National living wage is not enough to fix Britain's low-pay problem – here's why
Tony Dobbins, University of Birmingham
The legal minimum wage is vital for regulating low pay and preventing exploitation. But it is insufficient on its own to reduce poverty for working people and protect living standards. It is also contradicted by broader Conservative government policies which are causing income inequality, debt, and weak collective representation, which are detrimental for working people.
On April 1, about 1.6m workers received a 4.9% rise in the National Living Wage. This is the compulsory minimum wage for workers aged 25 plus, and it increased from £7.83 to £8.21 per hour. Workers under 25 received lower minimum wage rises (which some suggest discriminates against younger people). Rates are recommended by the Low Pay Commission, whose remit is to reduce low pay without adverse impacts on employment and the economy.
The government is aiming to increase the national living wage to 60% of median earnings by 2020, depending on economic conditions. It is a remarkable transformation – given that Conservatives opposed the minimum wage when Labour introduced it in 1999 – that Tory Chancellor Philip Hammond endorses minimum wage targets rivalling the highest European comparators.
Predicted job losses due to the minimum wage have not occurred. But the informal economy, where employers and the “self-employed” operate outside of government regulation, has grown and some smaller firms, especially, find it challenging to pay the national living wage. Arguments that minimum wages give the low-paid higher disposable income and benefit the economy, seem accurate. But there are serious problems with enforcement, non-compliance and underpayment.
The ‘real living wage’
Yet the national living wage is arguably not a real living wage. Statutory minimum wages are inadequate to address working poverty and living costs. Through its Living Wage Foundation, Citizens UK introduced a voluntary “real living wage”. The foundation recommends this real living wage by annually calculating what workers need to afford basic living costs like housing, bills and food. The voluntary wage is higher than the misleadingly rebranded “national living wage” introduced by then chancellor George Osborne in 2016. In May 2019, the real living wage increases by 2.9% to £9 outside London and 3.4% to £10.55 in London.
Over 5,000 employers voluntarily pay it and are accredited by the Living Wage Foundation. These include public sector organisations like some councils and universities, as well as private sector companies like insurers Aviva, retailer Ikea, Nationwide building society, and some football clubs.
Many employers view it as ethical. And research also shows a business case for paying the real living wage. This matters for establishing examples of good employers.
Conservative party policy relies too heavily on the national living wage as a single economic measure to address living standards. It is also undermined by other policies that hurt people in low-paid work and increase inequality.
As established, legal minimum wages alone are insufficient for what many people need to live. This is because austerity policies have forced people to take on more debt and essentials like housing, energy and transport have risen – partly due to public services being privatised and outsourced, as well as excessive profiteering.
This has been compounded by welfare cuts, including the Universal Credit debacle, since 2010. Raising minimum wages to tackle working poverty is like placing a plaster on an open wound when living costs have risen and the welfare state and public services are being eviscerated.
Low pay is symptomatic of deeper systemic deficiencies in the UK economy and poor comparative productivity. Cost competition dominates business strategy; notably service sector employers with large quantities of poor quality low-skilled jobs. Job quality, not just quantity, needs attention.
Stark regional pay inequalities also exist: the proportion of low-paid employee jobs in the UK’s regions is double that of London. The UK badly requires proper regional industrial strategy, not only encompassing manufacturing, but a Green New Deal and the foundations of the economy. This could increase fair pay and decent work.
Rebuild collective bargaining
Minimum wage legislation only establishes an individual minimum pay floor. But many employers interpret it as a pay ceiling – something they pay, to meet regulation, but won’t go above. Declining trade union membership substantially limits the power of employees to negotiate higher wages and other benefits.
Collective bargaining and other institutions like Wage Councils need strengthening and rebuilding so that power is distributed more evenly in British workplaces. Most workers don’t have enough power individually to bargain wages above the legal minimum. Plus, trade unions play a crucial role in boosting productivity.
Thus, Britain still has a low pay problem. For many, real wages (adjusted for inflation) are no higher than before the 2008 financial crisis. Low pay is defined as two thirds of median hourly earnings, which is £8.52 at the moment. The proportion of low-paid employee jobs measured by weekly earnings was 27.3% in 2018. Large numbers of workers are clustered at or just above national living wage thresholds.
So while statutory minimum wages are vital for regulating low pay, they do not provide a real living wage. They are an insufficient response from the government to inequalities that are caused by deeper structural issues with the UK economy and political choices associated with “trickle-down economics” and neoliberalism. The UK is increasingly now a low-tax, deregulated, market economy. Unless these causes of low pay are targeted by radically alternative policies, income inequalities will persist.Comment on this article
Tony Dobbins receives funding from the British Academy and Leverhulme Trust.
University of Birmingham provides funding as a founding partner of The Conversation UK.