The Minimum Wage Paradox

By Aoife Doyle

This is not an argument against raising the minimum wage, but on its own, it will fail to prevent a continuous cycle of inadequate living conditions for the UK’s working class.

A government policy is a remarkable success when former opponents steal it. The National Minimum wage law, first introduced by Labour in 1998 with caution, has been seized and supercharged by Conservative governments in the past years. The National Minimum wage, which aimed to lift many families out of poverty, was imperative in regulating low wages and protecting the vulnerable from exploitation. Nevertheless, progress has stagnated as the hourly rate has failed to keep pace with rising living costs and changes to the working world. So, an increase in the minimum wage solely is inadequate in reducing poverty. 

The National Minimum wage (NMW) is the minimum pay per hour employees are entitled to by law. The umbrella term employees encompass all workers, including part-timers, contracted workers, and zero-hour contracts; all workers except those genuinely self-employed. There are varying rates for each age group, from school leavers upward. The National Living wage (NLW), the highest bracket of pay, is the minimum wage for those over the age of 25; however, the age threshold will be lowered from 25 to 23 from April 2021. The current NLW, which came into force in April 2020, is £8.72, with a 2.2% increase to £8.91 anticipated from April 2021. The combination of an increase in the pay rate and a reduction in the age required to receive the NLW is exceptionally significant for workers in the 23-24 age bracket, who will see their wages increase by 9%. In recent years, there have been substantial increases to the NLW in efforts by the government to attain their 2024 goal of £10.50 per hour, proposing to reach two-thirds of median earnings. Nevertheless, these increases will not prevent millions of families from falling into hardship each year. Many households find that their wages are not ample in satisfying a basic standard of living. 

The Living Wage Foundation is a campaigning organisation that intends to persuade employers to pay a living wage. In their terms“a real living wage is the hourly rate working people need to afford a ‘decent’ standard of living.” It is the only living wage calculated on the cost of living. It provides a robust benchmark for employers to voluntarily choose to pay their workers a wage that meets their necessary living expenses. It also considers where the worker lives with a higher London rate, which allows for the costly expenses of living in the capital. The foundation recommends a £9.50 UK rate and a £10.85 London rate, significantly higher than the statutory minimum wages. With increased income – based on the living wage foundation proposal – low-paid workers may not have to make tough choices on mundane matters, such as whether to pay their heating bill or buy a new winter coat for their child. A sustained period of such an increase in wages, ceteris paribus, could break the cycle of employees falling into hardship.

While paying a fair wage to employees may cost the employer, the business benefits are numerous. Living wage accredited enterprises have found that their reputation as an employer was enhanced and increased the commitment and motivation of their employees. Head of corporate affairs at KPMG, Marianne Fallon, asserts that there are advantages for employers by paying the living wage, “The voluntary adoption of a living wage policy by employers over time is one of the tools that will help improve social mobility in the UK as well as directly addressing in-work poverty.” In-work poverty refers to a household in poverty, but at least one household member is in paid work. Pre-coronavirus in-work poverty was rising with 13% of those in poverty in 2018/19. A key reason many families were falling into in-work poverty has been the lack of development in social housebuilding over the past decade. By increasing the Affordable Homes Programme’s funding by £90 billion, 145,000 social homes could be constructed over the subsequent five years. Conservative administrations elected to divert funding from social housebuilding to more expensive property types, namely ‘affordable’ homes. These homes could be ‘affordable’ for low- and middle-income families, but these homes were the reverse for in-work poverty households. To address the crisis, Johnson’s administration published a white paper in early August 2020, introducing a package of proposals to cut the red type and modernise the planning system for housebuilding. Such plans could speed up the process of social housebuilding and help those in need. The decline in the construction of economical housing meant fewer of those in desperate need had access to an affordable home in the social rented sector. Married with increased house prices, households that may have been in secure tenure at the introduction of the NMW are now stuck in unsecure, expensive homes. 

It is naïve of one to assume that the living wage is a direct answer to poverty. This is not an argument against raising the minimum wage, but on its own, it will not prevent a continuous cycle of inadequate living for the UK’s working class. The minimum wage paradox: higher minimum wages prevent low-wage workers from falling into poverty and help them get off benefits but can leave them worse off if supplementary economic reforms do not follow. The increase in NLW undermines the need to target those on welfare and the most in need. 

Even though many workers receiving the lowest pay still need additional support, the introduction of the NMW can be seen as one of the most successful policies by the government as the Low Pay Commission stated“it has reversed historic trends which saw the lowest paid members of society receiving the weakest growth in earnings” and has done so without causing mass unemployment. The increase in the NLW in April 2020 intended to protect low-paid workers’ living standards, as their incomes would rise broadly in line with predicted wage growth and modestly ahead of the projected increases in prices. However, when hypothesising an increase in the minimum wage and living wage, it is vital to consider the economic effects. Under current government policies and assuming there were no changes to the tax or benefits system, an immediate increase in the NLW to two-thirds of the median income would unequivocally see low-wage workers take on a more significant share of taxes. Hence, an increase in the NMW would not mitigate pressures endured by the poverty-stricken. 

A post-coronavirus future may look bleak to many. Millions of people in our society who were living precariously – from paycheck to paycheck – will have been swept deeper into poverty. A substantial number of workers will also face hardship, many of whom would not have undergone such a situation before. The government has implemented temporary policies to help the worst affected weather the storm. While it is right that the immediate focus is on people’s circumstances now, this is not adequate for the longer term. We must confront the crisis to ‘build back better’ for everyone. Thus, the government will need to deliver a comprehensive package of policies, including committing to an extensive job recovery plan to turn the tide on in-work poverty and maintaining the universal credit boost implemented in April, spanning the labour market, social security, and the housing market to get people out of poverty once and for all. 

The views expressed in this article are the author’s own and may not reflect the opinions of the St Andrews Economist.

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