The purpose of this paper is to understand the impact of living wages on organisational pay systems.
The research draws on 23 semi-structured interviews with HR managers, trade union representatives, and politicians at four UK local government case study sites.
The findings suggest that living wages can have a positive impact on directly employed workers in cleaning, catering and care services, but the research also finds that the localised adoption of living wages can lead to significant wage compression, resulting in a broad band of “low skill-low wage jobs”.
The theoretical contribution is twofold. In-line with earlier research the “first-order” effects of living wages are clear: hourly wages for a large number of women in part-time roles increased sharply. However, this is only part of the story as “second-order” effects such as ripples and spill-overs are less extensive than suggested by other studies. This is due to the limited scope for trade unions to restore wage differentials through collective bargaining, the slow progress in extending the living wage to contracted staff, and parallel processes of downsizing and outsourcing.
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Copyright © 2017, Mathew Johnson
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High levels of income inequality and the increasing share of low wage work in many developed economies have led to calls from trade unions, social justice campaigners, and academics for a “living wage” for all workers. In contrast with collectively agreed or legally mandated minimum wages which are designed to protect workers against exploitation and extreme low pay, a living wage is calculated explicitly to provide a worker with sufficient income to reach a “modest but decent standard of living” based on the cost of accommodation, goods and services within a particular country (Figart et al., 2002). Living wage campaigns began in 1994 in the US city of Baltimore and have spread to more than 150 cities throughout the USA since then (Luce, 2014), and the UK living wage campaigns began in the early 2000s when The East London Community Organisation and one of the UKs largest trade unions, UNISON, began lobbying for a living wage some 30 per cent higher than the UK national minimum wage (UK NMW) (Wills, 2004).
The economic impact of living wage ordinances (laws) in the USA has been much discussed (see Neumark et al., 2012), but the evidence on “first-order effects” suggests that they can increase wages at the bottom by up to 30 per cent (over the federal minimum wage) with few of the adverse consequences predicted by critics in terms of the loss of jobs and working hours, or stunted economic growth and business relocation (Luce, 2014). Wills and Linneker (2012 p. 4) note that although the UK NMW has helped reduce the incidence of extreme low pay, it has not been able to stem ‘the rising tide of in-work poverty’. The authors also observed an average increase in hourly wages of 26 per cent in firms that adopted the London Living Wage (LLW).
There are also potentially wider benefits from living wages, or “second-order effects”. These include wage gains for workers higher up as employers seek to restore differentials (a “ripple effect”), and “spill-over effects” to other businesses who are incentivised to raise rates of pay in order to remain competitive in the labour market. Reviewing the early evidence from living wage ordinances in the USA, Luce (2004) suggests that for every 100 workers who see a direct increase in wages, another 40 receive increases as a result of ripple and spill-over effects. Another important second-order effect is the scope for living wage campaigns to invigorate union recruitment, and to mobilise low paid workers in pursuit of “social justice” (Holgate, 2009; Lopes and Hall, 2015; Wills, 2004).
While the concrete gains of local living wages should not be underestimated, there are still some doubts about the ability of living wages to generate widespread wage gains across the labour market. Indeed as Freeman (2005, p. 17) argues: “just as local efforts to lower global warming cannot solve the world’s climate problem, living wage campaigns cannot solve the problem of low wages broadly”. For example, despite positive wage gains within firms Wills and Linneker (2012) estimate that just 11,000 workers received pay increases as a result of employers across the capital adopting the LLW between 2005 and 2011, which is only a small fraction of the estimated 750,000 workers in London who earn less than the living wage (KPMG/Markit, 2015).
Limited ripple effects may partly be explained by the fragmentation of wage setting in liberal market economies which means that wage increases at the bottom do not provide a platform for more general upward pressure on wages (Grimshaw, 2013). Furthermore, although the living wage is often seen as an important “proxy” for collective bargaining in low paid and non-unionised sectors, concerns have been expressed within the trade unions about the threat to “traditional” collective bargaining from living wages, leading to a more reactive than strategic approach to tackling the issue of low pay (Holgate, 2009). While living wages may create a short-term focus for union recruitment drives (Lopes and Hall, 2015), the experience of the GMB campaign in UK local government also suggests that recruitment and organising efforts among low paid workers provide the basis for strong negotiations and lobbying of employers rather than the other way around (Prowse and Fells, 2016a).
