Pay the living wage and it's not just your employees who will benefit

In the age of social media, abuses of power can't stay hidden for long

Archbishop John Sentamu has given a spur to the drive for firms to pay a living wage, a notion that goes beyond the ideas both of a legally-set minimum wage and a market-clearing rate for the job – the rate at which an employer can find people willing to do the task in hand.

The Living Wage Commission, which the Archbishop chairs, defines this as “an hourly rate of income calculated according to a basic cost of living in the UK and defined as the minimum amount of money needed to enjoy a basic, but socially acceptable standard of living”. The current rate nationally is £7.65 an hour, while the London living wage is set at £8.80 per hour – both significantly higher that the official minimum wage of £6.31 an hour.

Much of the support for the living wage has been political but there are sound economic forces driving it too. One is that the job market overall is very strong: the UK is adding jobs at a rate of more than a million a year. Another is that pay has, as yet, to respond to this strong demand for labour. Still another is that where the growth has been most evident, in London and the south-east, living costs have risen sharply, underpinning the idea that there should be different wages in different parts of the country – something that the national minimum wage by definition cannot acknowledge.

In any case the view that employers should not over-exploit their bargaining position, when it happens to be strong, is deeply embedded in economic ideas. Adam Smith in The Theory of Moral Sentiments, his other great work aside from The Wealth of Nations, identified the trait in human nature that people were driven not just by narrow self-interest but a wider interest in the well-being of others. “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it…. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.”

If you are unconvinced by the theory, consider the practice. Henry Ford, a bit of a ruffian some would say, doubled the wages of his workers, ostensibly on the grounds that he wanted his workers to be paid enough to buy the cars they were making. Actually his motives were more mixed. He had a serious problem of labour turnover and doubling the wages stopped that in an instant, as well as putting pressure on his smaller competitors to match him.

The point here is that in all economic contracts it is in the long-term self-interest of both parties that the apparently stronger actor in the bargain should cut the apparently weaker one a little slack. This applies in contracts at all levels and I suspect we will hear a lot more about the need for a reasonable and balanced relationship in all sorts of contracts, not just job ones affecting the low paid.

For example some of the management contracts between government and private-sector suppliers are unravelling because they are seen as being unfair to taxpayers. The reputation of service providers has been savaged. The job contracts for some highly-paid public sector workers are being challenged for the same reason. Excessively aggressive tax avoidance – even if it is technically legal – is similarly being attacked. We have seen how firms such as Starbucks have had their business damaged thanks to publicity about their tax contribution in the UK.

It may seem a long way from the need for people doing not-well-paid jobs in expensive regions to earn enough to live on, to the need for foreign corporations to pay a reasonable amount of corporation tax, but the issue is the same. There is a general, widely-shared though vague feeling that economic transactions should not be exploitive – as Adam Smith identified – and falling back on a legal contract is not good enough.

As it happens, over the past 10 or so years, a set of technologies has arrived that makes it easier to counter abuses of power and to reinforce positive behaviour: the social media. So an employer that commits to paying a living wage will find its actions noted and disseminated. It may not benefit directly immediately but many people would at the margin prefer to deal with it, just as many of us would prefer not to go to Starbucks if there was somewhere else nearby. The word always got round, but it gets round a lot faster now. If we really do believe in the concept of a living wage, we can practice what we preach.


Juncker row is business, not personal

The row about Jean-Claude Juncker becoming the next president of the European Commission is mostly political but the growing divergence between the UK economy and the eurozone adds an economic needle to the tussle. Whereas a couple of years ago the two largest eurozone countries, Germany and France, appeared on balance to be outpacing the UK, the reverse is now the case. So David Cameron can rhetorically say: “Do you really want to pick a fight with your fastest-growing customer?”

Maybe the answer will be a robust “Yes”. However the opposition to Mr Juncker is not so much about his personality or his behaviour – we can all think of one recent UK party leader who could give him a run in the conviviality stakes – but rather that he stands for a more integrated Europe, in economic as well as political terms. Yet European economic performance is actually diverging rather than coming together.

Most of the concern about the European economy has been what has happened to the fringe, the dreadful unemployment in Greece, Spain, Portugal and even Italy. But the core is under pressure too, with even Germany is slowing a little. Yesterday the Ifo business climate index for manufacturing fell to its lowest level for six months, driven down by concerns about Ukraine, energy supplies and so on.

Sentiment is still positive and the general perception that the long, slow upswing will continue is intact. But growth will at best be 2 per cent this year, against more than 3 per cent for the UK. In France the outlook is worse. It seems to have stopped growing during the second quarter. A Markit survey of the business outlook showed the outlook for both manufacturing and services falling further below the 50 point, the level at which you would expect the economy to expand. Growth for the year as a whole? Maybe 0.5 per cent with luck.

None of this is Jean-Claude Juncker’s fault. But it puts a different spin on the debate about how Europe can lift its economic game in the years ahead.