In the UK we have the Minimum Wage - the base figure all employers must pay their employees for an hours work.
By definition the Minimum Wage is a low figure and many complain it is a figure not sufficient to live a half decent life on. Consequently there is a campaign for a "living wage" - a rate of pay significantly higher than the current Minimum Wage rate.
It would be wonderful if everyone regardless of their skills, commitment and responsibility could earn a living wage (whatever that is).
However there are realities!
REALITY 1 :- Wages and salaries are almost always the biggest business overhead. If they are increased it inevitably means a significant amount of money has to be found. Where does the money come from?
It could come from one or a combination of :-
1) the company profits - it reduces them.
2) other people within the company take a pay cut.
3) the company becomes more efficient to compensate.
4) the company puts it prices up to compensate.
5) the company reduces the number of employees (or hours available) it employs.
REALITY 2 :- Socialism doesn't work because it does not deal with the absolutely crucial point of human motivation - reward for individual effort (and the need to maintain pay differentials) - and reward for entrepreneurial risk taking and the stress and worry that goes with it. It probably does not accept the notion of return on capital invested and sees profit as a dirty word. Only capitalism works - and I am all for caring capitalism.
REALITY 3 - the rule of the market. Consumers - customers - will always seek out best value.
REALITY 4 - we live in a global village economy. It is easy to move businesses internationally. Our workers are competing with Chinese and Indian workers for jobs.
REALITY 5 - the rules of supply and demand. There is a shortage of people with good skills. There is an over supply of people will little or no skills.
Lets assume we are talking about a company employer - a small local company - or a large company (it does not matter - a large company is just a big small company) or we could be talking about a public service job.
SCENARIO
- The Minimum Wage becomes a higher Living Wage which the employer has to pay.
- This establishes a base figure for the company. Everyone else will want a similar % increase to retain existing differentials in order to reward higher skills, responsibility and experience. (if a company fails to address this issue it will have a demotivated staff or will lose employees - this is the reality of life).
- So everyone gets a pay rise!
- So where does the money to pay for the pay rise come from?
- Almost certainly by increasing prices for the goods or services produced by the company.
- As all UK companies will be affected by the Living Wage there will be inflation of shop prices.
- What affect does this have on the so called "Living Wage"?
- It reduces its real value as prices have increased to pay for it - it is no longer a living wage!
- Shall we put up the living wage again - to start a new round of price increases!?
Of course some will argue there does not have to be price increases - the company (employer) will have to bear it by reduced profits! The highly paid executives will have to take a pay cut - or the shareholders will have to accept reduced dividends. This might happen in the short term. However a country will soon learn if you do not allow entrepreneurs and investors to make healthy profits it will demotivate, reduce business activity, reduce international competiveness, reduce long term investment - the economy stagnates and business is the engine that creates and sustains employment.
If for whatever reason a company cannot put up prices (usually because it has to compete with cheaper imports or because its increased priced goods will not sell abroad) then there are great dangers for the sustainability of the business overall or the number and quality of jobs on offer. It will make creating efficiency savings and working smarter with technology even more crucial to reduce the burden of the cost of the human work force. The most likely outcome is companies will cut back on the staff they employ.
As the current Chancellor is far from stupid it seems to me he is happy to create a bout of wage led inflation. He must feel he has (will have) the Trades Unions in the Public Sector held sufficiently in check to curb wage related strikes as a reaction to inevitable cost of living increases (he is offering 1% max per year in the Public Sector so Public Sector wages will definitely fall in real terms in this period). Inflation across the board will have the effect of reducing existing debt in real terms (his major motivation) and of course the con of a "Living wage" looks and sounds good politically and steals some of Labours clothes. It gives him the justification and wriggle room to reduce tax credits and their burden on the state finances. Presumably he believes the economy is sufficiently strong and competitive to be able to compete internationally despite wage and prices increases and that it will not have a sufficiently negative effect on jobs available to be a problem for him. He is reducing Corporation Tax to help.Very clever if he pulls it off!
But back to my basic point - there is no such thing in reality as an across the board "Living Wage" because the need to maintain pay differentials and the price increases that will follow to pay for it - will quickly make it a "Minimum Wage" again. The only way to earn a "living wage" in the real world is for you the individual to offer your employer something extra, something more significant to justify a higher wage. You the employee have to be a more valuable asset to your company through your skills and or experience, commitment and responsibility. If you remain in the little or no skills category millions will be able to do your job and consequently pay will always remain at a minimum level (even if referred to as a living wage).
Our bodies have a very good system of keeping us well hydrated, and how much we need to drink is very much determined by the temperature, what we’re doing, and what we’re eating.