A One Nation policy

A smaller gap between high and low pay would promote social cohesion

Ed Miliband is starting to make sense. His plan for Make Work Pay contracts, which he reveals in an interview with this newspaper today, is a creative way of working with the grain of market forces to promote social justice. He proposes that a Labour government would give a one-year subsidy to employers who give a pay rise to low-paid workers to bring them up to the "living wage", currently £7.45 outside London.

The subsidy would cost taxpayers nothing, because it would be paid for by the higher tax and National Insurance revenue and the savings in tax credits.

It would still cost employers to raise their workers' pay, although the scheme would meet 32p in the pound of the additional cost, and there are many benefits to employers of higher wages, which tend to reduce staff turnover, increase productivity and enhance the employer's reputation. The subsidy could provide the spur to many employers for whom the decision to raise low wages is a marginal one – and if it doesn't provide the benefits in which Mr Miliband believes, then they can revert to paying the minimum wage.

This is sensible. The national minimum wage has been one of the success stories of the last Labour government. Introduced at a low level in 1999, it was raised steadily by much more than inflation and by more even than average wages. If it had kept up with wages it would be about £5.60 an hour now. Instead it is £6.31 for workers aged 21 and over, and was raised throughout the recession without an adverse effect on jobs. Indeed, the effect of this recession on employment has been much less than that of previous recessions.

However, Mr Miliband and Ed Balls, the Shadow Chancellor, accept that pushing the minimum wage up more quickly would probably have the effect of putting people out of work. Yet there is much that could be done to raise low wages selectively, which can have an effect in narrowing differentials workplace by workplace. The Living Wage Foundation, a charity, has already accredited 400 employers as living wage employers. Mr Miliband's plan could significantly increase that number, bringing tangible benefits to workers, employers and the nation generally. Not only would a smaller gap between high and low pay promote social cohesion, but more money in the hands of the low-paid feeds more quickly into aggregate demand than, say, tax cuts for the rich.

It is also worth congratulating Mr Miliband on the cleverness of his scheme. Unlike his proposed gas and electricity price freeze, it makes good economic sense while also being symbolic, advertising One Nation Labour's concern with the living standards of the hard-working poor. It will be interesting to see how the Conservatives, who once opposed the minimum wage, will respond.

If there are problems with the policy, they are those of the living wage generally. There are technical problems, for example, in how the wage is set. Outside London, the rate is based on what people say in surveys is needed for a "minimum standard" of life, assuming a typical household in which the adults work 38.5 hours a week. But the London rate, £8.55 an hour, seems to be calculated in an arbitrary way, and it is to be hoped that tomorrow's uprating puts that right.

Targeted living-wage subsidies were advocated in the US more than a decade ago, but they have not been tried on this scale. Mr Miliband is leading the world in intelligent One Nation politics.