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The Living Wage Will be an Economic Disaster for Britain

10/07/2015 16:38 BST | Updated 10/07/2016 10:59 BST

Politicians and campaigners backed by special interest groups have long harped on about the 'Living Wage' and why businesses should be forced to start paying it, over the minimum wage. Unfortunately, George Osborne and the Treasury have fallen for this argument hook, line and sinker: he has used the Summer Budget to bring in a new National Living Wage at £7.20 per hour, rising to an eye watering £9 per hour by 2020!

Let's look at what proposals for the Living Wage are. Supporters of the Living Wage think that employers should be forced to pay a new minimum wage (named Living Wage) of £7.85 per hour. With the minimum wage currently at £6.50, that would be in excess of a 20% increase in payroll for firms paying the minimum wage.

The people campaigning for the Living Wage just do not understand the financial burden that will place on companies, both large and small.

Smaller companies are likely to struggle with the increased payroll liability. In order to pay the Living Wage, some smaller companies will end up having to lay workers off, to free up money to pay an increased wage to other workers.

When it comes to larger companies, people may be thinking "why don't we just apply it to the big corporates who can afford it?" For starters, it's hardly fair that only those who work for big companies will be given the Living Wage, while those working for smaller companies would not be. Besides, around half of private sector employment is in the SME sector, so it is far too divisive to implement such a policy.

There is also the matter of duty to shareholders. Increasing payroll by 20% has a knock on effect to the shareholders, who are ultimately the owners of the company.

If we want to raise the quality of life for lower earners, we would do better to look at reducing the tax and regulatory burden on businesses, overall. With less of a burden on the private sector, market forces would propel both wage and employment rises.

In addition, help could be given to lower paid workers by increasing the nil rate income tax and national insurance threshold. This will be more beneficial than an increase to the Living Wage, which would be taxed. Removing lower paid workers from paying tax altogether is much more beneficial to them.

Just remember, if the minimum wage worked then we could raise it to say, £20 per hour or even £100 an hour with the aim of simply making everyone much better off. But the reality is that it doesn't work, as it is inflationary and would cause high unemployment. Everyone bar those on the extreme left accept this.

What truly matters is not arbitrary government set wages, which is in effect price controls, but family and household incomes. For example, a husband earning £100k per annum and his wife doing part time work earning the minimum wage, are doing just fine, on a household basis.

Equally students who do part time work while they study aren't trying to fund a full adult lifestyle with a household and family to support, they're just trying to earn some money to fund minimal living expenses. The debate seems to solely focus on people working full time on minimum wage with families.

But there are better solutions. Ideas like the negative income tax, or increasing income tax thresholds to top up household incomes, address poverty but primarily focus on productivity to lift market wage rates.

Furthermore, when debating the Living Wage, we seem to forget about the public sector. Increasing such a burden on organisations such as the NHS would be a disaster for it. The NHS is already financially splitting at the seams and would not be able to cope with paying such high wages. It relies on low paid workers. While it would be lovely to give every porter, admin worker, caterer and cleaner a 20+% pay rise we simply can't afford that. It would completely undermine pay and career progression. Councils who employ support workers would be put in an impossible financial position. The lion's share of the Living Wage bill will fall on the public sector ergo the national debt!

The huge unsaid economic side effect of forcing wages up is the effect on the increase in the state pension through the 'Triple Lock'. The Triple Lock guarantees that the state pension will rise annually by the higher of 2.5%, inflation or average earnings. The average earnings part is the big worry, with the cost of providing the state pension being £83bn, a 20% hike in lower earnings and another 2.5 million people expected to reach retirement age by 2020, we could potentially see an additional £20-£30bn cost to providing the basic state pension. The scary part is that the government haven't mentioned anything about the increased liability.

The government's own Office for Budget Responsibility says that this will cost jobs! The Tories used to be against arbitrary salaries for this exact reason; also, a static wage baseline does not flex when the economic cycle needs it to (i.e in recessions).

The only other country with a min wage this high is France - enough said!