InvestmentsJun 3 2014

Waging war on low pay

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Labour leader Ed Miliband has said he will give the Low Pay Commission (LPC) a five-year target to increase the national minimum wage to a set percentage of median hourly pay if he wins the general election in 2015.

A recent report for the Resolution Foundation suggested the government should set a medium-term target to raise the minimum wage to 60 per cent of median hourly earnings, from 55 per cent in 2012.

Labour has said it will announce the exact percentage nearer the election. It will also ask the LPC to work with trade unions and employers to raise productivity in low-paid sectors to help businesses fund big rises in wages.

The minimum wage is due to be increased from £6.31 to £6.50 per hour in October, giving more than 1 million workers a 3 per cent pay rise, the first real-terms increase for five years.

The proposal has elicited a hostile reaction from the British Chambers of Commerce, the Institute of Directors and the Confederation of British Industry, the latter dubbing it “political interference”.

So, do economists and fund managers see this as a major political risk in the UK? What are the technicalities of what Mr Miliband is suggesting, and could small businesses operate under such a regime?

Jeremy Lawson, chief economist at Standard Life Investments, says: “It’s not a political risk. Labour believes that wages have been rising slowly and that the low-paid have lost ground over the past five years when in fact the UK minimum wage is about the median for OECD countries,” he explains.

Mr Lawson says that instead of pushing the burden onto the business sector, Labour could increase wages through other means, such as raising productivity, innovation policies, greater incentives to work and tax credits.

“Wages should be more aligned to what’s going on in the economy. In sectors such as leisure and hospitality, the minimum wage is already 80 per cent of median earnings,” he says.

“Forcing higher wages on businesses would simply lead to a loss of jobs or a decrease in workers’ hours. Alan Buckle [who drew up Labour’s recommendations] thinks that if they raise the minimum wage it will increase productivity growth, but in some low-wage sectors it will be difficult to do this.”

Richard Jeffrey, chief investment officer at Cazenove Capital Management, says facilitating steady growth in the economy is the best way of improving incomes.

“Higher wages have got to be a consequence of sustainable economic growth. You have to be careful, in instituting income policies of any sort, that you don’t undermine the economy,” he warns.

Mr Jeffrey says the economic downturn did enormous damage to lower-paid workers. He argues that Labour should focus on policies that foster sustainable growth in the economy.

“Putting in place wage policies is not the same as creating jobs,” he says. “If you force up the pay of lower-paid workers through these sorts of mechanisms, the result is fewer of them are employed, because employers will invest in a piece of capital equipment to replace a percentage of workers.”

Lucy O’Carroll, economist at Aberdeen Asset Management, says Mr Miliband’s proposed changes to the minimum wage are not a top-level political risk at present.

Other issues – such as the wider economy, the housing market and immigration – have more traction among the electorate, she argues.

“The fundamental issue with the minimum wage is setting it at a level that provides an appropriate compromise between providing protection for the low-paid [and] stifling jobs and growth,” she says.

“The LPC appears to have done a decent, independent job of steering this course for the government during the past 15 years or so.

“[Regarding] whether implementation of Labour’s proposal is technically possible and would provide a similar track record to that of the LPC at present, we would really need to see more detail on the proposal.”

However, others see Labour’s proposal as a positive move that could have beneficial consequences for both employers and employees.

Marianne Fallon, partner and UK head of corporate affairs at KPMG, says the proportion of people on low pay has climbed in recent years while the cost of living has risen, resulting in people struggling to afford the basics.

“This is a scenario that should be consigned to the history books,” she says. “Fair pay is, after all, fair play. Organisations that can afford to do so should offer staff and suppliers a wage that is enough to live on. Doing so affords people the opportunity to improve their work-life balance, as they are not forced to work longer hours or hold down more than one job.

“We are pleased to see an increasing number and range of businesses and politicians across all UK parties supporting a living wage. A sensible review of the national minimum wage would be welcome, especially as it has fallen behind in real terms since the current level was set.”

She adds that KPMG’s experience of offering a living wage has seen a rise in service standards and a fall in sickness, which is good not only for individual morale but also for business.

“The cost of improving take-home pay for the lowest earners will be outweighed by the benefits of improved engagement and enhanced productivity,” she says.