To promote the living wage, we need to reform the tax system

We must end the absurdity of companies being financially penalised for becoming living wage employers.

The living wage is one of the few policies that garners consensus across the political spectrum. Which politician would be crazy enough to speak against the idea of companies paying their low-paid employees enough to live on? Cue Ed Miliband and Boris Johnson giving speeches today to mark the start of Living Wage Week – with David Cameron not letting the fact that he’s in the Middle East prevent him from pitching into the debate.

Yet when it comes to what supporting a living wage actually means, the differences begin to show. The to-ing and fro-ing between the Labour Party and No 10 today highlight the slippery nature of an idea that is – since no politicians are advocating a statutory living wage – in essence about businesses doing the right thing.

Cameron and Johnson – if their contributions today are anything to go by – stand for business voluntarism in its purest sense. Politicians should stand alongside campaigning organisations like London Citizens in imploring businesses to pay a living wage, but there the buck stops. This ignores the fact that early living wage adopters have tended to be City corporations with a very low proportion of low-paid staff – for whom the costs of becoming a living wage employer are relatively low – and values-driven public sector organisations (of which Boris Johnson’s Greater London Authority is not yet one). The idea that a moral campaign led by civil society and government can by itself shift working conditions for millions in the low-paid, low-skill service sector remains a distant prospect.

Ed Miliband recognised this today by floating the idea that the tax system should reward those companies that become living wage employers. This is an idea that merits serious consideration. The idea that we would financially penalise companies for doing the right thing – for using green energy, for investing in R&D, or for supporting local communities, seems ridiculously self-defeating.

Yet when it comes to the living wage, that is exactly what we do. The IFS estimated back in 2010 that the annual cost to the taxpayer of employers paying below the living wage – in terms of tax credits, benefits and foregone tax – is approximately £6bn. Yet we financially penalise companies taking the decision to become living wage employers. An employer would face an extra bill of £570 a year in employer national insurance contributions (NICs) as a result of moving a full-time employee from the minimum to the living wage. This is despite the fact that the cost to the Treasury of employers paying below living wage is around £1,000 per employee. The tax system effectively charges employers to do something that not only is the right thing to do, but which saves the Treasury a substantial amount of money.

A good way to address this anomaly would be to take the disincentive to pay the living wage out of the system – by introducing a new, flat-rate employer national insurance contribution for employees earning below living wage. This would be set at the same level for a full-time employee actually on the living wage, paid pro-rata for part-time employees. The Treasury could recycle the extra revenue this generates through targeted NICs holidays for small businesses taking on new employees.

Of course, the tax bill is only one of a number of factors companies take into account when making decisions about how much to pay their employees. But if the energy invested by business lobby groups into making the case for lower national insurance is anything to go by, it is something that weighs heavily on the minds of employers, particularly in these straitened times.

Politicians are wary of legislating for the living wage, and they are right to be so: the effects of a big increase in the statutory minimum wage for unemployment are untested. But the Tory approach of just asking nicely won’t bring about the change we need. The Labour party is right that we need government to be much more creative in terms of how it encourages employers to pay the living wage. A reform of employer national insurance contributions for low-paid employees would be one pragmatic way of doing so.

Sonia Sodha is a former senior policy adviser to Ed Miliband. She writes in a personal capacity. She tweets @soniasodha.

Labour Party leader Ed Miliband addresses workers at Islington Town Hall. Photograph: Getty Images.

Sonia Sodha is head of policy and strategy at the Social Research Unit and a former senior policy adviser to Ed Miliband. She tweets @soniasodha.

Photo:Getty
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Why isn't Labour putting forward Corbynite candidates?

Despite his successes as a candidate, the organisational victories have gone the way of Corbyn's opponents. 

The contest changes, but the result remains the same: Jeremy Corbyn’s preferred candidate defeated in a parliamentary selection. Afzhal Khan is Labour’s candidate in the Manchester Gorton by-election and the overwhelming favourite to be the seat’s next MP.

Although Khan, an MEP, was one of  the minority of Labour’s European MPs to dissent from a letter from the European parliamentary Labour party calling for Jeremy Corbyn to go in the summer of 2016, he backed Andy Burnham and Tom Watson in 2015, and it is widely believed, fairly or unfairly, that Khan had, as one local activist put it, “the brains to know which way the wind was blowing” rather than being a pukka Corbynite.

For the leader’s office, it was a double defeat;  their preferred candidate, Sam Wheeler, was kept off the longlist, when the party’s Corbynsceptics allied with the party’s BAME leadership to draw up an all ethnic minority shortlist, and Yasmine Dar, their back-up option, was narrowly defeated by Khan among members in Manchester Gorton.

But even when the leadership has got its preferred candidate to the contest, they have been defeated. That even happened in Copeland, where the shortlist was drawn up by Corbynites and designed to advantage Rachel Holliday, the leader’s office preferred candidate.

Why does the Labour left keep losing? Supporters combination of bad luck and bad decisions for the defeat.

In Oldham West, where Michael Meacher, a committed supporter of Jeremy Corbyn’s, was succeeded by Jim McMahon, who voted for Liz Kendall, McMahon was seen to be so far ahead that they had no credible chance of stopping him. Rosena Allin-Khan was a near-perfect candidate to hold the seat of Tooting: a doctor at the local hospital, the seat’s largest employer, with links to both the Polish and Pakistani communities that make up the seat’s biggest minority blocs.  Gillian Troughton, who won the Copeland selection, is a respected local councillor.

But the leadership has also made bad decisions, some claim.  The failure to get a candidate in Manchester Gorton was particularly egregious, as one trade unionist puts it: “We all knew that Gerald was not going to make it [until 2020], they had a local boy with good connections to the trade unions, that contest should have been theirs for the taking”. Instead, they lost control of the selection panel because Jeremy Corbyn missed an NEC meeting – the NEC is hung at present as the Corbynsceptics sacrificed their majority of one to retain the chair – and with it their best chance of taking the seat.

Others close to the leadership point out that for the first year of Corbyn’s leadership, the leader’s office was more preoccupied with the struggle for survival than it was with getting more of its people in. Decisions in by-elections were taken on the hop and often in a way that led to problems later down the line. It made sense to keep Mo Azam, from the party’s left, off the shortlist in Oldham West when Labour MPs were worried for their own seats and about the Ukip effect if Labour selected a minority candidate. But that enraged the party’s minority politicians and led directly to the all-ethnic-minority shortlist in Manchester Gorton.

They also point out that the party's councillor base, from where many candidates are drawn, is still largely Corbynsceptic, though they hope that this will change in the next round of local government selections. (Councillors must go through a reselection process at every election.)

But the biggest shift has very little to do with the Labour leadership. The big victories for the Labour left in internal battles under Ed Miliband were the result of Unite and the GMB working together. Now they are, for various reasons, at odds and the GMB has proven significantly better at working shortlists and campaigning for its members to become MPs.  That helps Corbynsceptics. “The reason why so many of the unions supported Jeremy the first time,” one senior Corbynite argues, “Is they wanted to move the Labour party a little bit to the left. They didn’t want a socialist transformation of the Labour party. And actually if you look at the people getting selected they are not Corbynites, but they are not Blairites either, and that’s what the unions wanted.”

Regardless of why, it means that, two years into Corbyn’s leadership, the Labour left finds itself smaller in parliament than it was at the beginning.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.