The economics of the London Living Wage just don’t add up

The first thing to note about the London Living Wage is that it is nothing of the sort. The website of Citizens UK says the Living Wage is intended to enable workers to “earn enough to provide their family with the essentials of life”.

But defining “the essentials of life” is rather tricky. Once upon a time it meant food, clothing and shelter. The free markets for food and clothing work quite well in providing these essentials (the housing market with its substantial government interference works noticeably less well). Between 1982 and 2005, according to the Office of National Statistics Family Spending Report, the average family’s spending on food fell from 21% of family spending to 16%. The cost of clothes fell by 2.6% per year between 1998 and 2008. Indeed, as far back as 1959 Barbara Castle told the Labour Party conference that “the poverty and unemployment which we came into existence to fight have been largely conquered”

So if the “essentials of life” are being readily provided ever more cheaply why the Living Wage campaign?

Quite simply “the essentials of life” were redefined. Poverty was no longer an absolute state threatening continued life but a state of wealth compared to others. Thus, in 1999 the Child Poverty Action Group said that the lack of a video recorder was a sign of poverty. In 2006 a US government report found that among officially ‘poor’ Americans 97% owned a colour TV, 62% have cable or satellite and 89% own microwaves. The Living Wage is really just a Higher Wage.

If the Living Wage is not, in fact, going to protect workers from imminent death what will its effects be?

There are few more basic propositions in economics than that an increase in the price of something leads to a fall in the amount of that something people demand. So it is with labour. If a government mandated rise in wages makes hiring workers more expensive companies will hire less of them.

Sadly analysis of the correctness of this theory in practice indicates the truth in the old joke that if you laid all the world’s economists end to end you wouldn’t reach a conclusion. Studies of the effects on employment of introduction or raises in minimum wages either tell you it has reduced employment (Machin, Manning and Rahman, 2003 and Stewart and Swaffield, 2006) or that it hasn’t (Metcalf, 2007).

Much of the doubt stems from the fact that minimum wages are typically set at around the market wage anyway. Despite casting doubt on the point of a minimum wage in the first place, this fact also raises another question; what happens if it rises too far? Here there is consensus; if the minimum wage rises too far employment will fall. Those in work will benefit at the expense of those out of it.

And this is where the Living Wage (sic) could be dangerous. At £7.85 per hour it is £2 higher than the national minimum wage and has increased 33% in the last five years. Coming at a time when university budgets face severe cuts the higher wage will become less affordable for employers. This will lead to less cleaning and other services being provided around campus and fewer jobs. Or it could mean a rise in your tuition fees.

The Living Wage Campaign is simply a higher minimum wage campaign and its current name is dishonest and emotive nonsense. When set at a rate around the market level its effects on employment are small but it is also pointless. But when it rises by a third in five years and universities have less money, something will have to give.

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