Living Wage – Who wins?

A lot has been said and done about the forthcoming living wage legislation  – “good for business”/”bad for business”, “good for productivity”/”will make no long term difference”, “prices will have to go up”, ”jobs will be lost”, “age discrimination will be encouraged” etc.. etc.. One of the most puzzling aspects is why it hasn’t simply been used as a re-brand/revamp of the minimum wage.  We are now in a situation where companies who chose to delineate between ages and pay those under 25 at the minimum wage and those over at the living wage will be required to adjust their pay rates twice yearly as the minimum wage traditionally goes up in October and the new living wage has been scheduled to rise every April in line with the financial and tax year.  This gives companies additional headaches and administrative burden as they potentially have to implement two rounds of annual pay rises, as well as price rises to accommodate it, and negotiations with their own supply chain twice a year as their suppliers push their prices up to pay for their own inflated wage bill.

If the government was determined that the living wage should kick in at 25 why not simply abolish the minimum wage as is and introduce the living wage with “stepped” age brackets up to 25 reviewed every April and save everyone a lot of hassle.

Of course it’s also worth remembering that the chancellor is known for giving with one hand whilst taking with another.  His much vaunted pledge to incrementally increase the tax free threshold for the lowest paid workers every year now tied in with the living wage could be seen as in one light as him being a champion of the low paid who are not traditionally seen as Tory supporters.  However looked at more closely the one simply pays for the other, by increasing hourly pay and the tax free allowance at the same time, the treasury actually increases its take on the average minimum/living wage person working for 40 hours per week.  So each time the chancellor raises the tax free allowance he simply puts up the living wage, makes his money back and takes a pat on the back for helping the low paid.

Net annual Pay on £7.20 assuming 40 hours – £14,180.80 – TAX – £795.20

Net annual Pay on £6.70 assuming 40 hours – £13,268.80 – TAX – £667.20

 

In fact whilst the workers net pay goes up around 6.5% the chancellor’s tax goes up a whopping 17%!  If we follow the assumption that wage inflation at the bottom will feed through to the top then it can also be assumed he will push more people into the higher tax category – again increasing his take.  Furthermore if the result of the new wage is that prices go up by a similar amount then workers’ pay in “real terms” actually remains the same but the chancellor is again a winner as any increased prices which attract VAT will mean more money going into this pot also! Giving with one hand and taking with the other indeed.

So whilst any attempt to push up wages for the low paid should genuinely be welcomed – and I’m all for it, it is hard to escape the feeling that not only has the government dealt business a bad hand in the cack handed way it’s been introduced but also that they are ultimately the biggest winner in all of this