Pay· Minimum wage· Living Wage We don’t want an economy where everything that is good is compulsory 10 October 2015 by David Willetts David Willetts It is Living Wage week and Boris Johnson has said he wants employers across London to pay at a rate of £9.40 an hour, while businesses outside the capital are being asked to pay £8.25. That is not to be confused with the National Living Wage announced by George Osborne in the Summer, which will start at £7.20 and rise to over £9 by 2020. These rates are all significantly higher than the national minimum wage, which currently stands at £6.70. What is going on here? The living wage being talked about this week has a very different concept and purpose to the government’s new policy. The living wage is a good thing but that does not mean that we want an economy where everything that is good is compulsory. The living wage comes from a campaign for employers to pay wages that people need to enjoy a decent standard of living. It varies across the country to reflect differing living costs and its calculation takes into account the fact that living costs for a family with two children are higher than if you are single and don’t have children. The living wage is not a national figure right for everyone everywhere and nor does it claim to be. And of course whether it is affordable differs very much on the employer. For a successful bank in the City of London it is about what they pay their cleaners – and offering them a living wage should be a moral obligation that does not have a big impact on their profits. If you are in the catering trade or delivering social care it could have implications for your entire workforce. At the other end of the scale is the national minimum wage, a legal obligation on employers. There was a lot of concern that it would cost jobs and the commissioners who set it explicitly have to take account of this risk. It meant that they have been deliberately cautious. Indeed we ended up with the problems facing a few sectors – care homes, retail and hospitality – effectively acting as a break on increases in the national minimum for everyone. That is the dead-lock that the Chancellor broke with his bold move in the Summer. We at the Resolution Foundation warmly welcome it. Indeed we had proposed something very like it in the report for us from George Bain, the original head of the Low Pay Commission. The Chancellor has moved the minimum wage up dramatically – meaning a pay rise of up to £1,000 from April. It laid down a challenge to low paying sectors, which include ones heavily dependent on public funding, to rise to the challenge of boosting their pay by embracing new technology and changing their business model. One of the big problems with Britain’s economic recovery was that not enough of that renewed growth was getting through to workers in their pay packets. Now that is changing with wages rising while inflation is zero. The National Living wage will eventually push up the wages of 3.2 million workers, with another 2.8 million gain indirectly as their wages increases to ensure there are still rewards to progression and extra training and skills. That in turn lies behind the economic optimism which is keeping our recovery going even with the headwinds of a slowdown in China and continuing problems in the Eurozone. Low paid work is one of the key challenges of our time and it is right that the Chancellor has injected some extra pressure and urgency. But there are going to be challenges implementing it for some companies in some sectors. So while we should encourage more employers to pay the higher voluntary living wage, it should not be made mandatory, as some advocate. The living wage is an assessment of living costs which people can use as a challenge to their employers. It does not have to take account of what is affordable and in what circumstances. The National Living Wage does have to take account of these realities. The challenge now is for sectors which are most affected to transform their performance. Companies will face important choices about how they adjust. I hope they will appreciate how much technology can help them with a far more imaginative approach than we have seen so far – mechanical aids that help frail older people get up and about for example. There is a pessimistic picture of Britain’s jobs market in which it is taking a U shape, with lots of low paid jobs at the bottom and jobs at the top but with jobs in the middle going. There is indeed some erosion of routine jobs in the middle. But we do not need to see the spread of more low paid jobs instead. The service industries can afford to boost their pay if they are imaginative in how they use technology to enable their staff to work more efficiently and effectively. That is what the National Living Wage can achieve.