Sample Paper on Should all UK companies pay a living wage?

Should all UK companies pay a living wage?

1.Executive summary

            ‘A living wage’ is a phrase that has become common in the recent past and quite a good number of people confuse what it means and the role that it plays in the society. This research paper begins by shedding some light in regard to this state of quandary, by giving a clear definition of what a living wage is, their purpose when implemented in life, in addition to locating the phrase alongside other techniques that can be used to solve issues such as low pay, or rather minute earnings or wages. First and foremost, the paper discusses the difference and relationship between a minimum wage and a living wage, and then further explores the link between a living wage and in-job benefits. Deeper into the paper, discussions in regard to major economic principles associated with the subject, the difference between minimum and living wages, in addition to the relationship between demand and supply of jobs or labour and market wage rates in the United Kingdom (UK) are discussed. On the second part, the research paper discusses some  ethical values that relate to living wages that includes the responsibility of business, including the understanding of the difference between social verses private costs and mentioning Milton Friedmann’s arguments on the responsibility of business. Additionally, the paper discusses the relationship between pay and performance, plus motivation and productivity, and then highlights some major findings associated with the research. The paper then concludes that all companies in the UK should pay living wages to employees based on an agreement or contract signed between them and their employees.

2.Economics: The Difference Between a Living Wage and a Minimum Wage

A living wage is clearly different from a constitutional minimum wage. While the process of working out the minimum wage may encompass giving a consideration of the pressures that low-paid workers experience linked with the cost of living, this is less important when compared to the degree of attention given to the current conditions of the labour market (Pollin & Stephanie, pp.12-76). A minimum wage refers to the maximum wage level that is thought to be reliable with evading major career losses in the least paying companies or divisions, regardless of whether most companies in those segments are able to have enough money to compensate employees with much higher pays. This implies that a minimum wage is constitutional, and it is compulsory that companies pay workers an amount that is not less than this set figure in the constitution. These particular considerations have been major to the process that is used by the Low Pay Commission (LPC) of the UK in determining the rates of National Minimum Wage since 1999 (Harford, n.p).

A living wage is mainly different because it is a phrase that is used to make reference to the rate of wage that is essential to provide employees and their dependents (families) with a fundamental but satisfactory, acceptable, adequate and tolerable living standard (Harford, 23; Pollin & Stephanie, pp.12-76). This implies a voluntary wage rate or rate of pay, usually calculated hourly, to help employees that are paid little or low amounts to afford a necessary or basic living standard. This least standard of living is defined socially, and thus varies from one place to another and with time. It is usually explicitly associated with other social objectives such as the realization of caring obligations. A living wage generally focuses on the responsibilities of employees beyond the working environment, for instance, as members of a particular community and as parents to families, and demands for a wage rate that will guarantee that employees are not forced to work overtime with an intention of having a satisfactory income. The possible effect on employment or the impact on employers is given minute, if any, thoughtfulness while calculating it (Levitt & Stephen, 47).

These ideological differences help to give a clear explanation of the various ways through which a minimum wage and a living wage are sophisticated. In the United Kingdom, paying a living is usually voluntary and is more than often adopted by companies (employers) after a negotiation process or a local or domestic campaign. This gives employers, who have a feeling that they cannot meet the cost of introducing living wages without losing employees, an opportunity to refuse the commitment of paying such (Levitt & Stephen, 76; Sloman & Dean, 101). It is therefore the nature of living wages to be fragmented and partial. Conversely, minimum wages are compulsory across the world, even though most companies have exclusion, through law or legislation at the local or national levels.

  1. The relationship between Demand of jobs and Wage Levels
  2. Demand for Labour: Labour as a Derived Demand

On top of making decisions associated with pricing and output, a company must similarly determine the extent (how much) of each input it is supposed to demand. Labour and capital are the most common inputs that any company can demand amongst others (Nordlund, 85). The supply and demand for labour are determined in the labour market by its participants, who are basically employers and employees. As companies demand for labour from employees in exchange for wages, workers supply the same in exchange for wages. What a firm finally decides to pay an employee or the additional cost that a company is ready to forge as a result of hiring an extra employee is referred to as the market wage rate (Sloman & Dean, pp. 32-46).

