Ignore the squeals, the higher minimum wage makes sense

Outlook

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What’s the key take-away from PricewaterhouseCoopers’ national living wage (NLW) survey, published this morning? The accountancy firm says 135 businesses with an average of 11,000 employees expect to pay an extra £1.6m each – on average – in 2016 and up to £11m more by 2020 thanks to its introduction.

“They’re doomed! The economy is doomed! We’re all doomed!” the pro-business right will cry.

While I accept that these businesses face a challenge, the key take-away for me, and the really unpleasant finding of the survey, is this: those businesses said that nearly a quarter of their workforces are currently paid less than £7.20 an hour. That’s a huge number of people who earn considerably less than what the Living Wage Foundation says is enough to secure a decent minimum standard of living. It currently stands at £7.85, and £9.15 in London. More than the current minimum wage, and more than the £7.20 that Chancellor George Osborne has set for the NLW.

Now here’s the good news, at least for those working in occupations that don’t pay well (retail, care work, service industries generally). The labour market continues to tighten. The latest figures show unemployment is at a seven-year low. Employment – the percentage of the population in work – is at its highest since records began.

This helps explains why wages are rising at a 3 per cent clip, comfortably ahead of inflation, which has turned negative again. Employers would have had to pay more to get the staff they need, even in the absence of the NLW.

One of the conclusions of PwC’s survey is that a third of those taking part plan to pass on the costs of just paying the NLW to customers. But the inflationary effect of that may also be a good thing, with Britain’s economy showing deflation. As the Governor of the Bank of England has noted, one needs a little inflation to oil the wheels of commerce. There are still issues with the NLW. The social care sector is facing a crisis as it grapples with meeting the cost. Providers from the third sector – charities and voluntary organisations – are hit particularly hard because they don’t benefit from recent cuts to corporation tax.

Cynics (like me) fear Mr Osborne will try to get away without supplying the necessary extra funding, and instead palm off the problem on to cash-strapped local authorities.

Still, despite what the pro- business right would have you believe, increasing the minimum wage is a sensible thing to do. Putting more money into the pockets of low-paid workers puts more money into the economy, because they spend most of their incomes.

Unfortunately, while the Chancellor has given out increased wages, he’s also taken away billions of pounds more in much needed tax credits paid to low earners. So that handy economic benefit may not be realised.