Limited spill-over effects may be explained by the narrow coverage of living wages and weak systems of enforcement. There are exemptions to the US living wage laws for smaller firms, and where municipal resources are not committed to systematic monitoring and enforcement then wage gains may be compromised (Luce, 2005). In the UK living wages have become recognised as a symbol of “business ethics” (Werner and Lim, 2016), and accreditation with the UK Living Wage Foundation means employers should abide by the annual uplift, and promote the living wage to suppliers. However, an employer may choose to pay a living wage without seeking accreditation, and there are no mechanisms by which the accreditation obligations can be enforced. The issue of extending the living wage to contracted staff is particularly relevant for the public sector where declining budgets may constrain the ability of the state to act as a “socially responsible customer”, and where outsourcing and work reorganisation are de facto leveraged to drive down unit costs (Jaehrling, 2015).
Research and methodology
This paper seeks to understand the practicalities of adopting voluntary living wages at the level of the organisation. It seeks to assess the scale of “first-order” effects (i.e. the impact on hourly wage rates and pay dispersion), and also the “second-order effects” (i.e. the scope for unions to bargain over the restoration of differentials, and the adoption of the living wage for contracted staff).
Local government was chosen as the focus of the research as it is the lowest paying part of the UK public sector and has been hit hard by austerity. Claims by the three main local government unions (UNISON, Unite and GMB) for the living wage to be adopted through the National Joint Council (NJC) collective agreement have so far proved unsuccessful. UNISON is the largest trade union in the UK local government sector, and was instrumental in the early east London campaigns, but given their strong representation among lower paid workers (including those working for private sector contractors) both Unite and the GMB have arguably taken a lead on local living wage campaigns (Lopes and Hall, 2015; Prowse and Fells, 2016a). In this context, living wages have spread across the sector in a somewhat piecemeal fashion. For example, over half of all 375 councils in England and Wales claim to pay the living wage but only a handful are accredited with the Living Wage Foundation, and some have adopted localised rates which fall short of the “official” figure (with or without trade union endorsement). Furthermore, local living wage deals may come with “strings” attached. For example, Derby City Council introduced a living wage in early 2014 but at the same time unions were not able to prevent cuts to unsocial hours enhancements with the result that many workers were no better off overall. As Prowse and Fells (2016b, p. 158) note in their analysis of the adoption of the living wage at one council: “The challenge of translating a broad ideal of a ‘living wage’ into the pay packets of employees is a complex process, relying on a mixture of political imperative, employer pragmatism and union opportunism (and some industrial action)”.
The research follows a comparative case study analysis of four English local authorities. The cases were all Labour-led unitary councils (i.e. larger councils with responsibility for core functions such as highways, refuse and social care), located in areas of relatively high deprivation, with union membership density of over 40 per cent. Two cases were inside London (London 1 and 2) and two were outside (North 1 and 2). The cases were sampled purposively on the basis of the relatively recent introduction of the living wage, but also to provide variation in terms of geographical and labour market context, and cost of living pressures. The qualitative data were gathered over a period of 18 months (2013-2014) through 23 semi-structured interviews with politicians, HR managers, operational and procurement managers, and UNISON representatives. The interview data were then combined with extensive document analysis to provide a contextualised picture of the development and outcomes of local living wage policies.
Against the backdrop of public sector austerity and a three year pay freeze (2010-2013) the introduction of the living wage in all four cases appeared to be predominantly a political strategy in order to be seen as a good or “ethical” employer (Werner and Lim, 2016). All four councils had a substantial Labour majority, and there was a broad consensus that public sector cuts enforced by the conservative-led coalition government (2010-2015) and the rising cost of living was having a detrimental effect on the lowest earners. At London 1 and North 2, political leaders were instrumental in driving forward the living wage policy, and committing the organisation to full accreditation with the Living Wage Foundation, something which HR and procurement managers recognised might not have happened had it remained a business-case proposal simply to reduce turnover.
Accreditation means that London 1 and North 2 have to comply with the annual uplift (within six months of the new rate being announced in November each year) and take steps to promote the living wage with contractors and local businesses. London 2 decided not to pursue accreditation owing to perceived difficulties with enforcing the living wage among suppliers (discussed below). At North 1, politicians and council officers developed a localised “minimum wage” policy as part of a wider package of workforce changes which led to a more gradual approach (the base rate only reached a full UK living wage of £7.65 in March 2014), with organisational discretion maintained by not pursuing accreditation.