Employees are often required for the output, which they are expected to give or produce. It is said that labour, when considered as a factor of input, becomes a derived demand. When companies experience or see an increasing demand for their services and products, they will be forced to employ additional labourers or workers, thereby increasing the demand for labour (Pollin & Stephanie, 67). Since demand would determine the degree of supply of any product, or service, labour can be categorized as a service and thus the more the demand for labour, the larger the supply base since most workers would report to a company that is in demand of more employees. A direct and linear relationship, therefore exists between the degree of supply for labour and the demand for the same (Nordlund, 34).

  1. Demand for Labour and The Market Wage Rate

An inverse relationship usually exists between the demand for human labour and the market wage rates (Sloman & Dean, 113). This essentially because a living wage is a payment that is done to the employee, and since every employer will have to pay a salary, including both living and minimum wages to every additional labourer, they tend to shy away from additional costs (Levitt & Stephen, 50). If the market wage rates are high, it would imply that it would be more expensive or costly to hire (than fire) any extra labourer or employee. In the event that wages become lower, sources of labour or labourers would become cheaper than making use of or committing capital (assets) equipment. Consequently, it would become affordable and more attractive for companies to hire additional employees, thus increasing the demand for employees (Mazumdar, 191). It is imperative to note that most companies are interested in maximizing their profits, as such, they will make use of whatever factor of production (whether capital or labour) to realize this provided that the factor chosen realizes this objective with close to maximum efficiency and for the lowest or least possible expenditure or cost.

  • Marginal Revenue Product

Marginal Revenue Product, similarly abbreviated as MRP, is a hypothesis that is linked with wages and it is used to describe a scenario where employees are compensated in regard to their MRP (Marginal Revenue Product) to the company under consideration (Mazumdar, pp. 190-193). The theory of Marginal Revenue Products postulates that the degree of wage differences originates from disparity in regard to the productivity of labour and the value attached to the output that a particular labour input gives or produces. The theory of Marginal Revenue Product is founded on an economical, competitive, and aggressive labour market and the hypothesis depends on various assumptions that are ideal (Mazumdar, 199). In actual sense, most supplies or sources of labour display imperfect features, which could as well be considered as a factor in determining the possible reasons for disparity in terms of payments or wages in occupations (Mazumdar, pp. 190-197).

Some of the assumptions that the MRP theory depends on include, but are not limited to:

  • The generalization that all workers are the same or homogenous,
  • Companies have no purchasing power when in demand of employees,
  • Trade unions are non-existent,
  • The degree of productivity that each employee gives can be measured clearly, and that
  • The labour supply is purely (perfectly) elastic. In this given regard, the theory suggests that employees are geographically and occupationally mobile, and face the possibility of being hired at the same or constant market wage rates.

MRP particularly measures the disparity or difference in the total revenue that a firm realizes when it sells the product or output that is given by a specific additional employee. As such, it can be measured using the formula:

 

The Demand and Supply Curves of Labour

http://www.tutor2u.net/economics/content/topics/labourmarket/labour_demand.htm

Key:

LD is an abbreviation for Labour Demand

Making reference to the diagram on the left, it is illustrated that there exists a fall in the market wage rate from point W1 to point W2. As a result of this drop in the market wage rate, the company is likely to increase its employment capacity from point E1 to point E2. The company undertakes such an action because the cost of hiring additional labour has become relatively cheaper for a particular degree of productivity, as compared to other input costs. A possible rise in the market wage rate from point W1 to point W3 is likely to cause a reduction in the demand for labour, or a contraction in the demand for labour.

  1. Shifts in the Marginal Revenue Product of Labour

The MRP of labour will rise when there is a rise in the productivity of labour, and similarly when there is a rise in demand for the company’s output, which results in hire prices thus raising the value associated with products given by this [articular employee (s) (Mazumdar, pp. 190-197). The diagram illustrated on the right hand side helps in illustrating how this market feature is likely to cause a noticeable shift in the demand curve for labour. For a specific market wage rate, ‘W1’, a company that maximizes its profits will hire additional employees, as such, the sum total of employment levels in the labour market will increase.

