Costs and benefits of the Living Wage
7.1 Across the interviews, it was clear that there were a number of shared concerns about wider payment of the Living Wage, as well as recognition of potential benefits.
7.2 The main benefits of the Living Wage were perceived to be:
- employee benefits - enhanced standard of living, better health and wellbeing and improved morale
- organisational benefits - enhanced reputation, ability to recruit higher calibre staff, better working environment, greater staff engagement
7.3 A number of key concerns about the Living Wage were raised, namely:
- the potential impact of implementing the Living Wage on an organisation's ability to remain competitive
- the potential negative impact on their profit
- the potential impact on wage costs by creating an inflationary impact on wages across their organisation
7.4 The Scottish Living Wage employers interviewed did not yet have a specific, formal assessment mechanism to monitor the impact once the Living Wage was implemented. Instead, monitoring of the impact was included as part of wider mechanisms used to measure overall staff performance and turnover. The existing research evidence on a Living Wage cannot determine exactly what would happen as a result of various policies of extending the Living Wage within Scotland. However, it allows these effects to be considered in a much more informed way than simply on the basis of the consequences predicted by economic theory.
7.5 In terms of the benefits to employees, the evidence suggests that payment of the Living Wage can improve wellbeing. Evidence from the US suggests that raising minimum pay can also have significant effects in reducing household poverty. However, for low-paid workers in the UK, a large proportion of any increased pay resulting from the Living Wage is lost, due to a resulting increase in taxes and reduction in means-tested benefits. This means that increasing earned income may have little or no impact on total household income. Therefore, it has been argued that it is essential to combine the Living Wage with other policies designed to improve career progression and to reduce the costs faced by people on low incomes (e.g. childcare costs). In addition, changes to benefit withdrawal and tax settings could ensure that lower income households keep a greater proportion of the increases in earned income.
7.6 While the US does not operate within the same legal framework as the UK, a considerable body of evidence from the US shows that employers have made many adaptations to higher wage floors, such as shifting the composition toward higher skilled workers, or simply accepting a smaller profit margin. Coupled with benefits such as reduced staff turnover and improved productivity, this has meant that the impact on labour demand (and, therefore, employment levels) has been limited.
7.7 This does not mean that a Living Wage can be readily implemented across the board without significant costs. In the lower-paying parts of the private sector such as hotels and catering, there is likely to be a significant impact on labour demand, which suggests a cautious approach to implementation in a weak economy. However, even here, the impact on labour demand is not as large as is sometimes assumed, not least because the industries with the lowest wages tend not to be in internationally traded goods or services (where higher pay could be readily undercut by overseas suppliers).
7.8 The fact that there are some sectors where implementing the Living Wage is harder than others is not an absolute barrier to its progressive extension. The US approach has been to test the limits of higher minimum and Living Wages in some areas, with research generally showing that negative impacts have been smaller than predicted. Evidence of impacts in the UK is at an earlier stage, suggesting that extending the payment of the Living Wage in Scotland would need to be carefully monitored.
Employers' views of the implementation process
7.9 There was widespread agreement among Living Wage employers that the process of implementing the Living Wage in their organisations was straightforward, though this was dependent on the size of an organisation or the sector in which it is operating.
7.10 A number of barriers to implementation were identified, namely:
- encouraging sub-contractors to implement the Living Wage
- staff reacting negatively to a wage increase, because of the associated loss of benefits and tax credits, and/or because it highlights that they were not being paid a fair wage previously
- a lack of clarity at the outset of the Living Wage accreditation process
7.11 Further, based on their experience, Living Wage employers made a number of suggestions to help organisations improve the implementation process, including:
- conducting feasibility studies to identify potential risks, devise approaches to address risks and develop an appropriate timescale for implementation
- communicating openly with all staff in the process to explain the rationale for adopting the Living Wage
- creating a clear action plan for working with sub-contractors and ensure good communication between their business and sub-contractors to facilitate implementation
7.12 Living Wage employers also suggested ways in which the Scottish Government and organisations promoting the Living Wage could support employers. These suggestions included:
- providing advice and guidance on all aspects of the implementation phase
- encouraging dialogue between employers that have been through the implementation process and employers that are considering it
- raising awareness among recruitment agencies about the Living Wage
- providing more information and evidence on its benefits
- providing financial incentives to help small businesses
- improving communications on how the current level of the Living Wage is set
- involving local businesses in the process of determining the Living Wage rate
Using public sector procurement to promote the Living Wage
7.13 Scottish Government contractors were generally supportive in principle of using procurement processes to encourage companies to adopt the Living Wage.
7.14 However, there were qualifications to this support, especially in relation to supporting business. Contractors suggested that this could be achieved through:
- encouraging payment of the Living Wage in public sector contracts, but not making it mandatory
- working in partnership with contractors, to encourage payment of the Living Wage in public contracts
- a staged approach to encouraging payment of the Living Wage, beginning with larger contracts before filtering down to smaller contracts
- providing clarity on how the Living Wage can be promoted in tendering processes
7.15 A small number of contractors were sceptical about the use of procurement to promote payment of the Living Wage, mainly due to perceptions that procurement would favour larger companies, increase the costs of goods and services, and fail to consider wider benefit packages offered to employees.
7.16 To address concerns, contractors identified actions that they felt could support the use of procurement to encourage implementation of the Living Wage, including:
- some form of subsidy to help offset increases in wage costs among contractors
- making use of local government and non-departmental government bodies to provide information and support
- organising workshops with contractors to provide information and advice on best practice
- providing robust evidence on the impacts and advice on addressing barriers
7.17 Stakeholders tended to take a broader view of the role of the Living Wage in procurement, and felt that its consideration should take place as part of a wider review of procurement and other relevant policies, focussed on issues such as the social or community impact, overall investment in staff by contractors and whether the overall cost is sufficient to deliver desired benefits.
7.18 Stakeholders also highlighted a range of practical issues in relation to incorporating Living Wage considerations in public contract awards, including the potential for perceived additional bureaucracy to discourage companies from bidding for public contracts, concerns about how contractors 'prove' they are paying the Living Wage and concerns about the extent to which Living Wage requirements extend to the company as a whole or the individual contract.
7.19 Existing research in the US has found that many bidders welcome the "level playing field" provided by a wage floor, which does not encourage a "race to the bottom". In some cases, this actually attracts more bidders. Where the additional contracting costs have been quantified, they have often been found to be low.
7.20 If a public sector body in Scotland (or the rest of the UK) made the payment of staff at a higher rate than the National Minimum Wage a mandatory requirement as part of a competitive procurement process, this would run the risk of breaching European Law and European Procurement rules. It is, however, possible to include Living Wage considerations in procurement exercises without making payment of the Living Wage a mandatory requirement, and a number of public bodies in the UK have done so. However, no satisfactory way of dealing with social care contracts has been found, due to very tight public budgets and a cost base dominated by low-paid labour.
Email: Alison Stout