WORKING DRAFT LIVING WAGE REVIEW DISCUSSION DOCUMENT

Transcription

1 WORKING DRAFT LIVING WAGE REVIEW DISCUSSION DOCUMENT June 2015

2 Introductory Note: This LIVING WAGE DISCUSSION DOCUMENT has been developed to Subsequent input and evidence will be utilised to complete our LIVING WAGE REVIEW REPORT. The final REPORT will be published in early summer 2015 and all evidence will be non-attributable, unless otherwise agreed, to allow contributors to freely express personal, business and sectoral opinion. To provide comment, evidence, or to challenge any of the initial observations below please contact our policy team at or by Friday 19 June 2015.!2

3 Context DRAFT DISCUSSION DOCUMENT The core role of is to support our members and champion the prosperity of Glasgow. As a representative of responsible businesses in the region we are focused on tackling issues that impact our city and a key challenge is in-work poverty. At the start of 2015 the Council of Directors committed to undertake a comprehensive and balanced review of the impacts of the Living Wage. It was agreed that particular attention would be given to how the Living Wage relates to businesses of all sizes and across a variety of sectors. The starting premise was that whilst supporting activity that enables individuals to increase earnings and enjoy the subsequent economic benefits, the Chamber also recognises that for businesses in some sectors there are a number of practical challenges in increasing operating costs. This study therefore focuses on key impacts of the Living Wage, to determine opportunities and issues for business and draws upon evidence supplied both directly by our members and from a range of academic research and think tank sources. Approach Although there is a significant amount of research and opinion publicly available that discusses the attributes and challenges of the Living Wage, sought to progress a balanced and politically neutral review, from a Glasgow perspective, to reflect impacts on different types and sizes of business. Glasgow Business Engagement In exploring the topic we have - and through this DISCUSSION DOCUMENT will continue to - engage directly with members and utilise our existing forums, including the Glasgow Employer Board and consumer-led sector forums such as the City Centre Retailers Association. Further, we will also access external groups, including the Glasgow Restaurant Association and the Greater Glasgow Hotels Association. Political & Think Tank Research To augment member evidence and to facilitate debate we have reviewed research from a wide variety of sources including academic, political and other representative / trade organisations.!3

4 Case Studies To provide a broader context a number of case studies have been developed, focusing on countries with relatively high productivity, according to the OECD, and the findings have been incorporated into the impacts section below. Process The following sections of this DISCUSSION DOCUMENT seek to define the Living Wage; summarise key impacts; and draw some preliminary observations. All of which are open to comment and challenge ahead of completing our LIVING WAGE REVIEW REPORT. For ease of reference all initial member and secondary evidence has been filtered and categorised by impact. Detailed review notes on each piece of evidence and the country case studies are available as an annex. The Living Wage Defined The Living Wage is an hourly rate set independently and updated annually according to the basic cost of living in the UK. Employers currently choose to pay the living wage on a voluntary basis. The Living Wage enjoys cross party support, with public backing from the Prime Minister, Leader of the Opposition and Scottish First Minister. All major parties mentioned the importance of the Living Wage in their respective 2015 General Election manifestos. In 2009, Glasgow City Council was the first Scottish Local Authority to implement the Living Wage and at the 2014 State of the City Economy Conference, Councillor Gordon Matheson, Leader of Glasgow City Council announced that he would write to every business in Glasgow calling on them to pay the Living Wage to all staff. The Living Wage Calculation The calculation of the UK Living Wage is based on the Minimum Income Standard taking into account the minimum hourly income required to guarantee a certain standard of living. To calculate a weighted average, consideration is given to nine different model household types (no. of children, relationship status) which is pre-determined through consultation with organisations including the Joseph Rowntree Foundation. The weighted average is further adjusted to include expenditure on council tax, tax credits, benefits and childcare for each respective household. Ultimately an hourly wage rate is calculated and to ensure that the derived Living Wage does not grow at a faster rate than the UK average, a 2% cap is applied. This yielded a Living Wage of 7.85 an hour for 2015.!4

