Britain's low wages are bad for business - Baroness Kingsmill

Low wages damage productivity and encourage a dependency culture among business owners, argues Denise Kingsmill.

by Denise Kingsmill
Last Updated: 03 Dec 2014

When the CBI, Polly Toynbee and Boris Johnson all agree that people on the lowest incomes should be paid more, that would seem to be the beginning of a consensus.  But when the FT and the Sun join the debate on behalf of the low-paid, then it starts to seem like a rolling bandwagon.

Everybody, even George Osborne, since his Damascene conversion on the road to the general election, thinks something should be done about low pay. Reasons vary.

Ed Miliband believes a low-wage culture encourages firms and agencies to recruit cheap low-skill foreign labour to the detriment of British workers, while John Cridland, director-general of the CBI, thinks that it is time for 'better pay and more opportunities for all employees after a prolonged squeeze' and that too many people are stuck in minimum-wage jobs without routes to progression.

Others think that it's only by increasing wages, which have fallen by an average of 14% in real terms since 2008 (and by around 20% in London), that consumer demand will be stimulated and spending power increased, thus supporting sustainable growth.

Certainly, the weak sales figures for the big supermarkets demonstrate that people are spending less as living standards fall steeply. Although, in contrast, Bentley had a record year in 2013, so while the low-paid struggle, some others are flourishing.

However, there is growing concern about the extent to which the taxpayer is subsidising those businesses that are paying such low wages that their employees are forced to rely on benefits.

The Low Pay Commission is looking into the appropriate level for the National Minimum Wage, which is now £6.31 for workers over 21. That works out at about £221 for a 35-hour week, well below the poverty line estimated by the Rowntree Trust to be £385 per week for a family of four.

A family dependent on a minimum-wage job would almost certainly need to have its income supplemented by social security benefits and/or tax credits.

The Low Pay Commission estimates that 5.3% of all jobs are minimum-wage jobs. About 75% of them are in retail, hospitality and contract cleaning - sectors dominated by large, profitable companies that should not be entitled to indirect taxpayer subsidies to cover their labour costs.

But it is not only those families relying on a minimum-wage job who have to claim benefits in order to keep their heads above the absolute poverty line.

It was estimated by the New Policy Institute last May that 4.3 million working families, defined as having at least one adult working, were in receipt of welfare benefits in 2012.

Furthermore, 40% of all working families with children were found to be in receipt of welfare benefits, the majority of which were in the form of tax credits. Their wages, although above the national minimum, were so low that they needed to be supplemented to keep them out of poverty.

This represents a huge taxpayer subsidy to business. State help is not given for other business overheads such as rent or energy costs, so why should people costs be subsidised in this way?

Companies undoubtedly would argue that the alternative to paying a fair wage would be to shed jobs. This should not necessarily be the case. It may be that they simply report lower profits or increase productivity through training, innovation and better management. Reliance on state subsidies rarely encourages this.

It has always struck me as odd that while it is routinely accepted that high performance and productivity in senior executives are encouraged by financial inducements in the form of bonuses, long-term incentive plans and share options, the same logic does not apply to those at the bottom.

If workers, currently paid so little that they have to claim state benefits, were paid more and encouraged to be more productive through financial incentives, not only would the benefits bill be lower but the tax take would be higher.

The UK has a notoriously low productivity rate per worker, one of the lowest in Europe. Could this be explained by the subsidies that encourage the dependence of many businesses on low-paid, low-skilled workers? Are we approaching the problem of the escalating welfare bill from the wrong side of the equation?

Instead of penalising the poor with swingeing cuts to benefits as in the Iain Duncan Smith model, could it be that significant increases to the minimum-wage level and more stringent enforcement would not only be more equitable but also increase productivity, reduce the benefits bill and produce more tax revenue?

Baroness Kingsmill is a non-executive director of various British, European and US boards. She can be contacted on editorial@managementtoday.com.

Follow her on Twitter: @denisekingsmill.

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