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How Effective Is The New Living Wage?

What's the crack with the new National Living Wage?

I am sure that some of you have unwittingly seen the government advert blaring from the TV screen, hammering home the mantra of how the national living wage provides a ‘step up for Britain’, insisting that the policy provides a ‘hand up, not a hand out’ for those at the bottom end of the pay scale. From this month the new national living wage (NLW) comes into effect, directly benefiting over a million UK workers – aged 25 and over – who will now see the minimum rate per hour increase from £6.70 to £7.20. This 50p increase in the wage rate is part of a rebranding strategy adopted by George Osborne, whose fox-like craftiness has led to not necessarily the demise but rather the renaming of the former national minimum wage, with perhaps the aim of hopelessly deceiving the public into believing that the Tory establishment is actually committed to improving income equality by reducing wage differentials. In fact, income inequality has worsened with the UK scoring a pitiful 0.404 in May 2015 in its Gini Coefficient Rating, increasing from 0.26 in 1979 making, according to The Independent, Britain the ‘most unequal country in the EU’.

This Labour-stolen policy falls short of the minimum wage rate proposed by the Living Wage Foundation of £8.25 per hour, with the London rate being considerably higher at £9.40 per hour. The failure for Osborne to introduce a separate minimum wage rate for Londoners highlights the downsides of the NLW. With average rents in the City of London exceeding £700 per week for a two-bed flat, the costs of living are simply astronomical. If little is done about this, then low income earners especially those from key sectors such as the emergency services, e.g. nurses and firemen will be forced to move out of our dearly loved capital. Already out-priced families are flocking to other areas in southern England, with the East Midlands and East Anglia being the number one destination by those cashing in on the capital’s ridiculously inflated property prices.

The danger of possible redundancies and increases in unemployment due to the NLW will always remain, especially as staff who are directly above the NLW seek to restore their pay relative to those on the lowest wages creating inflationary pressures. Therefore, increased labour costs may lead to some firms, especially those operating on a small scale such as newsagents, to struggle to finance their wages. This could lead to some firms moving away from mechanisation to an increasingly automated production process;  machines would essentially take over jobs performed by humans. This, indeed, is already evident in the introduction of self-checkout services at supermarkets. The NLW may also further encourage the growth of the informal economy fuelling increased ‘cash in hand’ activity, as more firms may feel incentivised or driven to covertly taking on illegal immigrants in order to avoid paying the NLW.

However, various studies conducted over the years on the question of whether a minimum wage induces a negative employment effect are contradictory, making the answer not very clear cut. The Office for Budget Responsibility predicts that 60,000 jobs may be lost as a direct result of the NLW, though some experts believe that the actual figure could be a lot worse. This will disproportionately affect the young, low-skilled and those living in low productivity regions, which could potentially further increase the gulf in unemployment rates between the predominantly white collared south and blue collared north. This could be why under-25’s are left behind – kicking the dirt – on the same pay rate in order to perhaps reduce this effect, so that employers don’t unfairly favour older, more experienced workers over the younger age groups. Though the severity of job losses will depend on several factors such as the elasticities of the goods/services being produced, since if an increase in price leads to a more than proportionate decrease in demand, then businesses will be forced to absorb the increased costs rather than passing them onto the consumer. As a result, some firms may be compelled to lay off staff.

Up till now, the national minimum wage has overall led to an increase in employment growth in low-paying sectors since 1999, as theoretically increasing the minimum wage rate should increase staff motivation and so reduce staff absenteeism and labour turnover, leading to reduced recruitment and training costs and increased productivity. However, there is no certainty that this pattern will continue.

The NLW is probably not very effective in reducing relative poverty, especially as over half of those living in poverty are unemployed and so will not be able to earn the NLW anyway. Notably, many on the NLW are not from poor households, as 44% of low-paid workers are from families classed in the top half of the income distribution according to the Institute for Fiscal Studies, since they can afford to be in jobs with lower pecuniary benefits. They are not the breadwinners of the family, though the non-pecuniary benefits (e.g. job satisfaction, working conditions, etc) may be much larger which may account for why they choose to stick around in their jobs. Ironically, those on or below the poverty line are the least likely group to benefit from the NLW rather those who are more financially well off will stand to benefit to a greater extent.

The NLW is planned to increase every year so that it will reach £9 in 2020, making it worth 60% of median earnings. Though I don’t mind paying a bit more for my cappuccino, if this will mean that the person serving it behind the counter can benefit from improved living standards, it’s hard to see the NLW being anything other than a political gimmick to increase conservative popularity and win votes. Whether the NLW will transform into a silver bullet,  a simple solution to a complex issue, or a poisoned chalice that will create a multitude of problems for the recipients or even both remains to be seen, as conveyed by the over-used cliché: ‘only time will tell’.

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