Wider Payment of the Living Wage in Scotland – Issues for Consideration

Executive Summary

Background

1. The Living Wage is calculated to represent the minimum pay rate required for a worker to meaningfully participate in society. It is based on detailed research into the types of goods or services members of the public think are needed to reach a socially acceptable standard of living. There is no legal requirement on employers to pay the Living Wage, unlike the statutory National Minimum Wage (NMW), and it is not possible to make payment of the Living Wage a compulsory condition of publicly procured contracts.

2. The Scottish Government has committed to paying the Living Wage as part of its public sector pay policy, and supports the Scottish Living Wage Campaign as one of the measures to address poverty in Scotland, and it has published guidance on how procurement processes can encourage payment of the Living Wage, as part of a wider package of workforce matters. There have been calls to encourage the further introduction of the Living Wage wherever it might be appropriate, taking account of the prevailing economic conditions.

Aim and research methods

3. The purpose of this research was to inform potential action by the Scottish Government to support the Living Wage, by:

• Reviewing, and assessing the applicability to Scotland, of existing empirical and theoretical research on the impacts and practicalities of introducing the Living Wage, universally, in parts of the public or private sectors and of promotion through public contracts.
• Through in-depth interviews with employers who had already introduced the Living Wage, Scottish Government contractors and stakeholder organisations: exploring perceived costs and benefits of the Living Wage, barriers (and enablers) to implementation, and their suggestions for future action; and gathering any objective evidence available on the impact of the Living Wage in Scottish organisations. It should be noted that it was not within the scope of the research to assess the feasibility of research participants' suggestions for future action.

4. The research was conducted between 16 January and 28 May 2014. Full details of methods can be found in chapter 2.

What the existing research literature tells us

5. Literature on the effects of the Living Wage in the United Kingdom, particularly outside London, is relatively new and sparse. However, a large body of literature from the United States gives empirical evidence of the impact of raising wage floors in practice, rather than merely the predictions of economic theory.

6. In particular, two decades of intensive research comparing employment levels under different minimum and Living Wages in the United States have failed to confirm the hypothesis that a higher wage floor reduces employment. The evidence suggests that the impact on labour demand is not as large as is sometimes assumed, not least because low wage jobs tend not to be in internationally traded goods or services where higher pay could be readily undercut from abroad. In the UK, estimates of the labour demand effect of the Living Wage being universally adopted remain theoretical, but also suggest a small impact, largely confined to certain sectors.

7. This limited impact on employment levels is because of a combination of productivity increases (e.g. due to reduced employee turnover), and employers reducing labour costs in other ways (e.g. non-wage benefits), increasing prices to consumers, or reducing profit margins. There is little consensus in the economics literature about which of these effects dominates. Although increased productivity is likely to outweigh the higher wage cost for many firms, this does not mean that all firms will experience increased productivity, or that it will fully cover the cost for all those that do experience it.

8. Significant US evidence indicates that introducing higher wages in the public sector has not been associated in a significant way with a net increase in public spending, and can even have the reverse effect (taking account of reduced income-related social benefits and increases in income taxes). Some UK analysts suggest that the same will be true in the UK, helped by reduced in-work benefits and the multiplier effect of additional disposable income spent by low-income groups.

9. The evidence suggests that payment of the Living Wage can improve employee wellbeing. However, the effects on reducing poverty are less clear, as a large proportion of the employee's pay increase is often lost in increased taxes and reduced means-tested benefits.

10. The US approach has been to test the limits of higher minimum and Living Wages in some areas, with research generally showing that negative impacts have been smaller than predicted. Evidence of impacts in the UK is at an earlier stage, suggesting that further steps in its implementation need to be carefully monitored.

The views of Scottish Living Wage employers

11. The Scottish Living Wage employers interviewed did not yet have a specific, formal assessment mechanism to monitor the impact once the Living Wage was implemented. Instead, monitoring of the impact was included as part of wider mechanisms used to measure overall staff performance and turnover. Therefore, the evidence of costs and benefits of introducing the Living Wage reported here relies on the perceptions of Scottish Living Wage employers interviewed, rather than on objectively quantified measurement of these gains. When asked about their perceptions of the positive impacts of introducing the Living Wage, employers tended to discuss these in terms of benefits to:

• Employees - through increased salaries, which were perceived to help employees and their families achieve a higher standard of living and create a more positive working environment.
• Employers - through an increased ability to retain high-calibre staff and attract more qualified applicants, as well as the reputational benefits of being seen to be a Living Wage employer.

12. Employers in smaller and medium sized organisations felt that introducing the Living Wage did not provide significant benefits to the company as a whole, due to the very small number of staff affected.

