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Researching the macro-economic impact of the Living Wage

Posted on September 12, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The idea of a ‘living wage’ is gathering momentum in many parts of the world. It is conceived and measured as a wage rate which is adequate to meet the needs of workers and their families in a given society at a given time. But affordability of life for workers is one thing – what about affordability for companies and employers? Would the application of a ‘living wage’ across the economy lead to businesses closing or jobs being lost or young people failing to find employment?  The answer depends on what level of increase is required to reach a ‘living wage’ (and how the latter is measured) as well as how different impacts play out in the economy with gains and losses added up. 

Clearly, it is not possible to be certain or precise about the impact of any change in the cost of labour. But, estimates can be made and last week a significant report on this very question was launched by the Northern Ireland Council for Voluntary Action (NICVA). The research was undertaken by Oxford Economics and published as a report of the Centre for Economic Empowerment at NICVA. The full report, entitled An Economic Analysis of the Living Wage in Northern Ireland, can be downloaded here . The Report finds net employment and output gains and a boost to the Northern Ireland economy. There follows, below, a brief summary of some of the key issues in defining and measuring a ‘Living Wage’ followed by a summary of the key findings of the Oxford Economics Report. I also raise some questions about how this research might be extended and used by policy makers.

What, Why and How much?

First, what is a living wage and how is it measured? In a previous blog on this site I have invoked the idea of a ‘wage rate that is adequate and appropriate to enable people to live with dignity in today's society’. But, how do we know what is an adequate wage rate and how is this applied to different household types in different places? Much research has been conducted both in the United Kingdom as well as, recently, in the Republic of Ireland. See, for example, the research work of the Vincentian Partnership here . In the U.K. as in the Republic of Ireland, the measure of a ‘living wage’ is with reference to hourly rates of pay and on the assumption that the worker works full-time. In the U.K. the measure is differentiated between London and outside London and refers to a blended average for the main household types (distinguishing by number of adults and children). The more recent work by the Vincentian Partnership in the Republic of Ireland has examined different household types but is focussed especially on a living hourly wage rate for single workers. This figure is currently at €11.45 per hours (above the national minimum wage (NMW) in the Republic is currently €8.65 per hour). In the U.K. the ‘Living Wage’ rate is £8.80 in London and £7.65 outside London (including Northern Ireland). The UK NMW  is currently £6.31 for those aged 21 and over). Further information is available here .

Clearly, nobody is suggesting that a ‘living wage’ rate as measured by employee pay per hour is the full story. Hours of work, access to continuous employment, maternity leave, pension contributions and benefits, paid holiday leave, sickness benefit are all crucial to what might be regarded as a decent work package commensurate with the skills, capacity and needs of the worker.  The State, in any society, has an important role in providing for the needs of workers and their families through the tax and welfare system as well as through regulation and legislation. However, employers are also responsible in paying wages and offering employment conditions that are fair and affordable. There is a rising concern about precarious work, exploitation and free-riding on internship schemes as socially corrosive developments in the new, global and local labour markets.

Can employers afford to pay living wages?

A good question. Enterprises and employers vary hugely depending on the line of economic activity, the size of the enterprise and the state of the market for goods and services in any particular sphere.  Some companies are in a position to pay higher wages, some are not.  The research evidence in the USA and in the UK is mixed and inconclusive at worst and mildly reassuring at best that the introduction or raising of the NMW is not negative in relation to employment levels (see references to this research in a previous Blog ).

A statutory national minimum wage (NMW) is used in many parts of the world to provide a floor of decency below which employers cannot go (even if legally they can in specific circumstances claim inability to pay). This should not be confused with a ‘living wage’ which is typically above the NMW.  A process of moving wages up from the statutory minimum to what is regarded as a ‘living wage’ may be the subject of negotiation or, in specific sectors and cases, a regulation under a Wage Board or Regulated Employment Agreement/Joint Labour Committee in the case of the Republic.

Northern Ireland has the highest concentration of low-paid workers in Britain or Ireland.