First-order effects: tackling low pay and reducing pay inequality
The living wage at all councils was part of wider efforts to embed “decent” employment standards within the local authority (with input from the unions), while also promoting the notion of “fairness” across the wider community. For example, in collaboration with the trade unions and charitable groups, Labour politicians at London 1 set up a “fairness commission” to address income inequality across the borough, with an explicit ambition to reduce the pay ratio across the council to less than 1:10. This was ultimately achieved by the introduction of the LLW combined with a reduction in salary for the chief executive’s role in 2012 (when the post-holder left).
At London 2, the adoption of the London living wage was a pragmatic response to of the sector wide pay freeze. During the late 2000s, the LLW steadily caught up with the bottom of the pay spine (although no staff were on the lowest spine point 4 of £7.83 per hour), and the LLW figure for 2011/2012 of £8.30 (an increase of £0.45 per hour on the previous year’s figure) moved above the four lowest rates within the council which remained unchanged (Table I). According to the HR director, introducing a supplement to the hourly wages of those workers on the bottom four spine points was the most expedient way of matching the LLW figure, in order to help tackle poverty and improve the economic well-being of the borough.
HR managers at North 1 reported that the minimum wage policy had more than halved the turnover rate for entry-level jobs (particularly in school catering), which helped offset the cost of higher wages. At North 2, the living wage formed part of an “employment standards charter” developed by the directly elected mayor that would act as a reference point for businesses across the city, as well as enhancing the reputation of the council. The living wage was implemented slightly later than the other cases as part of a wider pay and grading review (started in 2012) to shorten long overlapping pay grades. At North 2, the new base rate was £7.39 per hour and therefore a supplement of six pence was required to bring it up to £7.45 which has since been increased to £7.65, £7.85 and eventually £8.25 in late 2015.
The vast majority of staff covered by the living wage at all four cases were women working in historically low paid part-time jobs such as cleaning, catering and school support roles who (at the time of writing) received wage rates more than 20 per cent above the NMW and well in excess of median starting salaries for similar work across local government and the private sector. At London 1 and North 2, this was bolstered by a full living wage for apprentices, which was almost three times the minimum rate of £2.65 per hour at the time. In addition, by altering pay grades at London 1 and North 2, the living wage was automatically consolidated and pensionable, and any premium rates were calculated at multiples of the new higher base rate. At London 2 and North 1, the payment of a supplement to hourly rates left underlying grades unchanged, meaning that premium rates and pension payments did not increase.
Although not related to higher wage costs per se, as a result of austerity since 2010 all four councils reduced staffing levels through downsizing and outsourcing. The HR director at North 2 explained that paradoxically, the living wage had a significant impact in parts of the council where the total hours available to staff were being reduced and vacancies “held open” as part of departmental efficiency savings. This was not an explicit trade off (e.g. a better hourly rate for fewer hours) but it demonstrates that higher wage costs may be at least partially offset by staffing reductions and increased work intensity:
[…] so they are saying “oh well thanks very much you‘re paying me more but you’ve cut my hours’ or “I’m working really hard now because where there used to be four cleaners there is just me […]”
(HR director North 2).
Second-order effects: ripples and spill-overs
Across the four cases there were varying proportions of staff in lower paying roles, and the centrality of job evaluated pay structures resulted in different strategies to managing differentials between groups of staff. Broadly speaking, within the two London councils the main issue was incorporating the living wage into external contracts, whereas within the two North councils the management of internal differentials was more of a problem.
Compressing wage differentials
In 2013, the national local government pay spine started at point 5 (equivalent to £6.45 per hour) but individual councils are free to set entry rates at a higher level. Previous phases of outsourcing at London 1 and 2 left very few workers on the lowest pay points, and the cost to raise the pay of directly employed staff at London 1 was around £60,000, and at London 2 it was estimated that around 100 part-time cleaning and catering staff would see their take home wages increase by a relatively small figure of £160 per year (at a total cost to the council of around £25,000). The main issue at London 2 was sharp increases in the LLW figure which meant that by 2013 the bottom six spine points effectively disappeared. Staff in non-supervisory cleaning roles all moved onto the same basic rate of £8.80 per hour in 2013, with a higher rate reserved for cleaning supervisors of between £9.50 and £10 per hour.
