A case for the Living Wage

Andrea Werner Middlesex UniversityDr Andrea Werner (@drandreawerner) is Senior Lecturer in Management at Middlesex University. Here she makes the case for the Living Wage, but says more research needs to be done to understand the challenges employers face in adopting the pay standard.

Even though early ideas about a Living Wage can be traced back to Aristotle, medieval scholars (such as Thomas Aquinas) and Adam Smith, the concept has gained fresh impetus the past few decades as civil-society groups in Anglo-American countries such as the United States and the United Kingdom have been campaigning for a Living Wage for the large number of low-wage workers in their economies.

Living Wage campaigns have been motivated by stagnant wages at the lower end of the income scale that have made it difficult for low-wage workers to make ends meet, the growing retreat of the welfare state, and an increase in pay inequalities. They can be seen as a response to the decline in union density and power, which has weakened the collective bargaining power of workers.

In the US, the Living Wage movement has primarily campaigned for Living Wage ‘ordinances’, that is, local laws that require the local public sector to pay a Living Wage to their direct employees as well as require private organisations that benefit from business relationships with the local municipality to do the same. More recently, we have seen the fight for a Living Wage expressed in campaigns for higher local minimum wages around the United States, which would apply to all workers in a specific locality.

William Franklin (Creative Commons 2.0)

Photo by William Franklin (Creative Commons 2.0)

By contrast, the Living Wage movement in the UK – championed by civil society coalition Citizens UK – favours a voluntary approach. Citizens UK has set up the Living Wage Foundation, which provides accreditation to employers who pay a Living Wage to their direct employees and ensure that on-site contractors pay the Living Wage to their employees who work on the organisation’s premises.

The Living Wage is distinct from the National Minimum Wage – the legal wage floor for unorganised labour – which in the US and the UK is conservatively set so as to ensure affordability for business and not to undermine economic competitiveness. By contrast, the Living Wage is concerned about people’s ability to meet their basic needs through paid employment. The Living Wage also refers to a wage level that would make workers (and their families) independent of welfare or other public subsidies.

Three arguments in particular make a strong case for the Living Wage:

1) The sustainability argument

At an individual level, the Living Wage is about a wage that enables workers to sustain themselves (and their families). Their income should be sufficient to cover at least expenses for food, accommodation, transport, clothing and personal care, and should enable the worker to participate in society.

The sustainability argument might also be applied to organisations: workers who have to hold down two or three jobs to make ends meet are less productive and efficient, and this affects the sustainability of the workforce and the organisation overall. Therefore it should be in the interest of the employer to pay a decent wage to their employees.

Finally, the argument also relates to social sustainability: economic inequalities within one society erode social cohesion and trust, which in turn may pose challenges for businesses who operate in such a context. The Living Wage is one small, yet important, contribution to social sustainability and cohesion.

2) The capability argument

This argument is about recognising that income from work should not just ensure survival but should also enable a life worth living as a human being. A decent income enhances a person’s capability, that is, his or her freedom to achieve the ‘doings and beings’ they have reason to value. While a higher income will enhance individual well-being, an argument can also be made that enhanced capability also helps people to become better citizens and workers. For example, if a worker is no longer forced to hold down several jobs and work long hours to make ends meet they will have more time available to spend with their family, to get involved in their communities, or to attend evening classes.

3) The externality argument

This argument takes account of the fact that low wages impose costs on others. From an economic perspective, this means that below subsistence wages will allow incompetent employers to continue to exist and thus distort true economic competitiveness. Also, if labour is too cheap a resource, employers will end up producing more of their ‘product’ due to lower costs, and thus resources are not being used efficiently.

Low wages also pose a considerable cost to society, as people will claim means-tested welfare payments (such as tax credits and housing benefit) to make ends meet. In effect, this means that the tax payer subsidizes ‘low-wage’ employers, who can then carry on using workers as a low-cost resource. Especially in view of the ‘social contract’ in which the members of society grant businesses the right to exist in return for certain specified benefits, the externality argument carries a very strong force.

