Guest Post: The UK’s voluntary Living Wage and its contribution to building a better economy and ethical business

Dr Andrea Werner, Senior Lecturer at the Department of Management Leadership & Organisations of the Middlesex University Business School, contributes to today’s guest post:

In 2017, nearly 5 million people in the UK earned less than two-thirds than the poverty threshold of two-thirds of median hourly wage, an indication that despite low unemployment figures a significant proportion of the UK workforce is trapped in low-wage and low-skilled jobs. This has been a persistent problem also facing a number of other developed economies, particularly Anglo-American ones, and there is also a growing focus on this issue in global supply chains and the developing economies attached to them. Concern over low wages, in-work poverty, and entrenched wage inequalities has led to the emergence of civil society movements around the world that campaign for a Living Wage. These campaigns promote the idea that people should earn a wage that enables them to meet their basic needs as set by the standards of the society in which they live.

There are a number of good economic and political reasons as to why societies should ensure that workers at the bottom of the pay scale receive a Living Wage. For example, giving more money to low-paid workers will stimulate demand in the economy, people who do not have to struggle to make ends meet have more freedom to participate meaningfully, and more productively, in society, and taxpayers will not have to subsidise low-wage workers. There has been a debate, however, as to how best to achieve this. A number of campaigns, particularly in the US, have favoured an approach that would make it mandatory for all employers (in a particular geographical area) to pay a legal minimum wage rate that would reflect a Living Wage. In the UK, by contrast, being mindful of the economic shocks that a sudden mandatory implementation of the Living Wage is likely to bring, a voluntary, more incremental approach has been favoured by Living Wage campaigners.

Following on from campaigns in London’s East End in the early 2000s, Citizens UK, the civil society alliance that has been spearheading the UK Living Wage Campaign, set up a Living Wage Foundation that accredits employers who pay their direct employees as well as any sub-contractor employees that work on the employers’ premises on a regular basis a Living Wage. As a pragmatic response to the rather difficult question what a Living Wage is in exact monetary terms, as this is relative to the living standards of the community in which the workers lives, and also because the needs of workers may differ widely according to their family circumstances, the Living Wage Foundation sets the Living Wage as two hourly wage rates (one for London, one for the rest of the UK). These are based on averaged minimum living standards calculations taking into account different household types. At the time of writing, the two Living Wage rates are £10.20 and £8.75, for London and the rest of the UK respectively, which are both significantly higher than the highest legal minimum wage rate in the UK (£7.83 for those over 25). Since its inception in 2011, the Living Wage Foundation has accredited more than 4,500 employers from all sectors of the economy (public, private and third sector) and all sizes ranging from micro-enterprises to FTSE100 companies; and the number of employers signing up keeps growing.

One might argue that employers ought to pay a Living Wage simply because it is the ‘right thing to do’ as it pertains to employees’ basic rights to earn a livelihood or because it is a basic marker of organizations’ good citizenship and ‘public spirit’. And whilst the overwhelming majority of accredited Living Wage employers in the UK report that they have adopted the Living Wage for reasons related to ethics and values, they also state that Living Wage accreditation has had tangible positive effects for their organizations. Survey research looking at a cross-section of all UK LW employers from the University of Cardiff and an in-depth study focusing on small and medium-sized businesses (SMEs) conducted by the author, and Ming Lim from the University of Liverpool, identified a range of benefits pertaining to organizations’ adoption of the Living Wage.

A lot of positive effects that organizations report are human resources (HR) related benefits. Significant proportions of Living Wage employers report a reduction in turnover and a good retention rate as a result of paying the Living Wage. Further perceived benefits include improved employee relations, motivated and productive employees, the ability to attract ‘better’ and more qualified staff as well as reduced employee absenteeism. A number of businesses that we interviewed in our study also reported that because of paying the Living Wage, there was a tangible saving of HR related costs for them: they saved on recruitment and training costs, and they also saved money because they avoided HR disputes because the Living Wage would minimise conflict in the organization. Most commonly mentioned by Living Wage employers, however, are positive reputational effects: Living Wage accreditation marks them out as socially responsible employers, it generates a positive brand image, and many organizations would declare that Living Wage accreditation is a source of pride for them and their employees. A number of private sector businesses perceive the Living Wage as an important source of differentiation from their competitors, deriving from above-mentioned benefits. For instance, companies, such as domiciliary care and hospitality businesses link the higher levels of commitment, loyalty and experience that they get from their employees as a result of paying them a Living Wage to a higher quality of service that they can offer to their clients, which differentiates them from competitors with low-wage business models.  As another example, a growing number of construction and engineering businesses are seeking Living Wage accreditation as part of their CSR strategy as they perceive this will give them a competitive edge as they bid for contracts from larger clients, especially public sector institutions such as local authorities, universities and hospital trusts, which in turn are increasingly interested in awarding contracts to socially responsible companies.

Despite the numerous and tangible benefits that Living Wage accreditation can bring, the cost of higher wages and its associated risks remain a factor that organizations would consider when adopting the Living Wage. It is therefore not surprising, perhaps, that a significant proportion of Living Wage employers (about 60% in our SME study, for example) already paid Living Wage rates to their staff or were very close to paying them prior to their accreditation. If organizations are in this position there should be every encouragement for them to seek Living Wage accreditation, as there is a little added risk for them and they will in addition benefit from the reputational effects set out above.  The Living Wage is also an opportunity for start-up businesses. From the outset, they can build the costs of the Living Wage into their business model and use the Living Wage for their strategic and ethical positioning in the marketplace. Where a more substantial adjustment of the wage bill is required for Living Wage adoption, our research found that Living Wage implementation was particularly successful if it was part of a wider change happening in the organization, such as a change in business strategy or significant organizational growth. By tying it to other developments within the organization, the Living Wage would not be perceived so much as a cost but more as an investment in the long-term future of the business. At the same time, our study found that the willingness to accept a lower profit margin remained a viable compensation strategy for organisations.

Paying the Living Wage may be perceived as only a small step towards creating a more just and equitable society, as there are a swathe of related workplace issues that also need to be tackled. In the UK, issues such as exploitative zero-hour contracts need attention, as well as improvement of people’s sick pay and workplace pensions as statutory requirements in these areas fall way below standards that would truly meet people’s needs. However, our research found that a number of Living Wage employers are aware of these other issues too, and they would, therefore, regard the Living Wage as just one part of a package of measures designed to ensure employee well-being and long-term productivity.

There is every reason to believe that the Living Wage campaign will slowly but stealthily contribute to building a fairer society in which all people can flourish, as it continues to bring on board employers that believe that paying a Living Wage is a better and more productive way to run a business, and so sets a challenge for other employers in the economy to follow suit.

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