Why every organisation should become a living wage employer

The RSA is proud to now be accreditated as a living wage employer, and we urge all organisations to set this goal. The universal adoption of the living wage would be good for the economy and make a powerful statement of intent about what kind of society we are.

It was some years ago that the RSA resolved to become a living wage employer, and we finally reached the end of this journey just in time for Living Wage week by being officially accredited by the Living Wage Foundation.

The wheels have turned slowly - we have paid our own employees the living wage since 2012, but like many organisations we use contractors to provide various services and we need to ensure that they are also paying a living wage. Contracts come up for renewal and are renegotiated, margins and business plans are adjusted down the supply chain. The Living Wage Foundation must verify that standards are being fully met.

This all takes time, but social progress is no less profound when it proceeds in a quiet and orderly fashion.

But with only a quarter of FTSE 100 companies being accredited living wage employers, is progress just too slow?

Perhaps, but the real question is whether the living wage has gained universal acceptance. A phased implementation of the living wage is pragmatic and sensible, but there is no reason to delay in declaring the living wage a universal standard for all organisations.

Although few would argue that higher wages are desirable from a social point of view, many still resist the universal adoption of the living wage on the grounds that it would be economically very harmful, potentially hitting the most vulnerable the hardest.

Unemployment would rise, so the argument goes, and higher costs would just be passed on to consumers thereby reducing everyone’s standard of living.

Similar arguments were deployed against the minimum wage when it was introduced, and those dire predictions never came true.

So here are three reasons why a universal living wage would lead to a better economy for all.

More expensive means more valuable

First, increasing the cost of labour should encourage firms to make better use of their workforce. It is often argued that wages cannot increase until productivity improves, but this ignores the possibility that higher wages lead to more productive workers. Surveys suggest that organisations with a more engaged workforce perform better overall, and fair pay is one of the top factors in employee engagement.

Corporate Britain might finally tackle the UK’s chronically poor investment record as firms tried to make the most of their more valuable workforce. Of course, there are many outstanding UK companies, but there is long-tail of low-investment underperformers too. This needs to change.

Higher wages creates more demand

Second, increasing the cost of labour is merely correcting the erosion of bargaining power since the 1980’s. The proportion of national income represented by wages has fallen from around 60% in the 1950’s to 1970’s, to around 55% today.

What does this tell us? Textbook models of labour supply and demand ignore the real world brute reality of bargaining power. Imposing a new universal living wage across the economy would restore some bargaining power to workers who otherwise have very little agency over their economic conditions.

But would a falling profit share damage the economy? We were promised that boosting corporate profits through lower wages and cutting corporation tax would lead to an investment boom. This never materialised. So conversely, there is no reason to think that a falling profit share would threaten investment. Investment is driven by expectation of future returns, levels of confidence and availability of finance, not by poverty wages.

On the contrary, studies suggest that for economies where economic growth is primarily driven by consumer spending, such as the UK and the EU as a whole, higher wages are likely to boost the economy. Firms will be more likely to invest if they see the potential of healthy consumer demand for their products and services. More money in more people’s pockets is good for investment.

In 1914 Henry Ford shocked the automotive industry by doubling the wages of his factory workers to $5 a day. Against those who predicted financial disaster, he argued that it was important that his workers could also afford to be the customers for his cars.

He did not mean this literally in the sense that Ford workers would buy enough new Ford cars to pay for the increased wages. He made the point that a higher wage economy would have higher demand overall for cars.

He had other reasons too. Reinforcing my earlier argument, the pay increase also improved the commitment and productivity of his workers.

I am not a ‘factor of production’, I am a person

So what about the danger of higher wages for workers leading to higher prices for consumers? The Bank of England’s forecast of increased inflation has prompted much media commentary of what a terrible thing it is for consumer prices to rise.

This leads me to a more philosophical point. An increase in consumer prices may be bad, or maybe not, depending on the reason.

Even in the most well organised market economy, prices never reflect all the costs of production. The relentless creed of ‘cheap stuff’ drives environmental destruction and social injustice along supply chains that stretch all the way from the high street (and online store) to the destruction of the rain forest, to sweatshops crowded with Syrian refugee children, and to toxic waste dumps in Africa. Sometimes low prices come at an unacceptably high cost.

The sleight of hand at play here is to separate ‘workers’ from ‘consumers’. These are merely abstractions in the mathematical models of economists.

The world is not inhabited by consumers, workers and shareholders, it is inhabited by people.

The unquestioned sovereignty of consumers in modern discourse about the economy is a strange caricature of capitalism. We should not create a ‘consumer economy’ any more than a ‘shareholder economy’ or a ‘worker economy’. We should be building a citizen economy.

Suggesting that we cannot have higher wages if this means higher consumer prices is emblematic of the erosion of our social cohesion and collective identity.

We should consider it intolerable that in one of the world’s wealthiest countries, many of our fellow citizens are prevented by poverty wages from working and living in dignity.

If that means a few more pence on your latte then why not consider it an investment in a more just and harmonious society, and be glad.