Living wage would be welcomed by millions

The last rise of just 12 pence, or 1.93 per cent, is significantly lower than the Retail Price Index (RPI) of 2.7 per cent for December 2013. Energy and food inflation are the main factors in the increased cost of living – and these will have a real impact on earners at the minimum wage threshold.

Yet George Osborne has said that an inflation-busting rise of the minimum wage by 50p would be “self-defeating”, even though he has been hinting at a significant increase in next month’s Budget.

It’s easy to speculate that a rise in labour costs for businesses that rely on low-paid workers would be a bitter blow from the Exchequer. These workers are the lifeblood of large retailers, bars and restaurants.

According to a KPMG report, of the UK’s 4.5 million workers being paid below a living wage, 780,000 are retail and sales assistants.

With the worrying sales statistics from retail giants Tesco, M&S and Morrisons – not to mention a profit warning to investors of Debenhams – it is hardly surprising that some chairmen are baulking at the thought of increased labour costs.

Advocates of the free market economy would argue that there shouldn’t be a minimum wage and that wages should reflect supply and demand for labour.

The reality is that increased competition for roles and declining membership of trade unions and the considerable power of large multi-national companies all mean that if the minimum wage didn’t exist then the wages on offer would likely be well below the current minimum.

Businesses in London that are signed up to the London living wage agreement – currently set at £8.80 an hour – have reported an increase in productivity, morale and efficiency. Happier workers are also less likely to have stress-related absences.

It’s therefore safe to conclude that the biggest potential benefit to employers of increasing pay towards that of a living wage is lower staff turnover.

The living wage for the rest of the UK is estimated to be £7.20. Between 2009 and 2012, the difference between the national minimum wage set by the Low Pay Commission (LPC) and the UK living wage widened significantly – from £1.12 in 2009 to £1.34 currently.

An increase in minimum wage would be a welcome boost to the finances of millions of people in this country. Yet the major beneficiary of such an increase would likely be the Exchequer via an increase in tax receipts and a lower social welfare bill, particularly from part-time workers who receive some state benefits.

The aggregated effect would be increased pay, which would be offset by a smaller benefit claim. In isolation this could be a boost to the coalition’s deficit reduction strategy but the net benefits are unknown. One thing is for certain, it will be small change in the context of the £100bn budget deficit.

Currently the minimum wage for those aged 18 to 22 is £5.03 and for workers below 18 the rate is £3.72. In the age of equality and equal pay for equal work, this hardly seems fair.

An increase in the minimum rate for 18- to 22-year-olds could be a vote winner for the Conservatives in the next election; individuals in this category enjoy all the privileges of adult life but are not entitled to adult pay under the minimum wage laws.

Clearly, the current thinking regarding lower wages for younger workers – essentially making them cheaper and more attractive to potential employers – is not producing the desired results. Youth unemployment in 16- to 25-year-olds remains high at 643,000 or 20.5 per cent, despite a modest decline of 25,000 between May and October 2013, according to the Office of National Statistics.

Increased pay for this group could show that the Government is committed to providing young people with work, avoiding a lost generation of young people with little to aspire to.

Regardless of any changes to the minimum wage, it’s clear that the Low Pay Commission (LPC) acknowledges that an increase beyond the level of inflation is needed to address the widening difference between a living wage and the national minimum pay.

Labour is placing considerable pressure on the Government by pledging to increase the minimum wage should they win the May 2015 general election. The 4.5 million low-paid workers could well buy into this policy and I suspect, in resolving the issue, the outcome might be more politically motivated than in the best interests of the economy.

• Sean Kemp is a lecturer in banking and financial management at Sheffield Business School at Sheffield Hallam University.