1. Economics
September 3, 2018

A local living wage will boost wages, increase productivity and return cash to the taxpayer. What’s not to like?

By Paul Hunter

It’s that time of year again: summer is drawing to a close and the political party conference season is nearly upon us. Media attention over the coming weeks will focus on the politicians, the grand oratory and the low politics.

But behind the scenes and unnoticed will be an army of workers. Serving food, pouring drinks and cleaning hotel rooms. Most will be paid below the real living wage.

It isn’t just the individuals that are too often undervalued, but also the collective importance of low-paid jobs to local economies. In the Liverpool City Region, host to Labour’s conference, one in four jobs are paid below the living wage. Yet there is a tendency for economic regeneration plans for our towns and cities to fixate on the ‘creative class’, ‘innovation hubs’ or iconic infrastructure projects.  

By ignoring such a large proportion of the workforce, it is little wonder that our cities can’t exit the so-called ‘low-skills equilibrium’, where firms staffed by poorly trained managers and workers compete on price or costs rather than quality. It’s no surprise, either, that UK cities compare woefully with European counterparts on productivity.

Exiting the low road and tackling low pay will not be easy. Even with the introduction of the National Minimum Wage, a fifth of workers are still low paid. There are reasons to be optimistic – not least the emerging consensus around the idea of inclusive growth. But the words “inclusive growth” easily fall from the tongue. The rhetoric urgently needs to be backed up with action.

Thankfully, some of the newly elected mayors are supporting the Living Wage Campaign. The stats show what a huge difference the living wage can make. The average low-paid worker in the West Midlands, Glasgow, Greater Manchester and Cardiff would see an annual pay rise of over £1,000 if their pay was lifted to the Living Wage. Just as compelling are the testimonials. Only the cold-hearted could fail to be moved by stories about the struggles of daily life on low pay – with no spare money to enjoy the very benefits that cities exist to offer.

Of course something should be done, some will argue – but how will it be paid for and what about the job losses? This logic is being questioned by a growing body of evidence from the National Minimum Wage. Despite the pre-introduction scare stories, there is little evidence of disemployment effects. Instead, the data points towards increased productivity gains: studies have highlighted how, unsurprisingly, workers feel more valued when paid fairly and respond by upping their effort. Others have shown how firms themselves adopt productivity-enhancing practices.

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In a local and regional development context, the living wage could therefore support the move from our current winner takes all model. As a new report by the Smith Institute shows, extending the living wage could deliver economic benefits worth millions of pounds. With workers earning and spending more locally, the benefits ratchet up. And this ignores the wider savings to local public services like health.   

If this is to happen, local economic actors have a critical role to play in shaping firms’ decisions about how to compete. Beyond paying all local authority staff the living wage, take-up could be increased through living wage clauses in public procurement contracts and making skills and business support contingent on paying the living wage. The Living Wage Foundation and city leaders can also champion place-based approaches to tackling low pay.

Central government has a role, too. A third of someone’s increased pay to the living wage is taken from the local area by the Treasury. Rather than disincentivising efforts to promote inclusive growth, the Treasury should strike devo deals to promote the living wage. For example, gainshare arrangements could be agreed where part of the fiscal benefit to the Treasury is re-invested locally, creating an even bigger economic boost.

Growth does not have to come through a race to the bottom on wages: fairer wages can drive higher local growth. Whilst not a silver bullet, the real living wage offers local authority, city region and national policymakers a way of turning some of the warm words around inclusive growth into reality. Backing that vision should not only get the conference delegates cheering, but also the unsung workers who put the show on the road.

Paul Hunter is deputy director of the Smith Institute.

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