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.

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

  1. This article and the referenced studies offer great insights into the value of a minimum wage that meets the basic living standards in the UK! So a big thank you Dr Werner for this contribution!
    It is most encouraging to see that the Living Wage Foundation has a great impact in this matter and to see that companies start to see that providing fair payment for their employees has many benefits. Further elaborating on the debate for the minimum wage of employees over 25 years old, I believe there is also a need for reform of the minimum wage for people younger than 25.

    There are perks and risks to the current gap between what an 18 year old and a person older than 25 can earn. For example, it encourages companies to take on students and give them a chance to integrate in the economy at an early age with more ease, yes. The downside of this is that, especially given the difference in payment, it creates an opportunity for companies to exploit this fact in favour of profits. With socially irresponsible business models such as zero-hour contracts and the gig economy on the rise, I am concerned that student workers and others under 25 may fall victim to the current shifts in business. To take the debate away from the classic (but no less valid) argument that is also used in the debate for gender equality in terms of remuneration, “equal payment for equal work”, let us look at it from several different angles.

    There are a number of reasons why it might not only be beneficial to young workers alone to elevate the minimum wage for the several age categories under 25 existing in the UK. To start my argument from a general social and economic angle , I will start from the bottom of society: those who start working from a very young age in the category of very poor people, or people on the brink of poverty. Young workers in these situations have a very hard time making ends meet, moreover with the current minimum wages they need to work very hard for very little means to better that situation. There is an increased chance they will not be able to even consider higher education because they can hardly save money on the side despite working as well. From the studies referenced in the article it is clear that the current minimum wage for adult workers over 25 is not enough to maintain a normal living standard, so I believe it can be assumed that there are definitely people who need to start working at a younger age to support the family income so that they can actually maintain such a standard, but this does not leave them with any money to save for financing higher education when they are older. To raise the minimum wage of young workers could therefore serve as a tool in tackling structural poverty and inequality, giving an opportunity to people in poverty to end the vicious cycle they are stuck in, helping forward the country’s overall social situation and economy in the long term.

    A similar issue goes for young workers on the brink of poverty, or even middle-class students who want to go for higher education and need to finance this themselves due to lack of funds from the homefront. At current wages these students are under a lot of pressure outside their studying to pay for their tuition fees and general living costs (especially if due to circumstances they need to pay for student accommodation), which could be one of multiple factors causing them to underperform and quit their studies before graduating, or not pursuing a Master’s degree despite actually having the potential to if they did not need to be concerned for their financial situation on the side. For these reasons there might even be an improvement for the general education level of the country and a more stable middle class at the same time.

    What could be in it for companies one might still wonder? I believe the mentioned studies give a decent illustration of what might be the positive effects to the companies (why would these benefits be different from workers over 25 years old?). More loyalty and commitment from workers, and a better reputation, not to mention how the possible rise in educated workers could help (all) the corporations in their search for highly skilled workers in the long run.

    To conclude this overlong comment briefly, while the consequences I pointed out in my story are theoretical and mainly focus on the positive side effects, I think there is at least very good ground for studies and research in this area. In the debate for fair payment of employees it should not be forgotten that young people are the future employees of this country, and apart from the government the corporations have both a responsibility and interest in safeguarding their well-being.-being.

  2. First of all, I would like to thank Dr. Andrea Werner for this insightful post.

    The UK’s minimum wage system is far too complex and difficult to understand and enforce. There are four different minimum wages for different age groups, plus a separate one for apprentices. Arguably, France and Germany pay the full rate from the age of 18 onwards. Does this mean that younger workers are being discriminated in the UK? According to the Equality Act 2010, people are protected against age discrimination in the workplace and in the wider society, as it is considered one of the protected characteristics. Therefore, this means that the system of age groups in the wage system can be considered discriminatory. Furthermore, workers under 25 being paid less than the National Living Wage are being discriminated under the Act.

    From personal experience, I know how hard it is to survive 3 years of university trying to pay rent, bills, food, and other needs, whilst on a 0-hour contract receiving minimum wage (at the time, it was £5.10 p/h), especially being a foreigner student. This while my work colleagues, who were doing the same job as me, were getting paid more due to the fact that they were older than me. Does turning 25 mean that I will acquire new skills that I previously did not own? It’s a misconception that younger people don’t face the same challenges as older people. Apparently, under 25s are not ‘living’, therefore no need for a Living Wage? There are too many questions unanswered…

    Regardless of this, it is great to know that several companies adopted the Living Wage rather than just paying the mandatory minimum wage and that both its employees and employers are benefitting from this model. As mentioned in the commentary, this is a small step towards a more just and equitable society. And, maybe somewhere in the future, they will extend the Living Wage to all age groups.

  3. The Living Wage Foundation sounds like an intriguing organization. I often hear those who are pushing the government to raise the minimum wage in the US, but I have not come across a similar organization to the Living Wage Foundation here. It’s common to hear the two sides going head to head. Those who push for a higher minimum wage say it is an ethical issue and that all workers deserve a living wage. Their opponents say a mandated minimum wage rise would shock the economy and drive inflation. I believe that workers are entitled a fair wage, however, I also agree that a sweeping measure would probably negatively impact the economy as either prices would rise or companies would be forced to lay off workers. That being said, when companies choose of their own accord to raise wages, there are positive benefits. As Dr Werner notes, the organizations who have received Living Wage accreditation have seen positive impacts, including better retention rates. In the US, the warehouse chain Costco starts its employees at $15 an hour, more than double the US federal minimum wage, and offers better benefits than other retailers. The positive benefits and pay make Costco an enticing place to work; in the US, the average tenure for a Costco employee is nearly nine years. With the Coronavirus pandemic declaring that grocery store employees are essential workers, it will be fascinating to see what impact this has on wages in the industry. I doubt that there would be a significant change to the federal minimum wage, but it would be interesting if an organization like the Living Wage Foundation were to gain traction in the US on the back of this pandemic.

Leave a Reply