28/07/2013 18:52 BST | Updated 27/09/2013 06:12 BST

Why Conservatives Should Support a Living Wage

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Having a coffee with Jenny Jones, the dedicated Green Party Member of the London Assembly, is always a bracing experience for a Tory like me. It's fair to say that through the twenty years that I've known her, we have agreed on very little. The other day, as we sipped on our lattes, she explained her support for the Living Wage campaign. The national minimum wage of £6.19 per hour is far too low for someone living in London, Jenny said. Instead, businesses in the capital should pay their cleaners, security guards and caterers a minimum of £8.55 per hour to reflect the real cost of living.

Jenny thought that paying higher wages would also be good for the economy. Pay people more and they will spend more, increasing demand and helping to lift the economy out of the slump. It is true that poor people spend a higher proportion of their wages than the well off. They have to, of course, just to keep a roof over their heads. But the capitalist in me was unconvinced. Surely, businesses should not be forced to pay more than the market demands for unskilled labour. Adding costs to business is hardly the right way to stimulate the economy.

The proposed Living Wage (which works out at about £16,000 per annum for a 40 hour week) is actually higher than I was paid when I first joined the accountancy firm KPMG fresh out of university in 1993. But that was two decades ago, and even then it only took three years of progression in the firm to double my salary. In any event, quite apart from the economic arguments, the living wage could just be the right thing to do. Don't people deserve to be paid enough to get by, whatever the market might say? And something else that Jenny had said continued to nag at me. She mentioned that it would reduce welfare dependency. The more I thought about it, the more I realised that this was a very good point indeed.

The basic problem with moving people from welfare to work is this: suppose I can find a job that pays me £6 per hour for 20 hours a week. That gets me an extra £120. But if I lose £100 of benefits because I'm earning more, it is hardly worth my while to find work. I'm working 20 hours for £20, or effectively for a pound an hour. When he was Chancellor of the Exchequer, Gordon Brown made this situation worse. His welfare policy was to pay people just enough to lift them above some arbitrary poverty line. Once they no longer counted as "poor", he lost interest in them. They remained dependent on benefits, but with just enough money to keep the Labour Party's conscience clean. Brown's welfare clients had no incentive to climb out of the poverty trap by working harder.

The present Coalition Government is trying to improve this situation with the Universal Credit. The system is now so complicated that any change risks having unintended knock on effects. This means that the Universal Credit must be implemented slowly and carefully to ensure its success. But the fundamental problem of the welfare trap is harder to solve. As people begin to earn money from a job, benefits are withdrawn, meaning that their net position is not very much better off. Here's where the Living Wage might help. When someone starts work, they enjoy a minimum of £8.55 per hour instead of £6.19. That higher wage means that, even allowing for the reduction of benefit payments, it becomes worthwhile to find work.

What about the employers who have to pay the additional wages? For them it is a real cost. In the long term, if the policy works, the Government can cut taxes to compensate. After all, what the Living Wage is really about is privatising welfare. Instead of the government paying people to do nothing, businesses pay them to do something useful. It's certainly a much better way for companies to spend their shareholders' money than trying to be "carbon neutral". Worse, many low wage workers are employed by the NHS or local councils. So, in their case, all that's really happening is spending is moving out of the welfare budget and into health or local government.

For this reason, I don't think paying the Living Wage can be compulsory. But this is a left wing campaign that Conservatives, including the Mayor of London and the Government, can and should support. Many of the big accountancy and law firms, including my old employer KPMG, have already signed up. Businesses who pay their staff £8.55 per hour deserve, at least, an official stamp of approval. Best of all, they can avoid being scolded by the redoubtable Jenny Jones.