13. There was widespread agreement among Living Wage employers that, on the whole, the process of implementing the Living Wage was straightforward, particularly among small and medium-sized companies. However, Living Wage employers did identify a range of factors that created barriers or difficulties in adopting the Living Wage. The barriers cited by employers tended to fall under four broad categories.

14. The financial cost of increasing wages - Before they implemented the Living Wage, employers had three main concerns about increased wage costs: the potential for undercutting of prices by competitors; the potential for a wider inflationary impact on salaries across larger organisations; and a reluctance to pay younger employees the Living Wage in addition to investment in their training and development.

15. Ensuring that sub-contractors paid the Living Wage - The most commonly expressed difficulties were: the resources needed to manage this; resistance from sub-contractors; an increase in contract costs; and ensuring sub-contractors actually pay their employees the Living Wage. Living Wage employers discussed the need to create an action plan incorporating: setting achievable goals for sub-contractors; determining a timeline for implementing the Living Wage across all contracts; and identifying challenges and ways of addressing these.

16. Communicating changes to employees - Some employers were concerned that staff might perceive the company to have been "taking advantage of them" prior to implementing the Living Wage, or that some employees may lose out on receiving state benefits or tax credits. To address this, they adopted an iterative approach in which they responded to negative reactions as and when they occurred. Among employers who chose to openly communicate with staff about the implementation of the Living Wage, many felt it created a "feel good" factor within the company.

17. Perceived lack of clarity about what is expected as part of Living Wage accreditation - Some larger employers expressed a need for more information on reporting requirements, the nature of the yearly audits and the impact of having a different financial year to the Living Wage Foundation. However, these concerns tended to be addressed through dialogue with Glasgow City Council or the Living Wage Foundation.

The views of Scottish Government contractors

18. Contractors' perceptions about the potential benefits and costs of encouraging the implementation of the Living Wage were broadly similar to those held by Living Wage employers - namely, that promoting the Living Wage through public contracts would bring benefits to:

• Employees - through improved employee morale, leading to greater levels of job satisfaction and engagement; and contributing towards improving the general health and wellbeing of employees by enabling them to support themselves and their families adequately.
• Employers - through greater employee engagement, resulting in improved staff retention, reduced absenteeism and improved workplace atmosphere; enabling organisations to attract higher calibre employees; and improved reputation by demonstrating that they were a socially responsible organisation.

19. Contractors expressed deeper concerns about the potential financial cost of implementing the Living Wage than Living Wage employers. The prevailing view was that it would be difficult to absorb the additional cost of paying the Living Wage, particularly within the current economic climate of "squeezed" profit margins. They felt increases in staff costs would have to be passed on to clients, and would therefore put the organisation's competitiveness at risk.

20. Some contractors were of the view that increasing the wages of employees below the Living Wage could create an inflationary impact on wages across the organisation. Others felt that it might result in the Living Wage being used as a "wage floor" by organisations to depress wages within industries.

21. Most contractors felt that the promotion of the Living Wage through public contracts would have little impact on the recruitment of young people, but had two main concerns. Firstly, some felt that, when considering how much young people are paid, it is important to look at the wider investment in young people by companies, such as the cost of training and providing experience. Secondly, there was a broader concern about the "appropriateness" of paying young people at Living Wage levels based on the belief that many young people live at home and the subsistence costs the Living Wage is designed to cover will already be addressed through the household income of their parents.

22. On the whole, contractors were supportive of the principle of using public sector procurement to promote the Living Wage. Indeed, some contractors commented that they had a clear preference to an approach which would enable incorporating the Living Wage into procurement practice in a way which would help to establish a "level playing field" and enable contracts to be judged on quality and their contribution to society as opposed to cost.

23. A small number of contractors were more sceptical about the use of procurement to promote Living Wage, mainly due to perceptions that: the procurement process would favour larger companies; there would be an exponential increase in the cost of goods and services if organisations in a supply chain all implemented the Living Wage; and focussing on the Living Wage was too arbitrary and failed to consider wider packages offered to employees.

The views of key stakeholder organisations

24. The benefit of increasing employees' salaries was mentioned by some stakeholders in the context of addressing in-work poverty.

25. The timing of the Living Wage debate was a concern for some stakeholders, who felt that the economy had only very recently begun to show signs of recovery and additional "burden" on businesses would be unwelcome.

26. Stakeholder views on Scottish Government contractors' concerns were mixed. On the one hand, some stakeholders felt that businesses tended to overstate the financial costs of increasing employees' wages. On the other hand, some expressed strong concerns that the impact on costs would have a considerable impact on businesses and a disproportionate impact on companies in industries where staff costs tend to make up a higher proportion of the overall business costs.