The Oxford Economics (OE) Report estimates that there were 173,000 low paid workers (below the Living wage rate of £7.20 in 2012) in Northern Ireland in 2012. This accounted for 23% of all employees. Cross-UK comparisons show Northern Ireland as having the highest proportions of low pay. See here  [See, also, Chart below] . An interesting finding of the OE Report is that there were an estimated 40,000 jobs sustained as a result of public sector procurement (purchase of construction services, medical supplies, energy, etc.) of which 35% were estimated to be earning less than the ‘Living Wage’

My colleague Paul MacFlynn has already outlined the extent and distribution of low pay in Northern Ireland ( Hours and Earnings in the Northern Ireland Labour Market ). In summary low paid workers are heavily concentrated among the following groups or sectors:

  • Young
  • Female
  • Part-time
  • Low-skilled (below GCSE A*-C)
  • Sales and customer service occupations
  • Retail, Accommodation and Food sectors

Chart:    Percentage of earners below Living Wage by UK Region 2013

Below Living Wage NI

And what impact would paying a living wage have on jobs, businesses and the local economy?

Five channels of impact were identified by Oxford Economics:

  1. Reduction in employment by firms.
  2. Reduction in labour costs by firms cutting back on the wages of higher paid workers or curtailing hours of work.
  3. Absorption of wage increases through a reduction in profits of firms.
  4. Passing on of cost of wage increases to consumers through price increases.
  5. An increase in productivity arising from higher wages (via employee morale for example).

Which of these five impacts will dominate is an empirical question and is likely to vary by sector and firm distinguishing between the composition of trading as well as structure of firm costs and profits. For a review of the literature see the NERI Working Paper by my colleague Micheál Collins ('The Impacts and Challenges of a Living Wage for Ireland'). He cites the work of Matthew Pennycock (2012) among others (What Price  a Living Wage? Understanding the impact of a living wage on firm-level wage bills).

Here is a flavour of some of the estimated impacts of an uplift to a living wage increase in the case of Northern Ireland from the OE Report:

£221 in additional wages

An uplift to the living wage would impact on an estimated 173,000 workers (and their families) and, on the assumption of no behavioural change, would increase the total Northern Ireland wage bill by £221 million (or just over 1% of the total). About £100 million of this would be in the Wholesale and retail trade along with Accommodation and Food.

Up to £88 million in additional Exchequer revenue

In addition, it is estimated that the U.K. exchequer would benefit by way of additional taxes and national insurance contributions as well as lower in-work benefits as a result of paying the living wage or higher to all workers. The estimated additional revenue is put at £88 million. However, this figure could be less depending on possible impacts of higher wages on company profitability and corporation taxes paid.

£132 million in additional consumption

Disposable income would be boosted by an estimated £133 million, 99% of which is likely to be consumed rather than saved.

Gross Value Added (close to local GDP) would be boosted by an estimated £84 million.

While overall employment would rise by  between 1,200 and 2,500 when job losses are netted out.

Implications for policy and further research

research

The research work undertaken by Oxford Economics proves that, notwithstanding the severe data limitations at a macro-economic and firm level for Northern Ireland, estimation of possible or likely impacts of a wage increase are possible using Input-Output models. It would be greatly helpful if such Tables were available to researchers from a timely supply of official statistics.

Policy and implementation

The determination of the National Minimum Wage is a matter for the UK Government acting on the advice or information provided by the UK Low Pay Commission. There is a case for raising the NMW not least because low pay is a problem across all UK regions and recent trends suggest a pattern of falling average real wages across the UK which is impacting on equality and a broad-based economic recovery.  There may be scope at regional level such as in Northern Ireland to provide ‘local solutions’ along some of the following lines:

  1. Implementation of the ‘living wage’ at local council level in regards to procurement.
  2. Establishment of appropriate negotiation structures at sectoral level especially in those sectors where low pay is heavily concentrated.

If there is a general positive case for greater devolution of powers to the UK regions let’s remember that wages combined with upskilling and organisational transformation are key to successful local economic regeneration not a self-defeating (in the longrun) competition to out-do other regions by cutting corporation tax and thus deprive the regions of their revenue capacity to provide public services and goods.

Posted in: Living wageNorthern Ireland Wages

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