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Is the Living Wage a win-win policy for UK businesses and employees?

12May Posted by Matej Jovanovic

The Living Wage is the minimum income necessary for a worker to meet their basic needs. In the UK, it is different from the National Minimum Wage (NMW) as it incorporates the basic cost of living, and it is not mandatory for employers.

The Living Wage enjoys cross party support in the UK, with David Cameron calling the policy "an idea whose time has come". However, while the living wage will promote social justice and is a successful product of political rhetoric, could it also create benefits for businesses by enhancing performance?

The Living Wage increases employee engagement

The Living Wage provides workers on the lower-end of the pay spectrum with substantial welfare benefits. Implementing the Living Wage has been shown to lead to a clear increase in employee motivation and engagement, which has been noticed by employers.  A study by London Economics for the Greater London Authority in 2009 showed that half of the employers asked felt that the living wage had made their workers “more willing to implement changes in their working practices, enabled them to require fewer concessions to effect change, and made them more likely to adopt changes more quickly”.

This is particularly important as employees now have a much greater voice, and are closer to customers and clients than ever before, and can therefore make a true difference to a business. Having a Living Wage can therefore create substantial reputational benefits to an organisation, as employees become more engaged and are more willing to demonstrate a company’s values.

Which leads to lower staff turnover and absenteeism

The Living Wage has proved to effectively reduce absenteeism and staff turnover, as well as to decrease recruitment and induction costs. This is particularly relevant now, as The Chartered Institute of Personnel and Development (CIPD) estimated the average cost of labour turnover at £8,200 per leaver, and the Fair Pay Network indicates that the direct costs of sick leave to the economy are more than £11 billion a year.

Looking at the example of cleaning staff for big corporations who have opted for the living wage, Barclays has seen a cleaning staff retention rate of 92% and KPMG has seen turnover of cleaning staff fall by 50%. PWC experienced reduced absenteeism and a 75% drop in staff turnover, outweighing their £100,000 wage bill rise.

And a rise of productivity at work

There is evidence in support of an improvement of worker productivity following a successful implementation of the Living Wage. The study by London Economics showed that “more than 80% of employers have seen the quality of the work of their staff improved after having opted for the Living Wage, while absenteeism has fallen by 25%”.

Companies that have implemented the Living Wage have explained increases in productivity by a shift in attitudes of their employees. KPMG reported more ‘flexible and positive attitudes among staff’, and Linklaters said that the ‘cleaning, catering and security staff benefiting from the living wage are now more motivated’.

Flaws in the concept

Despite the proven benefits, implementing the Living Wage has also been criticised as a result of some perceived inherent flaws in the concept. In particular, some critics have branded it as economically weak. Ryan Bourne, Head of Economic Research at the Institute of Economic Affairs, comments “as it is calculated using a weighted aggregation of various household types, in reality the final number isn’t particularly instructive of what a certain family would need to live comfortably. Furthermore, much of any gross income gains can subsequently be taken in increased tax revenue or withdrawn benefits, and not reach the workers themselves.” However, while this criticism may hold weight, it is still undeniable that many people would benefit from receiving the living wage rather than the NMW.

Another main concern is the fact that it adds another wage rigidity to the labour market, and could cause a rise in unemployment for young or unskilled workers, something which has also been levelled at the NMW. However, the Living Wage still effectively makes working conditions better for employees, and as we have described previously, increases employee motivation and performance. Furthermore, young people can still easily take up internships and apprenticeships in order to gain more experience and acquire skills, thus build their CVs and get a competitive full-time position.

There is solid proof that businesses that have opted for it have seen strong advantages in terms of staff retention, employee engagement and reduced absenteeism, which in turn increased productivity in the workplace. Those business advantages outweigh the rise in the wage bills, and combined with the reputational benefit for a company to introduce the Living Wage, this measure is clearly an effective and efficient solution for businesses, and one that many should consider implementing, regardless of the outcomes of political rhetoric and economic debates.

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