Should labour adopt a policy of the living wage for public sector contracts?

Ed Miliband is proposing the adoption of the Living Wage in all public procurement contracts, while the CBI’s Director General, John Cridland, views the mandating of the living wage as a threat to small businesses. In the UK we already have the minimum wage of £6.19 (for London) but if the Living Wage were used instead that would mean all employees in London would receive a minimum of £8.55 per hour.

Would the adoption of the Living Wage be a threat to small businesses? Is it even right to use public procurement as a policy tool in this way? It’s for politicians to decide but we need to be reassured they have thought it through.

Could such a condition in public sector contracts lead to a two-tier workforce with those working on public sector contracts within the same firm, paid a different rate than those working on private or third sector contracts? How easy would it be to cope with those who work on more than more than one sector’s contracts?

Given that the additional cost of the living wage will have to be passed through the contract price to the public sector, will the additional costs not merely be transferred to the public purse? Will the Treasury accept such an additional cost? What will be the implications to wider budgets and will some public services be cut to balance the books?

Then we have to ask will this mean different pricing strategies are required for public and non-public sector contracts?  Surely it would be counter-productive to have non-public sector contracts priced on a minimum wage while public sector contracts are bid on the higher living wage?  If such an approach were adopted it would make a mockery of any comparative benchmarking between private sector prices and those of the public sector.

Where do you draw the line on a public sector contract? For example, what about the supplier who has a low value order for say, Lego blocks, how far down the supply chain would the impact of the living wage be passed? Would a threshold have to be adopted for the application of the living wage in contracts? If that were the case would we see disaggregation of contracts to avoid the higher costs?

But would the wider public sector be ready to pay the additional costs? When you think of it, this would really be a public sector purchase tax borne by the buying organisation. How would it be viewed by local government who have already wrestled to make significant cuts?

If the policy were introduced how much would it cost to handle the administration and even the policing of its application? Just as interesting would be to understand how the policy could be exited?

Then we have to ask the more fundamental questions: are there more effective ways of achieving the same outcome, and should public procurement be used as an alternative to low pay benefits?

I can’t see this idea as a risk to small businesses but I do think there’s a need for a more thorough analysis of the risks and alternatives

NB First published as a guest post on Procurement Insights and  Procurement Insights EU edition