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25 March 2013updated 26 Sep 2015 2:46pm

Labour should beat George Osborne at his own game with a living wage employment allowance

Cutting the "jobs tax" was the best move the Chancellor made, but Labour should go further, writes Nick Pecorelli.

By Nick Pecorelli

In George Osborne’s budget politics triumphed over economics and bravado over honesty. But in amidst the cauldron of denial, downgrades and general gloom there was one interesting policy proposal that small businesses should celebrate and progressives should build on.

George Osborne announced a new employer’s national insurance employment allowance of £2000 for all businesses; a cut in the “jobs tax”. This is a much better approach to supporting small businesses than cuts in corporation tax because so many small businesses are too hand to mouth to make a profit. Moreover, a flat rate allowance helps the smallest businesses most.

Using national insurance to promote employment goals is not new. But what is new is the decoupling of total employers’ national insurance payments from individual pay rates, and this opens the door to a very different way of using national insurance to support progressive values.

One of the last Labour government’s defining policies was the implementation of the national minimum wage. Over one and a half million low paid workers received a pay rise and instantly there was a wage floor set in statute below which no one could be legally paid. 

The national minimum wage has been a success not just because Labour made the moral case but because it made an economic one. Higher pay floats workers off benefits, saves taxpayers money and puts cash into the hands of those who are most likely to spend it rather than save it.

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But Labour also bound in business by setting up a Low Pay Commission, on which both sides of industry and experts are represented. The Low Pay Commission’s job has been to agree the minimum wage annually at a rate which is affordable and does not damage job creation. 

Today, the minimum wage is set at £6.19 an hour for those aged 21 and over. That’s better than a world where employers could legally pay £2 an hour but certainly not a decent wage.

Hence, the campaign for a living wage of £7.45 an hour (or £8.55 in London), launched by London Citizens over a decade ago. The Living Wage campaign is energised and has had many successes, but these are mainly amongst larger corporations and the public sector.  Larger corporations can typically afford to see paying a living wage as part of their corporate social responsibility agenda. Councils can make the political choice to pay a living wage (and for that matter stipulate that their contractors must also pay it). But for many small businesses, predominantly those in certain sectors, it’s simply tough to do it and make the sums add up, particularly when your competitors aren’t paying it.

Many of these businesses only employ a few people – restaurants, hairdressers, small independent retailers, niche textile operations and so on. So a simple way for Labour to adapt George Osborne’s employment allowance into a policy that not only promotes employment but employment on a decent wage, is to argue that it should become a Living Wage Employment Allowance and only be available to businesses who pay a living wage (a lower youth rate would be needed to encourage employers to take on inexperienced workers). 

This will help fill the policy void between the compulsion of the national minimum wage and the exaltation of the campaign for a living wage.

By giving most help to the smallest businesses it will help create a new wage norm. Once a first, second and third employee are paid a living wage it becomes more challenging for an employer to offer a lower wage to a subsequent employee. Slightly larger businesses will also be more likely to pay a living wage even if the financial inducement of the Living Wage Employment Allowance does not fully cover the cost, partly because their employees would now be able to earn a higher wage elsewhere and partly simply because paying a living wage should become the new norm.

Over time when entrepreneurs are thinking of setting up new ventures the Living Wage Employment Allowance will help focus minds on sectors and business propositions where a living wage is affordable.

As wages for low paid workers increase more people will be floated off benefits and the taxpayer will gain. Some local areas where poverty is rife will get a spending boost, providing not only a direct benefit to economically depressed areas but a further boost to government coffers. A future Labour government could commit to use these proceeds to increase the Living Wage Employment Allowance and create a virtuous circle of more jobs, better wages, and higher tax revenues. A target of £10,000 might be achievable in the next parliament.

Compliance should also be relatively easy to monitor because wage information is automatically gathered through the national insurance system.

Britain cannot afford a low pay economy but neither can it expect small businesses struggling to make ends meet to pay decent wages without some support. A chancellor who has pursued some of the most regressive policies in recent history has unwittingly opened the door to progress. Labour should seize the opportunity George Osborne has presented with both hands and argue for a new approach that will make Britain’s economy both stronger and fairer.

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