Raising the living wage: will it work?

Dan Price, founder and CEO of Seattle-based credit card processing company Gravity Payments raised his company’s minimum starting salary to $70,000 a year (about £45,000) to take on wage inequality, but he now faces a backlash.

Mr Price said he was met with overwhelming support for the wage increase when he announced the move in April this year. He even cut his own salary by 90 per cent to ensure it could be done.

However, just six months after his generous move, Mr Price said the company has faced challenges and he is now renting his house to make ends meet.

In an interview with the New York Times, he said: “My hope is that I will be right at the end of the day but I actually don’t think the idea is so good to guarantee that I’ll be right. I’m working as hard as I ever worked to try to make it work.

“I’m renting out my house right now to try and make ends meet myself.”

While employees welcomed the wage increase, some staff members left the company, frustrated that newly hired people would be on a similar wage. In addition, some customers unhappy with what was seen as a political statement and unable to compete with wage standards for their own employees, took their business elsewhere.

In the UK, another battle for wage equality is making waves.

Chancellor George Osborne announced the National Living Wage policy in his summer budget. Under this flagship policy, the statutory minimum wage for over 25s will increase to from£6.50 to £7.20 per hour, from April 2016. This coincides with a series of staggered wage increases to reach £9 per hour by 2020.

But business groups have become increasingly vocal in their criticism of the impact this might have on the UK economy.

Living wage ‘a gamble’

CBI director general, John Cridland, believes many CEOs feel they are forced to change their business models to accommodate the new living wage, which could result in less job opportunities.

Speaking at an event at King’s College London to mark the CBI’s 50th anniversary, Mr Cridland said: “A £7.20 national living wage in 2016 and a £9 national living wage by 2020 are laudable objectives, but they are a gamble.

“I’ve talked to many CEOs who feel they may now have to make changes to their business models, which could result in fewer job and progression opportunities.”

#CBI chief John Cridland: #NationalLivingWage could force CEOs to make changes to their firms that ‘could result in fewer jobs.’ #CBI50

— The CBI (@CBItweets) September 10, 2015

The Living Wage Foundation, launched by community charity Citizens UK, calculated the living wage to be £7.85 an hour based on the basic cost of living in the UK. In London, that rises to £9.15 an hour.

Rhys Moore, director, Living Wage Foundation, welcomed the chancellor’s plan to increase wages but insisted it was not a true picture of the living wage.

“Is this really a Living Wage? Without a change of remit for the Low Pay Commission this is effectively a higher National Minimum Wage and not a Living Wage,” he said.

While the policy has been widely welcomed by campaigners, some business leaders fear a living wage increase will push up costs.

One of the UK’s biggest employers, Whitbread, who owns Costa Coffee and Premier Inn, warned it will have to hike prices as it will take a ‘substantial’ hit from the new living wage plans.

“We are developing plans to adopt the recently announced national living wage,” chief executive Andy Harrison said.

“We shall mitigate this substantial cost increase over time with a combination of productivity improvements, boosted by investment in systems and training, efficiency savings and some selective price increases.”

‘The burden is manageable’

Next, which is the latest retailer to raise concerns over the cost of the living wage, said it expects prices to rise by 6 per cent between now and 2020 to match the pay increase.

The retailer said: “In summary … we believe that the burden is manageable.”

Laith Khalaf, senior analyst at financial services company Hargreaves Lansdown, said this could be a growing trend among UK businesses, with hospitality and retail industries being hit the hardest.

“Paying more for cappuccinos and onion rings could be the thin end of the wedge when it comes to the Living Wage pushing prices up, because Whitbread won’t be the only company facing these issues,” he said.

“Businesses across the hospitality and retail sectors in particular will somehow have to manage the additional cost, which means higher prices for customers, lower profits for shareholders, or some combination of the two.”

Employment group Manpower also raised concerns that the living wage could prompt employers to take on staff under the age of 25 who are not entitled to a wage increase.

It said: “some employers may look to mitigate the extra costs by taking on more younger or self-employed workers, who are not entitled to the national living wage.”

However, Business Secretary Sajid Javid insists that employees will get a fair wage, saying the “government is committed to making work pay and making sure hardworking people get the salary they are entitled to.”

Winners

The introduction of a higher living wage will mean almost a third of women workers will receive a pay rise, according to a new study.

Some six million people – almost a quarter of all employees – are expected to see their wages increase from April next year. Women, who account for approximately 3.7 million, will see the benefits more largley because they are in lower paid roles.

The study by think tank Resolution Foundation found that two out of five part-time workers and 16 per cent of full –time employees will benefit from the new higher wage.

By 2020, someone aged 25 an hour working 35 hours a week could see their wages increase by around £4,000 a year.

Losers

The change won’t affect people aged 24 and under who current earn the minimum wage. Those aged 21 and hour on the minimum wage earn £650 an hour and this will increase from October 1 to £6.70 an hour.

Those aged 18 – 20 will see an increase of 17p per hour to a minimum wage of £5.30 per hour. The rate for 16-17year olds will increase by 8p to £3.87 per hour.