5 The calculation of the Living Wage accounts for differences in Living Costs between London and the rest of the UK by setting a different London Living Wage. The calculation of the Living Wage in London is based on two approaches. The first, estimates a Low Cost but Acceptable (LCA) budget for a selection of households and calculates the wage required to meet these costs. This is termed the Basic Living Costs approach. The second method focuses on Income Distribution and calculates the wage required for 11 household types in London to attain an income equivalent to 60 per cent of the median income for London, with that median adjusted appropriately to reflect the different household type. Consequently, the average of the wages derived from both methods is taken to determine the Living Wage. The derived average for 2015 is 7.95 per hour. In order to protect against unforeseen events a margin of 15 percent is added to the poverty threshold wage resulting in a London Living Wage of 9.15 per hour. The Living Wage, whilst accounting for differences between London and the rest of the UK, does not account for disparities between other regions. ONS data shows that there are strong regional disparities between consumer price levels for goods and services as well as differences in housing prices between those regions. Key Impacts Although not an exhaustive list we have explored a number of key impacts of implementing the Living Wage in terms of affordability and benefit to the economy, industry and employees. Key impacts explored include: INCOME & COST - Tax, Remuneration & Pensions BRAND REPUTATION - Customer Sentiment & Impact on Price CONSUMPTION - Increased Income & Propensity to Spend RETENTION & PROGRESSION - Financial Reward & Opportunity for Promotion PRODUCTIVITY - Higher Wages & Increased Output EMPLOYMENT - Staffing Levels & National Prosperity INCOME & COST - Tax, Remuneration & Pensions Increases to wages should lead to an increase in tax income but consideration needs to be given to the impact of increased cost to business and treatment of total reward. Will increased cost lead to potential reductions in total staff employed or number of hours offered? Tax An extension of the Living Wage could potentially create financial benefits to the Treasury, as income tax receipts and national insurance contributions would rise in line with a higher wage.!5

6 Further, tax credits and in-work benefits subsidised by the government have become an increasingly important income source for low pay households (Rowntree Foundation, 2014). An increase in the Living Wage could replace these income sources whilst generating a decrease in expenditure for the Treasury. Empirically, this is supported by a report of Landman Economics from October 2013: under a scenario of extending the Living Wage to all employees in the UK, a statutory Living Wage would result in an increase of around 4bn in net incomes, with the government receiving a net boost to public finances equal to 650m of employer NICs plus 2.58bn in increased employee NICs and income tax plus reduced benefit and tax credit payments. Thus, the total improvement in public finances would be around 3.3bn. The Living Wage Commission (2014) suggests a higher figure of 4.2bn. Remuneration However, the introduction of a compulsory Living Wage could have a significant impact on firms wage bills with the cost of introducing a Living Wage across the public sector estimated at 1.3 billion and the increase in the wage bill for private sector employees estimated at 5.3 billion (Landman Economics, 2014). Further, the Living Wage approach fails to take account of total income over a period longer than an hour. For example in Spain, the Living Wage is calculated based on monthly income which enables the calculation to account for performance / productivity related bonuses. There is also currently no consideration of employee benefits which help to reduce the cost of living. An employee survey by the Trust for London shows that a majority of interviewed workers of 17 representative London businesses (The costs and benefits of the London living wage, Trust for London, 2012) reports that the introduction of the Living Wage had been associated with a cut in their hours, reduced overtime and the consolidation of in-work bonuses/benefits. Therefore if businesses react in such a manner the introduction of the Living Wage might potentially even lead to a decrease in overall earnings and welfare. Hence in such a scenario earning the Living Wage might be less preferable. Pensions Consequently it could be hypothesised that in addition to the consolidation of in-work bonuses/benefits that pension contributions could be tightened leading to longer term welfare consequences. Cases Studies of Germany, USA, Ireland and Spain do not show a link between an increase in minimum wages and reduced pension payments. However, note that minimum wages in Spain, Ireland and USA are comparatively low (and Living Wage does not or only to a limited extend exists). As the minimum wage has only recently been introduced in Germany, it is too early to assess its full impact.!6