At North 1 and North 2, the number of staff in lower grades meant much higher initial costs (£600,000 and £900,000, respectively) and also meant that ongoing adjustments were necessary as the living wage was increased between 2013 and 2016. At North 1, the local minimum wage equated to £6.74 at the bottom in 2009, which was then increased in £7.01 in 2012, and £7.15 in 2013 for all staff who had completed a six-month probation period. In 2014, discretionary (i.e. non-contractual) supplements were added to spine points 8, 9 and 10, which smoothed out the differentials between points either side of the living wage, and late in 2015 when the living wage rate was increased to £8.25 supplements were added to spine points 11 and 12. Although the use of supplements prevented the complete collapsing of the bottom pay points, between 2013 and 2016, the gap between spine points 7 and 12 decreased from 16.4 to 5.1 per cent (Figure 1).
At North 2, the faster increase in the rate at which the living wage has been uplifted compared with national collectively agreed rates means that spine point 11 has effectively been subsumed by the living wage, and the gap between the spine points in the bottom two grades decreased from 11.5 to 4.6 per cent (Figure 2).
Spill-over effects – the importance of accreditation
Living wages can have an effect far wider than just the gains in hourly wages for directly employed staff. At North 2, waste, cleaning and catering services were still delivered in-house meaning that most workers saw an immediate uplift, and the creation of an employee-owned mutual company allowed for the implementation of the living wage in complex social care services (although at the time of the research the council had not adopted a living wage policy for contracted out domiciliary care services). In addition, the council’s employment standards charter led to 11 local businesses adopting the living wage even though they were not under contract to the council. At North 1, the decision not to pursue accreditation, and the payment of a supplement (rather than the permanent alteration of the pay spine) meant that the new base rate was not technically “contractual” and according to the procurement director progress in extending the policy to partner organisations and contractors typically proceeded on a case-by-case basis.
London 1 had relatively few directly employed staff that were affected by the LLW, and the main focus of the policy was to work with contractors to increase wages throughout the supply chain. Although social care was tackled last, contract renewals were used to negotiate the addition of living wage “clauses”, which a senior councillor stated was achieved at no extra cost to the council and without any loss of jobs or hours for contracted staff (with no legal challenges to date). By using the council’s purchasing power the chief executive was able to renegotiate the management fees charged by external providers and use this to offset the additional cost of the LLW. The councillor explained:
You are in a good [bargaining] position when you have multi-million pound contracts […] in some ways it’s actually a lot easier to work with contractors than to do it for your own directly employed staff because no-one else will pick up the tab […].
At London 2, the living wage was introduced in 2012, but an outsourcing exercise undertaken in 2014 actually transferred a number of cleaning staff to the private sector. In contrast with London 1, procurement officers at London 2 viewed living wage clauses in contracts as an issue for “soft” negotiation rather than enforcement for two main reasons. First, there was no provision within the council’s quality criteria for specific HR standards such as terms and conditions (other than relevant statutory provisions). Second, as the living wage figure applied to London only, the council could not adopt a blanket wage policy for providers who were based outside the capital. Prospective bidders for the building cleaning contract were asked to calculate costs both inclusive and exclusive of the LLW, and in the end 75 staff TUPE transferred over to the successful bidder at the LLW (£8.30 at that point). However, neither the council nor the contractor had allowed for any uplift in the contract value to reflect increases in the hourly rate. The low unit cost of the contract was instrumental in the private provider securing the contract, but the need to achieve further labour cost savings from the contract overall saw the increased hourly rate for TUPE transferred cleaners offset by job cuts of over 30 per cent.
A final “second-order” effect identified in the literature is the scope for unions to leverage the tangible gains from living wage campaigns to organise low paid workers who might not otherwise join a union (Holgate, 2009; Wills, 2004). Although the three locally recognised unions were supportive of the efforts to tackle low pay, the living wage was not generally viewed as a recruitment strategy in and of itself for three reasons. First, the adoption of the living wage was driven by the political ambitions of council leaders rather than extensive local campaigns or episodes of industrial action led by the unions. Second, the outsourcing of those services most affected by the living wage such as cleaning and catering partly undermined the perceived “gains”, and the fragmentation of services and staff across the private sector meant that targeted recruitment on the back of the living wage would be difficult. Third, UNISON branches in particular appeared to be wary of strongly endorsing local living wage deals, which meant their role was not as prominent as observed in other Unite and GMB campaigns (Lopes and Hall, 2015; Prowse and Fells, 2016a). This in part was a product of the perceived adverse trade-offs associated with living wage negotiations at other local authorities, but there also appeared to be a more fundamental reluctance to allow living wages to become the central plank of the union’s strategy. In fact rather than local living wages being viewed as a positive outcome at a time of austerity, one branch secretary argued that they reflected badly on national bargaining:
[…] it’s the failure of national bargaining that puts us in this situation […]
(UNISON Branch Secretary North 2).
