Fair Pay and Minimum Wages: A Role for the Living Wage?

Stuart Hill - Founder and Executive Director, Pay Compare

The statutory National Living Wage is an extension of the UK National Minimum Wage. The National Minimum Wage is a minimum rate of pay that all adult workers in the UK must receive by law. The National Living Wage is essentially a higher rate of the National Minimum Wage that must be paid to all workers in the UK who are aged twenty-five years or older. The rate of the National Minimum Wage and the rate of the National Living Wage are set by Government. The Low Pay Commission, an independent body attached to the Department of Business, Energy and Industrial Strategy, advises the government on the National Minimum Wage and National Living Wage. The Commission recommends changes to the rates of the National Minimum Wage and National Living Wage at the government’s request. Critically, in making its recommendations, the Commission must consider the wider economic context. In essence, it must aim to avoid negative impact on the UK economy as a whole when recommending rates of the National Minimum Wage and National Living Wage.

Since its introduction in the early 2000s, the rate of the voluntary Living Wage has been higher than that of the statutory National Minimum Wage and the National Living Wage. Motivations of employers to participate in this higher-rated minimum wage scheme have then become a topic of enquiry given introduction of the voluntary Living Wage is likely to increase an employer’s overall pay bill. Two major studies of the voluntary Living Wage in the UK have been carried out. One study examined all Accredited Living Wage Employers and the other examined accredited employers in Small and Medium-sized Enterprises. Findings of the two studies resonated strongly. They found employers largely become accredited for two reasons. The first reason was because the voluntary Living Wage aligned with their organisation’s ethical position or value base. The second reason was because the voluntary Living Wage brought some form of strategic or economic benefit to the organisation.

However, my new research at the University of Brighton has extended our understanding of what motivates employers to adopt the voluntary Living Wage. My research finds employers are also motivated to adopt the voluntary Living Wage because the basis of this minimum wage intervention aligns with how they conceptualise fair pay. I studied ten Brighton and Hove employers. Six of these were signed up to the local Brighton and Hove Living Wage scheme and four were not. The ten employers were also drawn from two contrasting industries to provide further comparison. Four employers were from the traditionally low-paid adult social care industry and six employers were from the higher-paid computer programming industry.

In analysing how employers described fair pay, I found all employers conceptualised fair pay in accordance with a rule of proportionality. That the quantity of pay awarded to an individual should be related to their personal contribution – whether measured in terms of expertise, experience or some other quality. Theoretically, this is described by the equity norm of distribution where fairness is determined by the relationship between personal contribution and individual reward. I also found some employers conceptualised fair pay using the equality norm of distribution. The equality norm of distribution requires all members of a group to receive the same treatment regardless of their personal contribution. Employers described this in terms of pay parity across genders and of all employees being entitled to a share of corporate bonuses irrespective of their individual contribution to the company’s performance.

Described by the need norm of distribution, some employers conceptualised fair pay as the reduction or satisfaction of some state of deprivation experienced by an individual employee. Here employers increased the pay of individual employees in response to their real or perceived personal needs. Individual employees might receive additional pay because they had higher living costs, high travelling-to-work costs or a new addition to their family. As a needs-based intervention, employers understood that the voluntary Living Wage fell within this category of response. Indeed, some employers explicitly stated that they signed up to the voluntary Living Wage because they thought the level of pay assured by the statutory pay minima was inadequate to enable their employees to afford to live in the city.

However, employers became conflicted when trying to resolve to a single description of fair pay. If, as they all described, fair pay is an amount of individual reward that is proportional to personal contribution, then pay awards simultaneously made on a basis of need or equality undermine this underlying principle. Their payment of the voluntary Living Wage – a needs and equality based intervention – meant employees received pay benefits that were not related to their personal contribution. Although the financial impact of paying the voluntary Living Wage was low or non-existent for these employers, their exploration of fair pay helped them reveal inconsistencies or challenges in their approaches to pay setting.

The voluntary Living Wage in the UK has then enjoyed significant success since its launch almost twenty years ago. By basing its minimum rate of pay on the needs of workers it has conceptually differentiated itself from the statutory National Living Wage which must consider wider economic factors in its rate setting. Employers are motivated to adopt the voluntary Living Wage despite their legal obligation to pay the statutory National Living Wage because this voluntary minimum pay intervention aligns with their ethical outlook and because it offers organisational benefit. My recent research has found employers are also motivated to adopt the voluntary Living Wage because the basis of this minimum wage intervention aligns with how they conceptualise fair pay. However, analysis shows employers use multiple concepts to describe fair pay and that these may not be compatible with one another. As well as being a popular voluntary pay intervention in practice, the Living Wage is also seen then to be useful in the examination of pay fairness at both theoretical and conceptual levels.