7 Mitigation An option could be for the government to introduce tax rebates, especially for small to medium sized businesses in traditional low-pay sectors (e.g. retail, hospitality and care). The Labour Party in its 2015 election manifesto suggested creating Make Work Pay contracts which will give tax rebates to businesses which sign up to paying Living Wages. Election manifestos of other parties do not mention the described problem. A joint research project by the Institute for Public Policy Research (IPPR) and the Resolution Foundation suggests the use of the architecture of City Deals to create Living Wage city deals, drawing forward future tax and benefit savings from paying local government workers the Living Wage and devolving this money to support private sector businesses in transitioning to the Living Wage. BRAND REPUTATION - Customer Sentiment & Impact on Price Like Corporate Social Responsibility there is an expectation that consumers are more likely to choose businesses that are most proactive. However how will consumers respond to increased cost and competition from other territories? Sentiment In advance of the 2015 UK General Election, an Ipsos Mori survey showed that the most popular policies amongst voters demonstrated action to improve living standards whether by increasing the minimum wage or further support on pensions. The public are aware and conscious of activity to improve living standards and recent studies are showing that support of the living wage has increasing attraction to business from a reputation / brand perspective. Twenty three companies in the FTSE 100 are Living Wage employers, GSK and Burberry most recently joining the ranks, with momentum being cited on some occasions due to shareholder pressure (Wages - an honest days living, Economist, November 2014) but with benefits to the core business such as increased investment also being achieved through accreditation as a Living Wage employer (Living Wage Employers: evidence of UK Business Cases, University of Strathclyde, January 2015). It is noted that the available evidence is predominantly from larger businesses and from the outset of this review, GCOC recognises that for some sectors - particularly competitive sectors where consumers have a range of choice and purchasing options - paying the Living Wage is a challenge as there would be a resultant knock-on effect to consumer prices. Impact on Price Implementing a Living Wage policy would raise the average wage bill for a bar or restaurant by 6.2%, and by around 4.8% for retailers, whereas banking and construction industries face!7

8 less than a 0.5% increase in their wage bill from adopting the Living Wage (Living Wage Commission, 2014). Initial member feedback suggests that the percentage impact for smaller businesses would be higher. Evidence suggests that consumers will support businesses that pay the Living Wage with a survey conducted by KPMG in April 2015 highlighting that 70% of UK adults would consciously shop in favour of a Living Wage accredited retail chain - a 10% increase on the previous year. As with all survey activity, it is unclear whether this would translate if higher pricing is implemented. As more companies adopt the living wage it is becoming an expectation rather than a differentiating factor. This may be of significance if a business is competing with other territories which do not have the same cost structure. CONSUMPTION - Increased Income & Propensity To Spend Logic would dictate that an increase in income would lead to an increase in consumption and a subsequent increase in overall economic activity. Therefore could higher spending offset higher wages? Increased Income Consumption spending is an important source of GDP growth as it positively impacts aggregate demand. Consumer spending in the UK, reported by the Office for National Statistics, increased to an all-time high of 276 billion in the fourth quarter of This illustrates the UK s economic recovery after consumption levels fell sharply during the recession between However, there still remain relatively high levels of poverty in Scotland and the rest of the UK. Research by the Poverty and Social Exclusion Project shows that almost one in four adults in Scotland has an income below what they consider is needed to avoid poverty, and around 13% of adults in paid work are considered poor (e.g. earning below 60% of the UK median income). The main reason for in-work poverty is low pay. Generally, there has been a trend of rising living costs and stagnating wages (Living Wage Commission). In 2014, 10% of all employees in Scotland earned 6.79 an hour or less, and 20% earned 7.85 or less (SPICE Briefing). UK wide, 5.2 million people (20%) are paid below the living wage and the fraction of those earning below living wage has been increasing since the recession (Living Wage Commission, 2014). Research suggests that the extension of Living Wage provides a potential measure to reduce inwork poverty (Resolution Foundation, 2014). Reduced poverty and a higher pay in turn contribute to a higher disposable income. As income tends to be positively correlated to consumption levels, consumption is likely to increase: Landman Economics estimates that a mandatory Living wage would lead to an overall increase in consumption of 6.6 billion. Further, the Employment Research Institute at Edinburgh Napier University suggests that raising the level of all full-time employee wages in Glasgow to the Living Wage could contribute around 76 million per annum to our local economy.!8

