George Osborne announced earlier this month that he would support the suggestion of the Low Pay Commission to raise the minimum wage in the UK to £7 from it’s current £6.31. Should the move go ahead, we will see the wage instated around Autumn bringing it in line with inflation for 2015, and catching up three years earlier than expected.
This signals an 11% increase and there have been some warnings about potential detrimental effects on SMEs (small and medium enterprises), should the move go ahead. In fact, any raise in the minimum wage, particularly during the recession, has seen a strong backlash from businesses of all sizes.
When the minimum wage was first brought in, in 1999, Conservatives opposed it, and economists predicted that it would have a devastating effect on the economy. It didn’t. In fact, it brought stability to the market, and raised living standards for those entering work.
Indeed, it will be SME’s who will struggle most with adapting to the proposed increase, and had the minimum wage increased steadily over time, this jump would be unnecessary and maybe, more adjustable.
Nevertheless, the raise is much needed, and whilst we focus on the effects on business, we also need to understand what the current rate is doing to our economy and those on the minimum wage.
The Resolution Foundation calculates that the minimum wage is around £1,010 lower a year than it was in 2008, in real terms. “That matters because around 1 million adult workers in Britain are paid the minimum wage, while twice that number earn within 50 pence of the minimum wage.”
The pressure put on keeping the minimum wage low and straggling behind inflation against rising living costs has caused the current rising rates of in-work poverty, where families and individuals working full time continue to live below the bread line. In September, in Wales, the number of people in in-work poverty, outnumbered the ones out of work – proof that retaining the current minimum wage will fail to make work pay, increase poverty and de-incentivise work.
Some help has been provided by the state up to now, in the form of Tax Credits for those on low incomes. Working Tax Credits top up the income of those on low pay, however, they have proved in some areas to be a hindrance to increased pay rates for employees.
The WTC was introduced in 2003, to incentivise people into work on low pay. However, research by the LSE found that it was not necessarily effective, as many potential employees wanted to work, and felt devalued in being unable to support themselves without help from the state:
“The recipients’ motivations to work were far more complex and varied than a simple response to a financial incentive. Recipients wanted by and large to work, and often felt good that they could, but sometimes the value they placed on work had little to do with money, or else the jobs they were doing failed to meet their aspirations or undermined their sense of self-worth.
“Professor Dean said: “Although the WTC scheme was generally viewed positively and most of the people we talked to were grateful for the additional income, there were still some important undercurrents of resentment. WTC does not of itself compensate for the injustices or adverse effects of a precarious and inadequately paid work. Paradoxically, hardly any of the people who took part in this research explicitly recognised that schemes like WTC are in effect a subsidy to low paying employers, but a lot of them felt devalued at work or locked in to menial jobs.”
In 2012, £14bn was spent on Working Tax Credits, as they become used more and more by employees of huge chains and not just SMEs. Supermarket chains, retail stores and other global businesses have been able to take advantage of paying below inflation minimum wages, as opposed to what they can afford, and this has contributed to a culture of large businesses relying on the state to pick up part of the bill they should be paying in wages to employees – essentially allowing the state to pay the profits of large businesses. To be more effective, the WTC should have only been offered to help smaller businesses take on employees – concentrating this help to where it is most needed, and this support should be continued where increases in the minimum wage could seriously affect SME’s.
The proposed increase could see a dramatic reduction in spending on Working Tax Credits. Further, the increase in money among the low paid will see further economic mobility, as the low paid spend much larger portions of their pay, and this re-invests into the economy creating growth, rather than those on low pay accumulating debt or being unable to afford to spend more on essentials.
Living wage campaigners have welcomed the proposed increase but remain adamant that there is much work to do to get their suggested rates of £7.65 an hour in the UK, and £8.80 in London – figures calculated on the basic cost of living in the UK.
Whilst this seems like a huge jump, working towards this incrementally is possible and should be a goal, because for as long as we legislate minimum wages that keep people in poverty, we are legislating poverty and maintaining a section of the population in poverty.
When the minimum wage faces any increase there is alway strong reactions from businesses in the media, and they often do talk to SMEs at this point. However, there is rarely any input or opinion from the large global traders and retailers who keep thousands on the minimum wage, and rely on the state’s help to top up pay. This culture is not one that we can afford, yet remains out of the limelight as SMEs fight the battle when the issue of a raise for the minimum wage comes up. However, it is the abuse of the minimum wage by large companies that has created reliance on the state to this extent, and to get them to pay, we need the minimum wage raised.
In truth, increasing the minimum wage will bring lots of positives to our economy. And, the question that seems to escape media attention most when it comes to this subject, is what we want to work towards in the larger scale of things. As the 7th richest country in the world, shouldn’t we be doing all we can to ensure our minimum wage is one that lifts people out of poverty and can deal with the basic cost of living? And if our current system is one that legislates in-work poverty, then maybe we need some drastic action and a re-think of what our economy should be providing.
by Kam Sandhu – @KamBass