Proposal #3: Increase the Minimum Wage to a Living Wage

By Michael Green

A minimum wage of £7.45 per hour, coupled with modest corporation tax cut for small and medium size businesses is economically viable in the UK. It would lift millions of adults out of poverty, and children too.

The current minimum wage of £5.73 per hour is not enough to live on for one person, and falls below the poverty level of pay according to many studies and the general public.

Luxembourg has a minimum wage of €9.08 per hour which is £8.26 per hour at the current exchange rate. France has a minimum wage of €8.71 per hour (£7.92 per hour) and Ireland has a minimum wage of €8.65 per hour (£7.87 per hour). So a minimum wage of £7.45 per hour is hardly radical.

The trade union Unison recommends a minimum wage of £7.45 per hour by 2010. Labour could promise to bring this in before the end of its 4th term, once the economy has been back on track for several years.

18% of British children lived in workless households in early 2008. One of the major reasons for this is because work still doesn’t pay. The basic rate of income tax threshold should be pushed up to £10,000 (see later New Ideas contribution) and the minimum wage should be raised to £7.45.

Somebody has to do the low paying unskilled service sector jobs, so offering parents education alone isn’t good enough to end child poverty and create a society where everyone is of equal worth, knowledge worker or unskilled service worker. A living wage would reduce the number of workless households and reduce the need to spend on the working tax credit and jobseekers allowance; in the long term it would save billions of pounds.

In recent years, low income groups have seen their wages fall in real terms, while the middle income earners have had wage stagnation. As the ratio between supply and demand for low skilled labour increases due to knowledge economy expansion, unskilled workers will see their wages fall even further. So government must take action to prevent their wages from falling to an unacceptable level.

For all the fantastic new education opportunities for adults, too many are on far too low pay and often voting for political extremist parties as a result – this will get worse unless the minimum wage is raised to a living wage.

A living wage would benefit the economy because it would increase the amount of disposable income for the poorest. Most of the extra money available as a result of a living wage go back into the economy, and particularly benefit local Small and Medium Enterprises. Some of the lost government revenue from the SME corporation tax cuts would be made back through increased consumer spending by those on the living wage.

Scrapping pension relief for high earners could also bring back some of the lost government revenue. It would provide some more bottom-up stimulus that we need in the economy both today and in the future.