Raising the standard of living and ending low pay: passing the buck to employers?

At long last, the economy is out of intensive care and the financial figures for UK plc seem to be on the up. But pay freezes and austerity have squeezed living standards for many. Politicians of every hue have recognised this and #ge2015 is rapidly becoming “the living standards election”. The main parties are fighting to devise policies which will get more money into the pockets of the lowest paid (and hoping to get their vote in the process).

Boosting the standard of living

With austerity and spending cuts continuing, any future government is unlikely to have much scope itself to bankroll increases in living standards. Instead, policy discussions are increasingly focussed on getting employers to “tackle” low pay.

What might these policies look like and what is the likely impact on employers?

Raise minimum wage?

Last month, the Conservative party announced that it is looking into ways of raising the national minimum wage. One idea is to have new higher rates of minimum wage for employers above a certain size or profit level. However, having different rates and levels for big and small employers could lead to perverse disincentives to grow for those on the borderline.

Another Conservative idea is to have “sector based” minimum wages. At first glance that might seem sensible, but in practical terms it would be impossible to implement. Deciding the appropriate wages per sector or within which sector an organisation falls would be fraught with difficulty.

Others have suggested cutting employers’ national insurance contributions for those who pay more than the legal minimum wage. Provided it doesn’t further complicate our already complex tax system, this could prove more successful. By making it cheaper to pay people more, employers could benefit from a better paid, more engaged workforce while keeping costs neutral.

This idea is a carrot to encourage higher pay at the bottom. But there are some that would prefer a stick, by simply raising the national minimum wage to a higher level. Opponents suggest this could lead to mass unemployment as it would become prohibitively expensive to employ people for some jobs. But similar arguments were made before the minimum wage was introduced in 1999 and it went on to become the most successful government policy for 30 years. However, our economy was more robust in those days: the same cannot be said today. We will have to wait and see who will win the arguments and whether a "national living wage" could ever become a reality that employers will have to deal with.

For employers who avoid minimum wage legislation altogether, Labour plans to use a different stick: a £50,000 fine and new powers for local authorities to “take action” against minimum wage breaches. Yet with local government funding disproportionately affected by cuts, little “action” is likely to be taken unless there is new funding and resources to underpin the new enforcement regime.

Zero-hours contracts

Related to the minimum wage is a current hot topic – zero-hours contracts. We’ve written previously on the issue here. Recently, these contracts have been demonised by the press as putting people into poverty, on the basis that many zero-hours workers are given insufficient hours and so don’t earn enough to pay their bills. Politicians often claim living standards are affected by zero-hours contracts. 

Vince Cable has now pledged to consult on the issue and Labour proposes that the exploitative use of zero-hours contracts should be outlawed and new rights created for employees to guaranteed work based upon their average working hours over the previous 12 weeks.

The problem is that zero-hours contracts cover a variety of different relationships. Some workers appreciate the flexibility these arrangements offer and they can give employers much needed flexibility over their workforce. Whilst the recent furore around the issue has highlighted that these arrangements are open to abuse, regulating zero-hours contracts across the board might risk jeopardising valuable flexibility for some and, ironically, have the unintended consequence of introducing more job instability and insecurity rather than less.

Worker representation

Another idea is to include ”shop floor” representation on remuneration committees, with a view to making decisions about pay more transparent and helping drive up pay from the bottom, while also curbing it at the top. The idea might seem straightforward enough at first glance, but in practice it would be complex. How would it be enforced? Who is a “shop floor” worker? How would they be selected? It also presupposes that every employer has such a committee – most don’t.

Pay ratios

Pay ratios have been debated for some time. These show the differences in pay of those within an organisation and usually compare the highest earner to the lowest/average pay levels. When adhered to, the result is that pay rises for those at the top can are dependent on those at the bottom rising too. Over 100 years ago, Mr JP Morgan himself said that no company needed a ratio of top earner to average which was greater than 20:1.

The problem with pay ratios, though, is that they are far too blunt a measure. They differ wildly from industry to industry: a large company with lots of low-skilled workers might have a very high ratio, while a start-up private equity firm could have a low one. It’s too impractical to require compliance with a set ratio. Instead, others are calling for a “name and shame” approach, requiring companies to put their ratio front and centre in annual reports.

Conclusion

Increasing pay for those at the bottom can sometimes make business sense. When those at the bottom are paid better, they will (to a point) tend to be more engaged and more productive. Henry Ford realised this nearly 100 years ago and the evidence from the Living Wage foundation still supports it today. However, placing employers at the forefront of many of the government’s policies to increase living standards could be overly costly and burdensome for many employers still grappling with the impact of the recession.