There is still much to understand how employers, especially those from the private sector, engage with the concept of the Living Wage.

Calculating the Living Wage

Despite these convincing arguments, the Living Wage remains an ambiguous and elusive concept: Individuals have different needs according to their circumstances (including their family circumstances) and it would be impractical and unrealistic to demand from employers to pay different Living Wage rates to different employees according to their needs if they are doing essentially the same work.

In the UK, this challenge has been met by a pragmatic approach. The GLA Economics Unit and the Centre for Research in Social Policy at Loughborough University calculate hourly living wage rates for London and for the rest of the UK respectively. They base their calculations on weighted averages of the basic needs of different household sizes and structures. The two calculated rates are significantly higher than the national minimum wage – £9.15 per hour for London and £7.85 outside London compared to the minimum wage rate of £6.50 (in 2015) – and so will definitely make a difference to the lives of low-waged workers. At the same time the calculated Living Wage rates still assume that people have access to certain welfare benefits; thus the Living Wage in the UK tips responsibility for basic living standards towards employers but does not provide complete ‘freedom’ from welfare payments.

Mandatory versus voluntary

There has been a debate as to whether paying the Living Wage should be mandatory or voluntary. Even though the former has a number of proponents, as it would help lift all low-waged workers in an economy out of poverty and stimulate the demand side of the economy, there have been concerns that a mandatory approach may increase unemployment, increase prices and make fewer entry-level jobs available in an economy.

By pursuing a voluntary approach, as in the UK, a number of these unintended consequences may be avoided as the Living Wage will be implemented more gradually, but it also limits the positive effect for low-wage workers in the economy overall. It thus poses the challenges of how to get employers to adopt the Living Wage voluntarily. For some organisations, implementation of the Living Wage will be regarded as good corporate social responsibility or as being in line with corporate values such as fairness and respect. For others, adoption of the Living Wage will arise in response to targeted civil-society led campaigns. In any case, paying the Living Wage will carry risks for business because of higher costs and will require employers to effectively communicate and ‘brand’ their commitment to their stakeholders, as well as think carefully about the deployment of their staff. Recent years have also seen the development of a solid business case for the Living Wage (reduction in staff turnover, less absenteeism, better motivated staff etc.), which helps employers make a case for their commitment to paying a Living Wage.

A voluntary context also calls for politicians and the government to find mechanisms to support the idea of the Living Wage in order to drive its adoption forward. In the UK, the Living Wage enjoys wide-ranging endorsement from politicians across the political spectrum. This general support will be strengthened if, for example, the government will make it a requirement for large employers to report how many of their employees and contractor employees are paid below the Living Wage, or if other incentive mechanisms are employed (for example, the inclusion of a Living Wage requirement in public tenders or the offer of tax rebates for Living Wage employers at local and national government level).

Despite the fact that to date more than 1,500 organisations in the UK have become accredited Living Wage employers, there is still much to understand how employers, especially those from the private sector, engage with the concept. What are the main reasons for employers to adopt the Living Wage? What are the obstacles that keep organisations from becoming accredited Living Wage employers? What are the dynamics of Living Wage adoption within different sectors and among companies of different sizes and ownership patterns? What are the benefits versus what are the challenges of Living Wage adoption? What is the role of Living Wage-accredited organisations in furthering the campaign? How is the Living Wage considered in employers’ supply chains?

These questions merit extensive empirical work, whose findings will provide us with a better understanding of the Living Wage as a meaningful intervention into organisational practices that will positively affect the lives and welfare of employees and society at large.

This article is a summary of an article by Andrea Werner and Ming Lim published in the Journal of Business Ethics in February 2015, which conceptualises the Living Wage in its philosophical as well as practical dimensions. To find out more about Middlesex University’s contribution to the minimum wage debate, visit www.mdx.ac.uk/campaign/experts/national-minimum-wage

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