This is cause for thought, even though the idea that the National Living Wage might work is based on something of a false premise – it doesn’t fit the definition of a living wage for the very good reason that working people will still need benefits to meet the cost of living.
The possibility of productivity improving with a wage rise is attractive – but the evidence of the past suggests that this may not encourage firms to invest more in their workers. Having a minimum wage gives them a line, to which they can stick, saying the law does not require them to spend any more. And with the National Living Wage not actually being enough for anybody to make a living from it, there’s a built-in handicap.
But the Conservative Party failed, failed and failed again, all the way through the Coalition Parliament – and still managed to win the 2015 election.
Perhaps that is a reflection of the electorate’s willingness to believe a comforting story rather than the inconvenient facts. Perhaps voters simply think that the cuts that have been implemented already, and those that are to come, are somebody else’s problem (they aren’t).
It makes you think, doesn’t it?
George Osborne’s masterstroke National Living Wage (NLW) is really just another deficit reduction policy.
The government has realised that the deficit is a labour market thing and that the only way to take big lumps off social security costs is for a lot of people to earn a lot more than they do now.
Solution? Get employers to pay more, so fewer people will need in-work benefits and the welfare bill will go down. Or, to put it another way, get employers to cover some of the cost of deficit reduction.
This won’t work, says just about everybody.
The NLW won’t increase earnings by anywhere near the amount that benefits are being cut but it will also favour those whose benefits are being cut least.
If the government succeeds in taking £12 billion out of the welfare budget it is likely to lead to serious distress for many people and possibly social unrest, even with the rise in the minimum wage. If it fails to do so, it must either take more cost out of public services, increase taxes or abandon it’s deficit target. All these options will be politically damaging.
Having said all that, no-one can be sure about the impact of the NLW because the government has never pushed up the minimum wage by so much over such a short-time.
There were blood-curdling warnings about job losses in many countries when minimum wages were introduced. Most of them came to nought. Economic theory might say that such a wage hike will lead to job losses but we can’t be sure.
There’s also the question of the impact of higher wages on productivity. Do wages rise when productivity rises or do higher wages lead to higher productivity?
If people cost more, it might also encourage firms to invest more.
More expensive workers might also be an incentive for employers to invest more in them. If you have to pay more for your people, it makes sense to get the most you can out of them.
Even so, an unexpected productivity boost and higher pay rises probably wouldn’t be enough to offset the benefit cuts.
But then again, it doesn’t need to. At least, not completely.
For the National Living Wage to work for the chancellor, all it needs to do is boost incomes and productivity by just enough. Just enough to raise the tax take. Just enough to mean that the hardship isn’t quite bad enough to cause social breakdown. Just enough to lower the benefits bill by just enough to soften the cuts to public services, so that, while they lurch from crisis to crisis, they somehow carry on. In short, just enough to squeak past the deficit target without major civil disorder or service collapse. Just enough for the chancellor to emerge triumphant at the end of the decade.