With inflation running at 2.7 percent, this week’s rise in the minimum wage from £6.19 to £6.31 per hour does too little to address Britain’s low pay problems, and the Government should be doing far more to seek to introduce a higher minimum wage floor. With comment from Kim Hoque is Professor of Human Resources Management at Warwick Business School.

 Professor Kim Hoque commented: “There is a plethora of evidence pointing to the extent to which real wages have fallen in Britain since the financial crisis of 2008. The Trades Union Congress, for example, recently reported that in the past five years, UK workers have seen their pay fall by 6.3 per cent in real terms (representing a loss of £30 a week). Similarly, the Resolution Foundation has reported that Britain has suffered the biggest fall in working incomes across the G7 countries. What the data also show, however, is that it is those at the bottom of the pile that have lost out the most, with the incomes of people in professional and managerial roles having continued to rise. Indeed, research by One Society has found that if the minimum wage had increased at the same rate as the pay of FTSE 100 directors since its introduction in 1999, it would now be about £19 an hour, rather than its current rate of £6.31 per hour.

“The fear, as the Resolution Foundation has suggested, is that although Britain is experiencing a fragile economic recovery, this is failing to prevent the emergence of a ‘two-tier’ workforce, with an ever growing divide between the increasing numbers of people in low-paid, part-time jobs, and those in the upper tier of more stable managerial and professional roles. The impact of this on the day-to-day lives on those at the bottom of the income distribution is becoming increasingly evident. While inflation may be currently running at 2.7 per cent overall, it is higher for essential items, on which the poor generally spend a larger proportion of their income. Reflecting this are the reportedly half a million people who are now dependent on food banks, and the nearly a quarter of families that are, according to the Energy Bill Revolution campaign, struggling to pay both their heating and their supermarket bills simultaneously.”

“What might be done to address the situation? Many, including the Government-appointed Social Mobility Commission chaired by Alan Milburn, are increasingly pointing to the case for a living wage (the hourly-sum deemed necessary for a reasonable standard of living). Standing at £7.45 an hour (£8.55 an hour in London), the living wage is currently paid voluntarily by about 250 employers. The Social Mobility Commission has also proposed making job centre incentives dependent not just on whether they help people into work, but also whether they help people into well-paid work. Further recommendations are for the Government to use its purchasing power to require that contractors seek to increase pay rates, and for higher wages to be promoted via greater transparency by requiring listed firms and public sector employers to publish pay ratios. Another idea is to offer lower national insurance payments to firms that pay higher wages.”

“What should not, of course, be lost in this debate is the economic impact a higher minimum wage floor would have. Inevitably, many will argue that a higher basic floor of wages will be unsustainable economically and will potentially destroy jobs. Arguments of this nature were made when the national minimum wage was first introduced, yet there has been no evidence since its introduction that it has had negative employment effects. In addition, it should be remembered that a higher minimum wage floor would have significant benefits to the exchequer and the economy more broadly. Were employers to pay the living wage in larger numbers, this would reduce the billions of pounds currently spent on tax credits and other in-work benefits. Indeed, the Institute for Fiscal Studies has estimated that for every pound spent paying the living wage, the Treasury saves 50p in lower tax credit and benefit payments. A higher minimum wage floor would also, economists have highlighted, provide a valuable economic stimulus, given that the poor are (out of necessity) likely to spend rather than save any additional income they would receive.”

“A higher minimum wage could therefore represent a substantial ‘win-win’ – not only would it provide valuable respite for the millions of families struggling to make ends meet each month, but it could also provide a much-needed boost to demand as part of a sustainable recovery into the future.” Professor Kim Hoque concluded.