  1. Ethics: The Responsibility of Business

Ethics implies a division of knowledge that is associated with moral values (DesJardins et al, 23). In other words, it is a term that is used to represent the moral principles that govern an organization, a group of people, or a company in this given context. Morality would mean doing what is right, and knowing what is wrong. In the context of businesses, companies have responsibilities that they owe to all stakeholders, shareholders, its clients, employees, and the society at large (Bowie, 124). For purposes of coexistence in an environment or a given locality, a company must undertake certain activities that benefit all parties that interacts with it in one way or the other, and this is referred to as a Corporate Social Responsibility (DesJardins et al, 23; Schneider, 191). For instance, a company that manufactures agricultural chemicals has to do everything within its reach to avoid polluting the environment, employ people from its locality, while at the same time make sustained profits (Crane &Dirk, pp. 10-51). Similarly, a company cannot just increase prices to whatever amount that its shareholders desire with an intention of maximizing its profits without considering the affordability of the product, or taking into consideration inflation rates (Boatright, 270). This is where the subject of doing the right or wrong comes in, and a company has to be identified with a specific value or principle that will encourage sustained production. In light of this discussion, it is clear that a company is charged with the obligation of ensuring that all parties that interact with it, either directly or indirectly benefit from its activities (Corporate Social Responsibility). Imperative to note, however, is that there are costs that the company will have to incur when meeting this obligation such as social costs (Bowie, 31).

A social cost, under economic definitions, is the expenditure that a company incurs as a result of its activities, or a change in policy towards the society (Turvey, pp. 309-313). It includes both private and other external costs, third party impacts and effects. Private costs that companies incur are not always equal to the total cost to a society of a particular activity, product, or service. Thus, the difference in amount between a social cost and a private cost is the external cost. For a company, a private cost includes the costs that the company pays for purchasing capital equipment, hiring labour, and buying raw materials or any other inputs (Turvey, pp. 309-313). For as much as this cost can be looked at from the company’s side, it is significant that the same be viewed from an end consumer’s point of view. Contrarily, external costs are not included in the income statements of a company or in the decisions made by clients, however, they remain part of the costs to the society, not considering who incurs the loss (pays for them) (Turvey, pp. 309-313). Social costs include both external and private costs to a specific society, which normally arises from the manufacture or consumption of a service or good (Turvey, pp. 309-313).

Applying these principles to the subject matter, a company may decide to avoid paying for the cost of buying an air pollution control machine or equipment, which would mean the cost incurred is passed to the society in terms of harm or health hazard. Morally, this is wrong because the company causes the pollution and should control it instead of maximizing its profits. Considering the private costs, a company has the responsibility of paying its employees a wage that is fair or acceptable to enable them to live a standard lifestyle (Turvey, pp. 309-313). Failure to do this would mean the company is evading its responsibilities. Milton Friedman argued that the social responsibility that a business is charged with is to make profits. According to his statements, “The difficulty of exercising ‘social responsibility’ illustrates, of course, the great virtue of private competitive enterprise — it forces people to be responsible for their own actions and makes it difficult for them to ‘exploit’ other people for either selfish or unselfish purposes. They can do good — but only at their own expense (Laidler, n.p).” This implies that companies should only take into consideration the interest of its shareholders to make profits and ignore the welfare of its service and product consumers, plus employees (Schneider, 11). This acts in contrary to the demands of Corporate Social Responsibility (CSR), and discourages sustained productivity and profitability which are essential to the survival of a business in any environment (Crane &Dirk, pp. 10-51).

http://www.frbsf.org/education/publications/doctor-econ/2002/november/private-social-costs-pollution-production

The curve illustrates that companies that incur social costs experience high expenditures and low outputs. However, the marginal private cost curve illustrates a better use of resources.

 

  1. The Relationship Between Pay and Performance

http://www.economics.utoronto.ca/jfloyd/modules/sadl.html

The aggregate supply curve for labor illustrated above represents the wealth effects of raising wages. During the low income levels and increased (higher) wages, employees are induced to work better since leisure is made more expensive in regard to the income that must be surrendered to get it. As such, employees, substitute their work for leisure. With high income levels and increased wages, however, possible income increments that can be achieved by more work in reaction to a higher pay is not as much of value as the foregone leisure. Nonetheless, a market wage level would be reached beyond which employees will work less for better pays since they can uphold the same degree of contentment as before, or rather still amplify it, by means of minus labour effort. Typically, as employees become wealthier, they work less and take additional leisure (Heywood & Daniel, pp. 249-490). Thus, pay increments beyond some level, by additional improvement of wealth, will increase an employee’s desire for leisure with an amount that is way above what an opportunity cost for leisure can reduce (Heywood & Daniel, pp. 249-490). Laborers therefore work less as payments improve beyond some level, and the supply curve, ‘SS’, portrays a backward bend pattern as illustrated above. In this regard, the effect of wealth originating from higher wages on leisure activities offsets the switch, substitution or swap effect.

