Why the London Living Wage is a bad idea


borisIt is a well known phenomenon that politicians show great promise before being elected but fail to deliver once in office.

Boris Johnson’s election as Mayor of London brought to one of Britain’s most powerful political offices a man whom many viewed (with varying degrees of excitement or terror) as a radical right winger, a free market fundamentalist and rampant Thatcherite. In fact, Johnson has proven to be that most sorry of politicians, the populist.

A prime example of this has been his shameless volte face on the minimum wage. Before he was elected he wrote how minimum wage laws drove “up your costs and greatly [reduced] your ability to reinvest". Yet since being elected he has not only accepted the minimum wage (which he is, after all, obliged to do by law) but has perpetuated the London Living Wage (over which he has discretion).

In July 2008 he described how “the living wage ... is not only morally right but also makes good business sense contributing to better recruitment and retention of staff, higher productivity and a more loyal workforce with high morale." How times have changed!

Economic theory explains why minimum wage restraints are bad for workers. By and large, minimum wage rules do not improve the wages of staff. Rather, they render the least productive workers – who tend therefore to be the poorest and the most vulnerable – unemployable. Put simply, if one can only make six widgets an hour, and a widget only sells for £1, one’s employer cannot afford to pay you £6, so if the minimum wage is over £6 she will not employ you. If widget making is your forte (if you are better at producing widgets than anything else) then the minimum wage condemns you to unemployment.

Note that Johnson is also wrong that minimum wage laws drive “up your costs and greatly [reduce] your ability to reinvest". Costs are actually lower because marginal activity is no longer profitable and so production falls (though, ironically, production per head rises – the French have higher productivity per head than the British because they have higher unemployment).

For now the London Living Wage is voluntary. However, the GLA already forces it on contractors working for the London Development Agency and there are moves afoot to foist it on Olympic contractors, too.

Meanwhile, the enthusiasm for it among non-commercial, charity- and tax- funded bodies (Tory-controlled Ealing Council, for example) is enlightening. These bodies are not constrained by economic concerns; they can continue to employ less productive staff at inflated wages because – whereas a company would have to pass the costs onto customers who would then stop buying their product – the taxpayer has no choice about whether to pay, and charity donors are simply not that discriminating.

So perhaps Johnson is right after all: minimum wage laws do drive up your costs: the cost of your taxes. If his policy were adopted across the UK, it would drive up the cost to those on low incomes in a second way, too: it would cost them their jobs.