Is the living wage the key to stronger public finances?

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The TUC has put out some research today suggesting that if everyone who is currently on low pay had their wages increased to the Living Wage this would imply savings of £3.2bn for the public purse due to a reduced benefits bill and increased tax take.

While – in any one case – the Treasury would benefit from an individual having a pay rise through increased tax take, it is not clear that there would be a commensurate impact if wages went up en masse. There are a few reasons for this.

  • The first of these is one that the TUC notes – that not every employer can afford to pay their staff the living wage – this is an important point. If an employer can't pay the living wage then they can't employ someone on the living wage. In other words, higher wages might well mean lower employment. And lower employment would hurt the public finances.
  • Even if an employer can afford to pay the living wage, there are reasons to think it might reduce employment. For example, if an employer is looking to increase output there may be two options: hire more people, or find ways of making production more efficient (e.g. by investing in new machinery). Of course, sometimes the first of these options will be the better choice, but the more expensive it is to hire someone; the more the balance will be skewed towards finding other ways of increasing output.
  • Finally, if a company does increase the pay of its entire workforce, while there it is likely there will be some benefits (for example increased staff retention) it is likely to have a negative effect on margins. Lower margins also reduce a company's ability to invest. Long term, lower investment means lower growth. And lower growth means less employment.

However, none of this means that employers shouldn't pay the living wage. In fact, while the TUC research found that in some regions around a fifth of people earn less than the living wage, this still means the majority of people are paid the living wage or more, and therefore in a majority of cases, the living wage is affordable for employers.

Ultimately, for a wage to be affordable to a company, it must reflect productivity. Therefore the long term solution to low wages is developing a highly skilled more productive workforce. This is one of the key pillars of EEF's view on how to grow a better-balanced economy. You can read more about how to achieve it in our report Skills for Growth.

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This person has now left EEF. Please contact us on 0808 168 1874 or email us at enquiries@eef.org.uk if you have any questions.

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