  1. The Relationship Between Motivation and Productivity

Motivation of employees is a necessity in improving productivity, as such the more they are motivated the better the production because they work with zeal (Mahy, François, & Mélanie, pp. 455-489). Increasing a worker’s wage is one amongst many factors that can be used to motivate employees (Heywood & Daniel, pp. 249-490). Since productivity is directly related to performance, the arguments illustrated above are applicable (Mahy, François, & Mélanie, pp. 455-489). As wages, improve the performance, productivity similarly improves up to a certain level. Beyond a certain point, the effect works to the disadvantage of the company as workers would engage more in leisure activities at the expense of working (Mahy, François, & Mélanie, pp. 455-489).

  1. Findings

This research came up with findings on the subject of wages in that:

  • A living wage is constitutional, while a minimum wage is voluntary.
  • The provisions of living wages do not necessarily lead to displacement of workers.
  • There is some degree of evidence that productivity improves with improved motivation of workers, commitment, and minimal employee turnover.
  • Increased cost pressure makes companies look for efficiency and the need to save costs from other segments of the industry like evading social costs.
  • There is some proof of ‘spill-over or ripple effects’ with an intention of maintaining pay disparities.
  • Companies are not committed to meeting their Social Responsibilities.
  • Decisions made in companies should take into considerations the consumer and producer perspectives.
  • The companies pay different living wages.

 

  1. Conclusion and Recommendations

Based on the above findings, it is clear that social responsibilities are becoming significant to the management of a business. Companies incur costs, both primary and social, when providing a given service or product to a society to enable sustainable growth and development of the business. A business cannot survive without making profits, but at the same time meet the welfare requirements of its employees and product or service consumers. Since it has become an absolute necessity to incorporate the interests of all parties affected by the activities of a company, it is necessary that all companies in the UK pay their living rates because it is moral or fair to do so. The productivity of a company depends on its employees’ performance and demoralized or poorly paid employees would not work, consequently leading to losses and high employee turnover rates in the company. This way, the business shareholders would not meet their fundamental goal of making profits. In the same perspective, it is clear that disparities exist in regard to the acceptable living wages that are payable to employees. It would therefore be prudent that an agreement or contract be established between employees and employers that would state an agreeable living wage that would enable a mutual survival of both parties based on each parties survival. The contract would then be enforced by law to ensure that companies meet their responsibility.

With these recommendations, it is possible that some companies may retrench employees with an intention of limiting or minimizing the expenditure that would be incurred as a result of implementing a statutory living wage. Additionally, employees are likely to file several lawsuits with an intention of compelling their employers to commit with the new regulation. In order to minimize the possibility transnational migrations and disparity that exist in regard to the amount of living wage paid to employees, there should be an established national and international body that determines the amount, though based on the market conditions in the country under consideration. The United Kingdom should therefore have a national body that oversees, implements, and enforces all aspects of economics that are associated with a living wage.

 

Works Cited

Boatright, John R. Ethics and The Conduct of Business, 6/e. Upper Saddle River, NJ: Pearson Education India, 2000.

Bowie, Norman E. “Management ethics.” (2005).

Crane, Andrew, and Dirk Matten. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford: Oxford University Press, 2007.

DesJardins, Joseph R., et al. An introduction to business ethics. New York: McGraw-Hill Higher Education, 2009.

Harford, Tim. The undercover economist. Hachette UK, 2010.

Heywood, John S., and Daniel Parent. “Performance pay and the white-black wage gap.” Journal of Labor Economics 30.2 (2012): 249-290.

Laidler, David. Milton Friedman’s contributions to macroeconomics and teir Influence. No. 2012-2. EPRI Working Paper, 2012.

Levitt, Steven D., and Stephen J. Dubner. “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by.” (2006).

Mahy, Benoît, François Rycx, and Mélanie Volral. “Does wage dispersion make all firms productive?.” Scottish journal of political economy 58.4 (2011): 455-489.

Mazumdar, Dipak. “The marginal productivity theory of wages and disguised unemployment.” The Review of Economic Studies (1959): 190-197.

Nordlund, Willis J. The quest for a living wage: The history of the federal minimum wage program. No. 48. Greenwood Publishing Group, 1997.

Pollin, Robert, and Stephanie Luce. The living wage. New Press, 2000.

Schneider, Susan C., and Jean-Louis Barsoux. Managing across cultures. New Jersey: Pearson Education, 2003.

Sloman, John, and Dean Garratt. Essentials of economics. NJ: Pearson Education, 2010.

Turvey, Ralph. “On divergences between social cost and private cost.”Economica (1963): 309-313.