Recycling old arguments against the Living Wage, on the grounds of affordability, misses the point about the real solutions to poverty
An interesting recent comment piece in the Telegraph suggested that the Living Wage is not an effective way of helping the growing numbers of working poor – and that tax cuts and reductions in utilities and childcare costs are a superior solution.
This conclusion is based on the well-trodden argument that inflating wages will have an adverse impact on the demand for labour and the health of the economy. In short, increasing the costs of wages means employers won’t be able to afford to hire people.
Of course, the same arguments were made years ago, before the introduction of the minimum wage, and it didn’t quite pan out the way sceptics predicted. A large and well-debated body of economic theory looks at the elasticity of labour markets and the impact of wage floors on increasing productivity to explain this – but I won’t attempt to do justice to these arguments in a blog.
However, the fact that the evidence isn’t conclusive about higher wages always meaning fewer jobs doesn’t mean that it is wrong to point out that in-work poverty isn’t just about income – but about the costs of living. Inflating wages to cover inflated living costs clearly isn’t efficient.
The reality is that we have to look at both – we have to improve wages, and tackle living costs.
When it comes to wages – there is room to manoeuvre. Recent evidence from the Resolution Foundation suggests that some sectors can afford to pay more without significantly affecting their productivity – they have benefited from a low-pay culture in part encouraged by the Minimum Wage.
The idea that the Living Wage would disrupt productivity by disrupting market forces assumes that all wages have achieved market equilibrium, without recognising that in some sectors wages are deflated by previous attempts at wage setting.
When it comes to reducing living costs – the proposed solutions (which mainly focus on deregulation) contain flaws. For example, deregulating childcare to reduce childcare costs (which are, indeed, very high and prevent many from going to work or increasing their hours) may well reduce wages in the childcare workforce – so making life more affordable for some will be paid for another group of low-wage workers.
Alternatives – like the Social Market Foundation’s idea of low cost childcare loans to be paid from future income – should be explored instead.
Green energy and EU customs tariffs (identified in the Telegraph article) might raise prices, but should we sacrifice environmental protection to make life cheaper? And moreover, there are easier and quicker wins than renegotiating EU tariffs – like dealing with the costs which are artificially high just for people on low incomes.
This 'poverty premium' includes ATM machine charges (free cash machines are scarcer in disadvantaged areas), the higher rates applied to pre-pay electricity meters, Christmas hamper schemes and doorstop lending, and so on.
The building of homes is, of course, a no-brainer. It creates jobs for a wide range of (often low-skilled) industries, and tackles the chronic housing shortage which is creating spiralling housing costs. But this isn’t as much about deregulating planning as investing in an affordable housing strategy on a scale which matches demand.
In-work poverty isn’t a single solution problem – it requires a multi-pronged strategy of improved wages and work progression (through middle tier job creation and skills investment), and looking at the costs of childcare and the drivers of the poverty premium. This means freeing up businesses in some sectors, and enforcing rules in others.
But as long as the debate remains an ‘either or’ question between predistribution and deregulation, then the problem will be overshadowed by the politics of more or less state intervention.
