James Ashton: The Living Wage is welcome but it could be bad for business

Back in March, when I interviewed the boss of McDonald’s, talk turned to wages. Despite tough competition for the burger chain — think Five Guys, Byron, Honest Burger, Gourmet Burger Kitchen et al — it had recorded 36 quarters of growing sales in the UK. And despite the myriad eating-out choices in London, the Golden Arches’ market share remains bigger here than the rest of the country.

So if trading was so good, would the company consider paying its staff more? Jill McDonald — the since departed executive — wasn’t keen. New joiners, she explained, started “a bit” above the minimum wage of £6.50 an hour for over-21s and had two pay reviews in the first year. As for the London living wage of £9.15 an hour, she described it as a “lovely idea” but McDonald’s found it “simply unaffordable, like many retailers and hospitals”. Yesterday, that “lovely idea” became a reality, with a “living wage” of £7.20 an hour from next April, rising to £9 by 2020. There are caveats. Osborne’s “living wage” isn’t as generous as it seems. It begins at 50p higher than the minimum wage, and only for over-25s not over-21s.

Pay rises have been elusive as the economic recovery took hold. As far back as last November, John Cridland, the CBI director-general who speaks for business, expressed surprise that wage growth hadn’t happened yet and, in the interests of fairness, it must. By February, it was David Cameron, knowing he had an election to win, who issued a clarion call to reward workers. Yet wage growth only began to outpace inflation when inflation plummeted thanks to falling oil and food prices — a global phenomenon distinct from British chief executives’ generosity.

On the face of it, fixing wage levels is little better than Ed Miliband’s threat to fix energy bills. Business leaders like as few political interventions in their world as possible. Because they failed to act, Osborne is acting for them, trading higher basic wages for lower in-work benefits with the sweetener of corporation tax falling once again.

The Chancellor brandished research that suggested minimum wage increases had had a minimal impact on employment levels but they had led to fewer hours worked — which might implicitly lead to productivity improvement. Few believe higher pay converts automatically to higher productivity. The flow is the other way around.

If firms have to pay more, they might make less investment in training and pour less money into the latest machinery and computers — two acts that do boost productivity. It also erodes the competitive advantage of one employer that chooses to pay more than another — a key issue in the capital, where the London Chamber of Commerce and Industry reported this week that 57 per cent of firms looking for new staff encountered difficulties in finding suitably skilled workers.

And even if it is effective, the five years it will take for the new living wage to reach £9 an hour is still a quick fix when the tougher, longer-term alternative is to tool up the next generation with 21st-century skills.

Thinking he could offset the cost of higher wages with lower corporation tax suggests Osborne has wonky scales. Not all organisations are created equal. The Living Wage is of little interest to science-based firms whose highly-skilled, highly-paid workforce fit into the Government’s vision of a knowledge economy. It was of little consequence for Mark Carney to pledge to the Trades Union Congress last September that the Bank of England would be an accredited Living Wage employer by the time of the same conference this year — even though his pledge included bringing contracted service staff up to the London Living Wage.

But it causes a headache for lower-skilled, labour-intensive firms such as retailers. Living Wage campaigners had a strong presence at Marks & Spencer’s annual shareholders meeting on Tuesday. The chairman, Robert Swannell, made encouraging noises about the cause but did not commit to joining it. Unless Osborne’s diverted-profits tax — the Google tax by another name — has a quick impact, it threatens to put bricks and mortar retailers at a further disadvantage to web retailers who retain a far smaller workforce.

Then there is the disparity between small and large firms. Multinational companies pay a disproportionately large amount of all corporation tax. Small firms, many likely to be start-ups, factor in several years of losses to reach a critical mass. The feedback yesterday was that a hike in the National Insurance employment allowance didn’t do enough to defray the cost of the living wage for them. Start-ups might recruit less.