The Living Wage: An economic understanding and a policy for equality.

Carlo J Morelli, University of Dundee

Carlo J Morelli

Co Authors
P.T Seaman

The revival of support for a living wage has reopened a long-run debate over the extent to which active regulation of labour markets may be necessary to attain more equitable outcomes. Market failure is suggested to result in lower wages and remuneration for low skilled workers than might otherwise be expected from models of perfect competition.

This paper examines the theoretical underpinning of living wage campaigns and demonstrates that once we move away from idealised models of perfect competition to one where employers retain market power over the bargaining process it is readily understandable that low wages may be endemic in low skilled employment contracts. The paper then examines evidence, derived from the UK Quarterly Labour Force Survey, for the extent to which a living wage will address low pay within the labour force. We highlight the greater incidence of low pay within the private sector and then focus upon the public sector where the Living Wage demand has had most impact. We examine the extent to which addressing low pay within the public sector increases costs. We further highlight the evidence that a predominance of low pay exists among public sector young and women workers (and in particular lone parent women workers) but not, perhaps surprisingly, among workers from ethnic minority backgrounds. The paper then builds upon the results from the Quarterly Labour Force Survey with analysis of the British Household Panel Survey in order to examine the impact the introduction of a living wage, within the public sector, would have in reducing household inequality.

The paper concludes that a living wage is indeed an appropriate regulatory response to market failure for low skilled workers and can act to reduce age, gender and regional pay inequality, and reduce household income inequality among in-work households below average earnings.