Look at that list of sign-ups: BoJo’s cozying up to the city is definitely paying off. Realistically, though: how many employees do you think those organisations have which are anywhere near the living wage? They will have contracted out all the low paid functions years ago.

Not a surprise: the Tories have been to the left of Labour on a number of issues.

Two points about this living wage thing.

1) The difference between the minimum wage and the living wage is entirely the tax wedge that is taken off people on low wages.

No, really, the difference between £7.85 per tax (at 37.5 hours a week, 52 weeks a year) and £5.91 post tax is, well, the income tax and NI that is charged, foully, on the wages of the working poor.

If the tax and NI allowance was raised to that minimum wage (which, for moral reasons, it probably should be) then those on min wage would be on the living wage.

(I’m also looking forward to the rise in the personal allowance to £10k as promised….for that should mean, if people are being intellecually honest, that the living wage should fall.)

2) “and who’d found that it generated loyalty, and that it thereby enabled them to cut down on their employment costs in hiring and firing.”

There’s been a lot of academic research on this. As Paul Krugman (not exactly a right wing baby eater) points out, this greater loyalty and lower workforce turnover comes not from having higher wages in general. It comes from having higher wages than the other employers competing for the same workers.

That is, you only get this desirable effect if you are paying more than the competition: not just because everyone is paying more. If everyone were offering this “living wage” then the effect would disappear.

Tim @3,

Good point that, your number 2. But wouldn’t you say that in low-wage situations the “outside option” is often unemployment? So if everybody paid the living wage, but unemployment benefits stayed fixed hence the gap widened, you might still get a “loyalty” efficiency effect?

This is the eternal bind of the left-winger, who wants to raise benefits and raise low-wages, and without destroying demand for now-not-so-low-waged labour. All of these things are not easy to do at once.

If you ask me (which nobody has) the most interesting economic policy question that I can think of is, putting aside legislated minimum wages and various tax and subsidy mechanisms, is what policies cause variation in the underlying market low-wage – not just in absolute terms (the answer to which is: the economy-wide level of productivity) but in relative terms. Economy A might pay a high wage of 10 and a low of 2, while economy B might pay a high wage of 8 and a low wage of 4. How do we get our economy to look more like B?

There are supply side answers (education) but it’s really not obvious that increasing supply of educate workers has pulled down wage inequality, and many of the reasons behind high wages are inherently fixed supply (having experience, being the fashionable actor, having lots of investment banking contacts). I don’t know how demand-side considerations can be influenced by policy.

If the outside option is unemployment, then yes. But then if unemployment were the outside option then people wouldn’t be switching jobs all the time in the first place, would they? You’d get the loyalty to the current employer anyway.

Do they specify the “non-loyalty” is coming from switching jobs, without spells of unemployment? If they do, then yes you’re right, sorry I misunderstood. If not then I think an efficiency argument for the living wage still goes through: it’s a simple efficiency wage argument. Of course one might ask if higher wages increase efficiency, why aren’t employers paying them?

albeit, of course, much weakened. You are quite right to say the efficiency effect is much higher when other employers aren’t paying living wages, and will decrease the more that do.

I haven’t got the Krugman piece to hand (I think it was in the 90s stuff he did for Slate) but this is exactly the point he makes.

We need to differentiate between efficiency wage in general and the effects of paying higher wages than your competitors. If you’re doing the latter then you’re obviously going to end up with the better end of the labour pool (and get more loyalty from it etc).

This is what lay behind Ford’s $5 a day wage. It was nothing to do with enabling his workers to afford his cars….when he brought it in he had an establishment of 14,000 workers or so and produced 300,000 cars a year. What he did have though was a turnover of 51,000 workers a year to keep that 14,000 establishment.

So he decided to pay double the prevailing wage (and do note that 50% of that $5 a day was in the form of bonuses. You had to “live right”, not booze, not gamble etc, single women didn’t get it, only women who were the sole earner in their household did etc…..it’s a lot less progressive than many think) so that he a) got the better end of the labour pool and b) if someone fucked up he had a line of people hoping to take the job.

Another angle to the efficiency wages point is asymmetric information and it is the reason why sensible employers pay above market clearing wages. No matter how high or how low everyone has a reservation wage, which is their personal minimum wage. However, from the employers point of view the relationship is asymmetric since an employer can never have as much information as the applicant themself. The applicant knows better than the employer whether they are a quality worker or useless and a shirker. If they offer a wage purely at the market clearing rate they will only receive applications from those whose real worth is a reservation wage on or below the market clearing rate. The quality workers will not apply because it is below their reservation wage. Therefore, it is in the interest of a firm to offer a wage above the market clearing rate, as they will then receive applications from quality workers and the shirkers who know the wage is above their true worth. The firm is then in a position to recruit good workers whereas before only those worth less would have applied.

A similar asymmetric thing applies when a firm is downsizing. Nowadays firms would rather dismiss workers than cut wages. If they dismiss workers they have an equal chance of dismissing a good worker as a lazy one. However, if they cut wages the good workers who know their true worth will leave and the lazy who are not earning their wage will stay. Therefore, rationally firms should dismiss workers rather than cut wages.