9 An increase in employers wage bills in the short run creates higher input costs for firms but in the long run could also increase total revenue due to a rise in consumption. Propensity to Spend However, it should be noted that the ultimate increase in consumption depends on the propensity to consume out of disposable income which depends on other variables such as interest rate levels and expected future income. Therefore ultimately the concise prediction of the Living Wage s impact on consumption levels remains difficult. RETENTION & PROGRESSION - Financial Reward & Opportunity for Promotion Although evidence would suggest that the Living wage is currently a key factor in ensuring staff retention, wide spread adoption may impact this advantage. Ensuring progression is also a key retention factor which has skills and productivity advantage so should also be considered when looking at wage thresholds. Would being stuck at a level become more likely? Financial Reward A key attribute cited by organisations promoting the Living Wage is increased staff retention and reduced absenteeism. Of the data gathered for this review, this position is supported, however the majority of data available focuses on larger companies. Using the example of KPMG (Living Wage Employers: evidence of UK Business Cases, University of Strathclyde, January 2015) who surveyed facilities management contractors following a KPMG policy to encourage on-site contractors to adopt the Living Wage it was established that contractors saw staff turnover rates decline for those staff involved in the KPMG contract and earning the Living Wage. While the evidence gathered supports the argument that paying a higher wage supports employee retention there are a number of other considerations. Firstly, financial reward is an inherent priority for employees so unless the Living Wage is universally implemented then potential employees will be attracted to employers that pay the greatest salary for the same position / responsibility. Secondly, some sectors traditionally have a higher staff turnover. Opportunity for Promotion Ensuring employee progression is another approach to achieve a greater income and there is a debate around the Living Wage and employee progression - why do some people become stuck in low paid jobs for most of their working lives? In order to ensure the same monetary incentives for progression as in a pre- Living Wage setup there would need to be a wage spillover effect whereby employers seeking to retain existing wage structures raised the wages of workers earning slightly above the Living Wage rate to reflect differences in employee experience, tenure and skills. This, however, could prove difficult as this would imply a larger financial burden for businesses which in turn could lead to a potential decline in in-job progression.!9

10 The CIPD undertook a comprehensive review to understand the barriers to progression for the lowest paid in October 2014 (Pay progression - understanding the barriers for the lowest paid). From the evidence gathered, the report cited that the likelihood of being stuck in a low paid job is mostly associated with being female and increases with age, with outcomes worse outside London. Amongst women, having children is not in itself associated with a higher chance of being stuck but being a lone parent or having young children does exhibit a correlation with being stuck, as does having a work-limiting health condition for both genders. Barriers to pay progression include: Economic climate: lack of affordability to employers of pay rises; employers market (employees are expendable) Employer-related factors: perceived nepotism ( my face doesn t fit ); perceived unfairness of opportunities between staff; being treated like a number Confidence: lack of knowledge about how to do a more senior job, linked to inexperience Costs outweigh benefits: financial costs (for example childcare, transport, benefits loss); greater pressure/ expectations The report suggests a number of opportunities to mitigate barriers and support employee progression such as: mentoring schemes to build confidence; establishment of a clear progression path; focus on junior level progression; and more productivity based incentives. PRODUCTIVITY - Higher Wages & Increased Output The ability to demonstrate that higher wages leads directly to higher productivity which in turn leads to higher profitability would be a compelling argument but can it be proved? Economic literature and theory on the impact of higher wages on productivity suggests several factors where a rise in wages can boost labour productivity (Peterson Institute for International Economics, 2015): Higher wages motivate employees to work harder Higher wages attract more capable and productive workers Higher wages lead to lower turnover, reducing the costs of hiring and training new workers Higher wages enhance quality and customer service Higher wages reduce disciplinary problems and absenteeism Firms with higher wages need to devote fewer resources to monitoring Workers excessively concerned about income security perform less well at work Higher wages are associated with better health - less illness and more stamina, which enhance worker productivity!10

11 Whilst several companies such as KPMG report an increase in worker s motivation, reduced worker turnover and an improved service quality, UK specific aggregate economic empirical evidence on the topic is relatively rare and limited. However, a study by Middlesex University Business School examines the aggregate impact of a rise in the National Minimum wage on labour productivity in traditional low pay sectors including service sectors, agriculture, food processing and textile manufacturing. The study finds that aggregate low pay labour productivity has been significantly positively impacted by the National Minimum Wage (with agriculture being the sole exception), while there was no overall detrimental impact on total employment. In contrast, others suggest that assumptions about wages positively impacting labour productivity are a reversal of causality. Antony Davies, senior scholar at the Mercatus Centre points out that workers who are more productive command higher wages because employers compete for them as they are perceived relatively valuable. A higher minimum or living wage, in contrast, does not automatically make formerly unproductive workers more productive. The case studies conducted as part of this report assess a potential positive link between labour productivity levels measured as GDP per hours worked and higher wages. With the exemption of Spain where research suggests a relationship between low pay and low productivity, rises of labour productivity in the remaining countries (Germany, USA, Ireland) cannot be directly linked to wage increases. All in all, the existence of a link between productivity and higher wages remains contentious. EMPLOYMENT - Staffing Levels & National Prosperity Introducing a compulsory Living Wage would reduce the number of employees in low paid work however how would a compulsory Living Wage impact total employment levels or on particular sectors or business size? The UK has one of the highest proportions of employees in low paid work from advanced economies. According to the OECD s definition the share of employees in the UK earning below the low pay threshold (hourly wages below two-thirds of gross median hourly pay), in the period was 21%, higher than most other European counties including more than twice the rate in Italy (10%) and Switzerland (9%), and four times that in Belgium (5%) (Living Wage Employers: evidence of UK Business Cases, University of Strathclyde, January 2015). Overall, in 2013 one-in-five employees (22 per cent, or just over five million individuals) in Britain earned less than the low-pay threshold which is a slight but statistically significant increase on 2012, reversing a slight fall in the previous year. Introducing a compulsory Living Wage potentially could address this issue by increasing the share of workers above the low pay threshold. However, the!11