Despite these reservations, in-line with research from US city ordinances (Luce, 2005), the unions were closely involved in monitoring the policies and pushing local politicians to maximise the wage gains for local workers. At London 1 and 2 the unions actively monitored the living wage by surveying contracted staff to check for non-compliance; and the unions pushed North 1 to eventually increase base rates up to a full living wage.
Discussion and conclusion
The aims of this study were to explore the implementation of the living wage in large organisations and their impact on embedded wage structures and procurement processes. In-line with other research (Luce, 2014; Neumark et al., 2012; Wills and Linneker, 2012), the findings suggest that the first-order effects of living wages for directly covered workers are significant: the hourly living wage represented an increase of more than 20 per cent over the UK NMW and lifted pay rates for a cohort of mostly female workers in historically low paid occupations such as cleaners and catering assistants well above starting salaries for comparable positions in the private sector. Moreover, this was achieved at no direct detriment to jobs or working hours for directly employed staff, despite the additional costs to all four councils studied.
However, the second-order effects such as the scope for the trade unions to achieve wider wage gains by bargaining for the restoration of differentials, and to extend the coverage to other private sector firms were less clear cut than observed by others (Luce, 2004). The cost burden of fully restoring differentials for those staff paid just above the living wage meant that the unions were not able to use the living wage as a platform to create a ripple effect upwards throughout the wage distribution. This finding aligns with studies of the UK minimum wage which show a wage compression effect in many low paying sectors as a result of the relatively weak position of the trade unions, and low collective bargaining coverage (Grimshaw, 2013). Although the flattening of wage hierarchies in this way to accommodate cost of living considerations potentially reduces the pressure on employers to make savings through job cuts, it also removes skill differentials and weakens internal hierarchies which can be important for the earnings growth of low wage workers over the long run (Gautié and Schmitt, 2010). The magnitude of spill-over effects also hinges on accreditation with the Living Wage Foundation which obliges employers to raise wages throughout the supply chain. The two accredited councils (London 1 and North 2) moved further to extend the living wage to contractors, but even then progress was slow in tackling low pay in outsourced care for older people.
There was also limited evidence that the unions attempted to use the success of local living wages to recruit low earners. This perhaps reflects idiosyncratic local circumstances which mean that campaigns follow different trajectories (Lopes and Hall, 2015; Prowse and Fells, 2016a), but also reflects the fact that it was local Labour party politicians rather than the unions who took up the mantle of pursuing “social justice”. An interesting finding is that within UNISON there appears to be an unresolved tension between the pragmatic “quick wins” of local living wages and the efforts to raise pay across the board through the local government NJC agreement. As the largest and most occupationally diverse union within local government, UNISON is perhaps understandably reluctant to pursue local deals that potentially threaten the institutional legitimacy of national bargaining (Holgate, 2009), and further erode the relative position of other relatively low paid members. This somewhat ambiguous stance means that even if the living wage in this research was not quite the “unilateral employer decision” observed by Prowse and Fells (2016b), employers may increasingly be inclined to press ahead with “egalitarian” wage strategies with or without union involvement.
The living wage is clearly an important means by which to protect low earners at a time of stagnant real wage growth, and is a welcome instrument of social justice in a UK context where union membership is low and collective bargaining is highly fragmented. However, a voluntary pay initiative which relies on either a business case, or “employer benevolence” is clearly at risk of atrophy once the initial publicity fades away. Furthermore, even in the public sector it appears that the relative isolation of localised living wages from coordinated systems of wage setting serve to contain the positive effects among a relatively small number of workers, who are at the same time most exposed to market forces as a result of organisational restructuring, downsizing and outsourcing.
The gap between the 2011/2012 LLW (£8.30) and the lowest rates of pay London 2
|Outer London spine Pt||Hourly rate (£)||LLW hourly rate gap|
Source: London 2 internal pay data
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