of 25 will have to be paid a minimum of £7.20 per hour. The 50p per hour raise on the minimum wage has big employers fretting that its costs will eat into their profits. But while it’s true that many are reliant on cheap labour, the new wage is unlikely to adversely affect large companies.

The phrase “living wage” was hijacked from a concept promoted by activists such as the Fair Wage Campaign, the International Labour Organisation and, closer to home, the Living Wage Foundation. They were referring to a wage that people need to live on minimally, but decently.

George Osborne, who introduced the law in the Conservatives’ first budget after their 2015 re-election, is using it to describe a new minimum wage. But now it is described as a “living wage”, it may well act as a ceiling on wages, while living wage activists are actually pressing companies to raise wages above the statutory floor.

Profit squeeze

Because there has been no real recovery following the global financial crisis, profits on capital investment continue to fall. So, given the pressures on company directors to maximise profits, including a statutory duty to act in the interests of their shareholders, they have been using financial wizardry to boost profits including share buybacks – and low wages.

Between 2009 and 2013, real earnings of full-time employees fell by 7.5% on average. By December 2015, 801,000 workers, or 2.5% of the employed UK workforce, were on zero-hours contracts, up 15% from 2014. Informal labour, particularly by women, is on the rise. The UK has the highest levels of self-employment in the EU, indicative of a weak labour market.

Cheap labour reduces incentives to invest in labour-saving innovations, keeping workers in low skill jobs. Thus, the British economy is marked by low unemployment and low productivity – an unusual combination in a crisis, but the culmination of successful political and legal attacks on organised labour beginning substantially with Thatcherism in the 1980s. Unions no longer have the power to demand higher wages, job security or more skilled work.

Indeed, labour globally has been unable to claim better conditions, even where productivity has increased. Oxfam has reported that “the average labour share of income across 127 countries had fallen from 55% in 1990 to 51% in 2011”. In the United States, while net productivity grew 72.2% between 1973 and 2014, pay for the average worker (adjusted for inflation) rose by just 8.7%. So government intervention may be one of the few ways left to ensure a rise in wages.

In spite of businesses’ dependence on a low-paid workforce, the introduction of the new wage should not be a problem for large companies (small, retail service businesses are another matter). Indeed, when assessing the impact of the current minimum wage on business, the Low Pay Commission found the academic evidence to be largely positive, particularly for large, listed companies. Plus, the national living wage rate is considerably lower than that currently recommended by the Living Wage Commission – £8.24 an hour or £9.40 an hour in London.

No guarantees

The government’s new national living wage is based on median earnings. Currently, the agreed rate is 52.5% of median earnings, but the aim is to increase it to 60% by 2020, which would be £9.16 an hour. This would mean a rise of nearly 30% in four years – far exceeding recent wage rises. There is no guarantee of this rise though. Reaching 60% of median earnings could equally be achieved by restructuring the work that is paid more than the new national living wage, thus reducing the median. With more cuts facing the public sector, this seems a likely scenario.

A real living wage has long been campaigned for. Anthony Devlin / PA Wire

The national living wage also only applies to over 25s, as the Low Pay Commission finds that the minimum wage resulted in a comparative overpaying of the 18-25s – no doubt a surprise to them. So the age limit keeps a high proportion of low paid workers on minimum wage only.

The new national living wage is intended as a floor, but evidence suggests that once set in law, companies will not pay more than they have to. The original aim of “living wage” activists was to use reputational effects to persuade companies to pay a real living wage. The existence of the new, lower “national living wage” may well undermine these efforts.

Multinational companies with UK-registered parent companies already profit to exceptional degrees from the low wages paid in global value chains. As Oxfam has noted: “firms are consistently using their dominant position to insist on poverty wages”. In the unlikely event that the new national living wage did adversely affect profits, multinational companies have the option of moving abroad and replacing domestic workers with cheap foreign labour.

So, while company profits depend on a cheap, compliant workforce, the new national living wage is too circumscribed to hurt large companies. They are, in any case, soon to enjoy yet another cut in corporate tax from 20% to 17%. Perhaps its real significance is that it is indicative of the fact that the government, not the unions, now defines a fair “living wage” – and they do so in consultation with, not in defiance of, business.