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Living wage – Ecuador shows the way

Living wage policies can be radical when they are more than a simple ‘take it or leave’ it opt-in for employers, but they can be practical at the same time.

Gavin Edwards recently wrote an excellent article for LabourList, picking up on the need for a statutory living wage. Gavin shows how the two main right-wing arguments against this – firstly that it would cost jobs, and secondly that it would undermine the voluntary principals of the living wage campaign – are both built on shaky premises.

When Labour introduced the minimum wage, there were similar predictions about job losses, which later proved to be fruitless ones. Simply raising pay does not necessarily mean losses in jobs. Some companies can take money from profits. Some have other efficiencies they can make. And crucially, this is rarely zero-sum economics.

The assumption that significant numbers of jobs would be lost also rests on assumption – perhaps higher wages for workers at the bottom would create higher rates of retention as products become more affordable, if a knock on effect in inflation can be avoided. Most of the inflation we have had for the last couple of decades has not been because of rising rates of pay. Evidence from the ONS shows that many of us returning to work earlier in January have seen wages have again fallen below inflation for the 5th consecutive year, meaning that in real terms we have had a pay cut every year since 2008.

Perhaps raising pay for the very poorest would avoid a significant knock on in price rises – this is certainly what happened when the National Minimum Wage was introduced.

What about the voluntary principle? While moral arguments and pressure can affect those in high density areas such as London to take up the Living-wage, without a statutory living wage those in other more rural parts of the country will not be able to benefit from such campaigns. Even so, London has the largest wage inequality across the regions, despite high profile Living wage campaigns. Now, that is offset by the fact that London is the capital, and home to the City – but if anything shouldn’t that engender a demand for a much more widespread take-up of the Living-wage?

I believe strongly that we need a statutory living wage with the force of law behind it. But I find it strange that so little has been done to debate the practicalities of such proposals – this is exactly the sort of thing the Labour Party should be discussing and passing as policy.

Perhaps there is a case for a ‘responsible capitalism’ agenda, as Ed Miliband would have it. But strong democratic oversight of the market is key to any such notion. Politics is more than simply saying to ourselves ‘wouldn’t it be great if employers were nice’.

In Ecuador where left-wing President Rafael Correa is standing for re-election, the government has introduced a minimum wage, and what they call a ‘Dignity’ wage for the private sector. Paying the national minimum wage is a legal requirement, but paying the Dignity (i.e. Living) wage is not.

Instead, it is a legal requirement for companies to pay the Dignity wage to all employees if they are to pay dividends to their shareholders.

This means that pressure is then redirected to company shareholders to ensure that their company is paying the Dignity wage, as a minimum, to all staff. Shareholders in search of dividends (or sale value) are then left to apply pressure to their own firms.

The politics

This is the sort of strategy that the right has used against the left for decades, dismantling the post war settlement piece by piece. Part of that has been done by breaking unions. Part has been done by setting public and private sector workers against each other in the rhetoric used by ministers or supportive newspaper columnists.

I am aware that there are all sorts of views on the region expressed online, including very valid concerns about the rising levels of crime and apparent crack-down on freedom of the press; but some of the ideas these countries have introduced are certainly valid for serious consideration, such as in Venezuela where a huge cooperative explosion, redistribution of oil monies, and the radicalisation of the Trade Union movement – all locked into sustaining an ongoing movement for change.

Though we are also a very different country to Ecuador, and Venezuela, some of these lessons from their own policies can be applied here. This politically divides shareholders who want to be paid from shareholders who want to concentrate on exploiting more from staff. It forces at least some owners onto the side of their employees.

This kind of policy will disproportionately benefit young people, who tend to work the lowest wage occupations in the private sector, typically in the service sector. Though there is certainly some good work being done by Trade Unions from Asda to betting shops, they have not been able to make up for the damage done by low pay and casual working conditions in workplaces which are so flexible and prone to change. If we continue to see young people increasingly impoverished by getting less pay for more time and labour, then the people that make money out of it should be given responsibility for it.

As well as benefiting young workers, the idea can’t help but heal the damage done by Tory attempts to drive a wedge between public and private employees. It might help to reduce hostility to attempts by unions to raise wages for public sector workers.

Last of all, using the incentive power of the state this way is an excellent method of helping to unpick the ‘investment strike’ – companies active in the global economy who are hoarding rather than investing due to low confidence, and in doing so creating ‘bear market’ conditions for low confidence to thrive. When everybody saves, nobody earns.

The moral argument

Wage inequality (ratio of highest to lowest earners) increased between 1986 and 1998 but fell after the introduction of the National Minimum Wage. The London Living-wage is defined as ‘the threshold at which people can live above the poverty level in London with a sufficient safety net to also provide for quality of life’, the Resolution Foundation and the IPPR published a joint report ‘Beyond the Bottom Line’, the report states that introducing such a measure would lead to a pay rise for 4 million workers and lift them into out of poverty wages. Thus a statutory Living-wage would also help contribute to the more equal society that is a central part of Labour’s vision for a One Nation Britain.

A ‘dignity wage’ approach to pay, using the levers of the state to back up Ed Miliband’s well intentioned language, would strike a blow for intergenerational justice, provide another doorstep-friendly practical gain from an incoming Labour government, and help to invigorate a much neglected form of practice in the democratic left – long-term political strategy. We shouldn’t be subsidising the private sector to pay people properly by cutting its tax obligations (and thereby subsidising the shortfall as taxpayers).

The Economic argument

Through tax cuts and in-work benefits, taxpayers are subsiding otherwise stagnant companies so that they can continue to pay poverty wages. Lifting 4 million people out of working poverty by introducing a statutory living wage would be a powerful stimulus to the economy. This is further cause for a statutory Living-wage being not just economically viable, but economically beneficial and desirable.

It is unnecessary private sector hoarding that underpins the downturn. The banks that provide it with finance have been bailed out by the public. Much of the service sector remains hostile to workers organising. Together, they leave people who should be able to depend on them to ‘pay back in’ completely high and dry.

Responsibility should now fall to private sector employers to stump up the finance for decent living conditions for their own staff. Politically and morally, it makes sense that they should be given an incentive for not shirking it. Instead, we could have a system where shareholders are incentivised to consider the lowest paid.

It might come from Latin America – but given its potential for bringing together sectors, generations and fractious interests, I think it could be a solid and innovative example of ‘One Nation’ politics in practice.

Hazel Nolan is Secretary of SERTUC Youth, coordinator of the Young Labour Trade Union Network, and a former International Officer for Irish Labour Youth

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