12 ultimate outcome depends on the Living Wage s impact on employment levels, as it could also have a detrimental overall impact by increasing unemployment. Basic microeconomic theory assuming a setup of perfect competition (a large number of firms selling a homogeneous good at a given price) suggests that workers for whom the Living Wage is greater than the value of their hourly productivity will lose their job when the Living Wage is introduced, since wages under perfect competition are assumed to equal workers productivity. In contrast, assuming a set up of imperfect competition due to more realistic labour market features such as employer s market power and the costs to employees of moving jobs, it is quite possible that many workers are being paid less than the value of what they produce. In this situation, it is possible for the Living Wage to raise wages without having any adverse effect on overall employment levels. The potential impact of an extension of the Living Wage therefore depends on structure of market (eg imperfect vs perfect competition). Empirical evidence tends to agree that there does not exist a noticeable negative impact on employment levels. A report by Landman economics, for example, states that there is no statistically significant evidence of reductions in employment or increases in unemployment arising from the uprating of the minimum wage in the UK over the last decade (The Economic Impact of Extending the Living Wage to all Employees in the UK, Landman Economics, October 2013). Further, an increase of wages to the Living Wage level could potentially provide a macroeconomic stimulus by increasing consumption, demand and hence production. However, whilst the aggregate overall impact of an extension of the Living Wage is likely to remain neutral, it could potentially have some sector specific detrimental impacts. Small and Medium Sized businesses in the service sector could initially meet increased wage bills by reducing staff numbers or hours worked. An employee survey by the Trust for London, for example, shows that a majority of interviewed workers reported a decrease in hours worked after the adoption of the Living Wage (The costs and benefits of the London living wage, Trust for London, 2012). Initial Observations There is considerable support at a political, business and consumer level to aspirate to eradicate inwork poverty. Our review of evidence suggests there are a number of potential benefits of introducing the Living Wage for the employee, the employer and the wider economy. These could include financial benefits to the Treasury and a reduced reliance on tax credits, increasing consumer support for Living Wage employers and a potential rise in the propensity to consume. For business, evidence suggests an increase in staff retention, however there are other considerations such as financial reward being an inherent priority for employees.!12

13 There are a number of potential challenges for particular sectors and smaller businesses in affording the Living Wage, yet much of the available evidence focuses on larger businesses with greater flexibility. It should also be recognised that there are some concerns regarding satisfying all of the current criteria required for formal accreditation. Many employers legitimately look at the total reward package for employees - which can include profit share, allowances for food, travel, uniform and other services and enhanced pension contributions - and would argue that an arbitrary judgement of salary alone is not a fair reflection on whether an employee is in in-work poverty. Evidence reviewed suggests that introducing the Living Wage would have no negative impact on aggregate employment however there may be initial short-term negative impacts to certain business sectors and size who could initially reduce employment to meet rising wage costs. The existence of a link between productivity and higher wages remains contentious as workers who are more productive inherently demand a higher wage and productivity improvements could possibly be better achieved through capital investment. Therefore whilst endorses the general principle of a Living Wage, we would make the following recommendations: Whilst the prescribed criteria remains a blunt instrument and does not fully reflect total reward then the Living Wage needs to remain voluntary. As support for the Living Wage continues to grow there is the opportunity to look at more innovative funding approaches, such as the Living Wage City Deal. A clear link between the Living Wage and increased productivity needs to be proved to encourage wider adoption. Checks and balances need to be put in place to ensure no adverse short term impact on employment levels. As with the London Living Wage there is the opportunity to explore regional margins to account for different regional living costs.!13