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KPMG economic analysis: Raising the minimum wage to the Living Wage would benefit staff and businesses

7th July 2015, 15:50

KPMG has calculated, for the first time, the impact of the universal adoption of the Living Wage in the UK. In a new report, “The Living Wage: an economic impact assessment,” KPMG has concluded that raising the Minimum Wage to the Living Wage would take just 1.3% of the national wage bill, lifting six million people out of poverty. Early adopters report clear benefit to their businesses.

The Living Wage has been set by the Living Wage Foundation at £7.85 (£9.15 in London). KPMG’s research comes ahead of the Budget on 8 July, with speculation that the Chancellor may look to incentivise companies into paying higher wages for lower paid workers. 

KPMG looked at the different scenarios on how the increase might be paid for if all workers’ wages were raised to the Living Wage and at the differing impacts on the public finances (table below). The average gain to the public finances across the different scenarios is just over £4 ½bn of additional revenue from taxes and reduced benefit payments. However, with universal adoption the government would face an extra £3bn of direct wage costs plus higher procurement costs, leaving a net benefit of just over £1½ bn.

 

Scenario

Impact on Government finances

Revenue benefit

Other workers pay – employers respond by reducing the workforce or reducing pay

No additional impact as the total wage and salary bill is unchanged

No benefit

Shareholders pay as companies pay for the increase through profits

Government will gain £6.6bn as a result of higher wages, but lose £2.6bn in corporation tax and £0.2bn in tax on dividends

£3.9bn benefit

Consumers pay through increased prices

Government will gain £6.6bn from higher wages Higher prices reduce the volume of spending, but value, and hence indirect tax receipts, are unchanged.

£6.6bn benefit

Productivity increases through increased pay

The economy grows enough to pay for the increased £12.4bn costs. No additional impact

£6.6bn benefit

 

Marianne Fallon, Head of Corporate Affairs at KPMG said: “We firmly believe that voluntary adoption of a Living Wage policy by employers, over time, is one of the tools that will help improve social mobility in the UK as well as directly addressing in–work poverty.

“As a firm who has paid the Living Wage since 2006, we have seen the benefits of lower absence and a more engaged workforce. We understand that this is a complex issue for employers and policymakers, but our research shows that there is more to be gained by employers adopting a Living Wage strategy integrated within their broader business strategy.”

The research by KPMG also simulated the effect of a wage increase using the macroeconomic model (NiGEM) built by the National Institute of Economics and Social Research which is used by HM Treasury for its own policy simulations. The NiGEM results suggest an effect on government revenue which is close to an average of the four scenarios set out above.

On the economic assumptions that underpin the NiGEM model, paying the Living Wage universally has no effect on productivity.  This may be as workers would simply consider it as the new minimum wage.  However, it is possible that productivity could actually rise as higher pay tends to motivate staff and helps with key costs, such as childcare. Current Living Wage employers have seen a boost to productivity, with much attributed to “first-mover” advantage, as employees really value the premium of being paid a higher than minimum wage.

To download the report, please select this link here.