The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Joe Storey Headshot

It Is a Misconception That a Living Wage Will Help Workers

Posted: Updated:

Election time is looming and it is time for the parties to start offering their giveaways in an attempt to win votes and persuade much needed 'floating' voters that their party will deliver for Britain. Labour and the Greens have highlighted their fiscal imprudence by pledging a 'living wage' of £7.65 per hour, with a rate of £8.80 in London. The Conservatives too have succumbed to populism by pledging an increase in the minimum wage to £6.50 per hour. Without devaluing the integrity of the low pay predicament, it must be highlighted that the living wage is not an appropriate nor efficient solution. A significant hike in the wage floor to a living wage level will be to the detriment of those whom it aims to aid during a time when living standards are squeezed.

In theory, such a significant rise in the minimum wage will severely damage the employment prospects of unskilled workers. It also true that a living wage increase could lead to an increase in unemployment, particularly of younger workers and those seeking their first steps on the employment ladder. The National Institute of Economic and Social Research (NIESR) have associated the job losses associated with the implementation of living wage at 160,000, whilst other studies have disputed this. However, a 2009 Meta study of 102 studies by Neumark and Wascher concluded that two-thirds of the studies highlighted "a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages." The UK Low Pay Commission has recognised the perilous impact a rise in the minimum wage could have on youth unemployment by freezing the minimum wage for younger workers in 2011.

If advocates of a living wage took into account taxation, their whole argument would be undermined. The living wage is quite rightly about increasing worker's disposable incomes, but it simply wouldn't have the desired effect. Adam Smith Institute research shows people will take more home earning minimum wage which is untaxed rather than the living wage. Taking these people out of income taxation will increase their disposable income and starve the Treasury of money which it would otherwise frivolously spend (as Friedman once said, "very few people spend other people's money as carefully as they spend their own"). National Minimum Wage (NMW) before tax (£12,875.20 a year, assuming work is full-time) is higher than the Living wage rate post-tax (£12,715.72 a year). Therefore it is possible for the lowest paid in society to earn the living wage if their incomes are removed from taxation by increasing the personal allowance to £12,875.20. This would provide an economic stimulus through increasing the disposable incomes of those earning minimum wage and to curtail the welfare bill through reducing tax credits, without harming employment prospects and incurring increasing labour costs for businesses.

Labour have progressed from amassing an unprecedented level of peacetime debt (net debt excluding the temporary effects of financial interventions was £823.3 billion in 2010,
equivalent to 56.3 per cent of GDP) and inflicting untold pain on public finances to burdening businesses with what is essentially a tax on unskilled workers. Despite Labour claiming they are the "workers' party", they were the party who abolished the 10p rate of tax and forced more than 5 million workers onto the 20% tax bracket. The underlying premise of a minimum wage is that it is illegal for firms to hire workers who they value less than the minimum wage. This condemns those who are not valued at the minimum wage level to a life of fragile employment prospects and for some, a life reliant on the state.

Nationwide implementation of the living wage would harm employment prospects for the lowest paid and those aiming to join the labour market, stifle any chance of a business led recovery and provide more money for the Treasury, not for hardworking people.