Sunday, 19 July 2015

Changing minimum wage to living wage needs thinking through

A lot has been made in the press about the introduction and rise in the living wage. This change was announced by George Osborne in the budget last week and made the headlines. The impact on businesses, especially small business will be major. But I'll take a look at some detail and how I think it will affect business, customers, employees and the wider economy.

One of my major bugbears over the past few years has been big business. Not in the anti-globalisation or the anti-capitalism sense that others have protested against. I think that globalisation is a fait accompli and no amount of protest will reverse it. Not solely in reaction to the way that they have conducted their tax affairs. I think that this is the job for government to patch up holes in their tax regimes. My issue is linked to the beneficial tax status afforded to multinational corporations and the profits these organisations announce every year. But it's also linked to the low wages these companies pay in this country and the fact that the government then has to top up the salaries of a large number of it's population in the form of tax credits.

Let me try to state this in the clearest terms I can-

Large corporations pay many employees so poorly that they need tax credits to be able to live, whilst these corporations make huge profits (sometimes aided by paying very low rates of tax.)

This situation obviously needs to change for many reasons. The power of the multinationals must be diluted, the government can't continue to prop up employees while multinational profits increase and the employees deserve a better standard of living and self esteem. My initial concern from my days of basic economics is that increased wages will have an inflationary effect. The worry is that rises in income will be offset by rises in prices and nobody will be better off. And it's a real concern. And this concern surrounds small business.

A larger business could take the hit by accepting lower profits. In order for a small business that's perhaps only making a small profit today to deal with the rising cost of staffing, they will have to increase their income or cut costs elsewhere. If they achieve this by increasing prices, which seems the most likely outcome, then the effect will be that people are no better off. They are paid more but everything costs more.

This will have another unintended effect, as higher wages for the lowest paid will probably have a knock-on effect of higher wages for most of the rest of the workforce. In order to attract and retain talented workers with experience or qualifications, employers will have to ensure that higher skill or higher stress jobs have a pay that is considerably higher than those in menial jobs. For example in a high street chemist and health & beauty retailer there are several levels of job role. There are store colleagues, healthcare assistants, dispensing assistants, pharmacists and the store management team. In terms of hierarchical pay, the structure is as follows-

Store manager - total responsibility/accountability
Pharmacist - total dispensing responsibility/accountability plus degree plus training to a very high level
Assistant manager - responsibility
Dispensing assistant - training to a high level and sims responsibility/accountability
Healthcare assistant - extra training
Store colleague - basic training

In order for someone to be incentivised to train up through healthcare assistant to dispensing assistant then the pay needs to be considerably better. If the current rates of pay are, for example, store colleague £7 per hour, healthcare assistant £7.74 per hour and dispensing assistant £9 per hour and George Osborne increases the pay of the store colleague to around £9, then by definition the pay of the other colleagues will probably need to increase by about £2 per hour as well.

All of this is inflationary. The people left behind are those whose income comes from elsewhere - unemployed, pensioners, income from investments, and students. They will feel the effects of the price increases but with no additional income to counteract this effect.
I love Quidco

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