27. Further, stakeholders tended to take a broader view of the role of the Living Wage in procurement, and felt that its consideration should take place within a context of wider social policies.

28. A number of stakeholders also highlighted a range of potential practical issues in relation to using Living Wage considerations in determining public contract decisions. These included: concerns that 'additional bureaucracy' may result in some businesses opting out of applying for Scottish Government contracts; concerns about how contractors will be asked to 'prove' that they are actually paying the Living Wage; and concerns about whether payment of the Living Wage applies only to work relating to a defined government contract, or whether it applies to all activity of an individual contractor.

29. The consensus among stakeholders was that organisations delivering public sector contracts would be unlikely to afford to pay all staff working on these contracts a Living Wage unless public bodies were willing to pay more for the contracts.

Conclusions

Costs and benefits

30. Existing research suggests that payment of the Living Wage can improve employee wellbeing, but has a limited impact on poverty. Therefore, it has been argued that it is essential to combine the Living Wage with other policies which impact on wider workforce terms and those which are designed to improve career progression and to reduce the costs faced by people on low incomes (e.g. childcare costs). In addition, changes to benefit withdrawal and tax settings could ensure that lower income households keep a greater proportion of the increases in earned income.

31. A considerable body of evidence from the US shows that employers have made many adaptations to higher wage floors, such as shifting the composition toward higher skilled workers, or simply accepting a smaller profit margin. Coupled with benefits such as reduced staff turnover and improved productivity, this has meant that the impact on employment levels has been limited. Evidence of impacts in the UK is at an earlier stage, however, suggesting that further steps in its implementation need to be carefully monitored.

Employers' views of the implementation process

32. There was widespread agreement among Living Wage employers that implementing the Living Wage was straightforward, though this was dependent on the size of an organisation or the sector in which it is operating.

33. Based on their experience of implementing Living Wage, employers made a number of suggestions that they felt would help organisations move to paying their employees a Living Wage, including:

• conducting feasibility studies to identify potential risks, devise approaches to address risks and develop an appropriate timescale for implementation
• communicating openly with all staff in the process to explain the rationale for adopting the Living Wage
• creating a clear action plan for working with sub-contractors and ensure good communication between their business and sub-contractors to facilitate implementation.

34. Living Wage employers also suggested ways in which they believed the Scottish Government and organisations promoting the Living Wage could support employers. These suggestions included:

• providing advice and guidance on all aspects of the implementation phase
• encouraging dialogue between employers that have been through the implementation process and employers that are considering it
• raising awareness among recruitment agencies about the Living Wage
• providing more information and evidence on its benefits
• providing financial incentives to help small businesses
• improving communications on how the current level of the Living Wage is set
• involving local businesses in the process of determining the Living Wage rate.

Using public sector procurement to promote the Living Wage

35. Scottish Government contractors were generally supportive in principle of using procurement processes to encourage companies to adopt the Living Wage, although a small number were sceptical, mainly due to perceptions that this would favour larger companies and increase the costs of goods and services, and fails to consider wider benefit packages offered to employees.

36. Contractors identified a range of steps that they felt could be taken to encourage them to pay the Living Wage. These mainly involve negotiation with the contractor to vary existing contracts, including price, to cater for the additional costs. The views expressed included:

• encouraging payment of the Living Wage in public sector contracts, but not making it mandatory
• working in partnership with contractors to promote the payment of Living Wage in public contracts
• a staged approach to promotion, beginning with larger contracts before filtering down to smaller contracts
• providing clarity on how the Living Wage can be promoted in tendering processes
• some form of subsidy for organisations to help offset increases in wage costs among contractors
• making use of local government and non-departmental government bodies who deal directly with contractors to provide information and support
• organising workshops with contractors to provide information and advice on best practice
• providing robust evidence on the impacts and advice on addressing barriers

37. Existing research in the US has found that many bidders welcome the "level playing field" provided by a wage floor, which does not encourage a "race to the bottom". In some cases, this actually attracts more bidders. Where the additional contracting costs have been quantified, they have often been found to be low. The US does not operate within the same legal framework as the UK. If a public sector body in Scotland (or the rest of the UK) made the payment of staff at a higher rate than the National Minimum Wage a mandatory requirement as part of a competitive procurement process, this would run the risk of breaching European Law and European Procurement rules. It is, however, possible to include Living Wage considerations in procurement exercises without making payment of the Living Wage a mandatory requirement, and a number of public bodies in the UK have done so.