Editor’s Note: The following is a post by Dr. Gordon Murray from our Procurement Insights European Union Edition Blog, that raises what I believe is a very interesting overall question . . . to what degree should public sector procurement be used as a lever to achieve social and economic policy objectives.
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 one sector’s contracts?
Leveraging public sector procurement to . . .
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.
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Procurement Insights 
Joshua Slavitt
August 6, 2013
The living wage is to any civilized society, what Greek economic policy is to Greece….
Gordon Murray
August 7, 2013
Thanks for the comment Joshua, I’m not sure you have fully followed my argument though, which is that before any policy of embedding the living wage within public sector contracts is pursued there is a need to fully explore both the alternatives, impact and pragmatism of implementation. Nevertheless my sense is that you are not in favour of a living wage. The strange thing is you have caused me to think more on the discussion and clarify my own position. Firstly, you imply a civilised society would not adopt a living wage – I find that strange as a civilised society is generally associated with looking after the most vulnerable and could be expected to take a wider view of value of procurement, for example, achieving wider political and social objectives. It is also worth noting that even non-public sector organisations are adopting CSR and supporting procurement strategies . Secondly, you imply that Greece, particularly its economic policy, is something to be derided and shunned, while I think of Greece as a nation which has a longer history than most countries as a result of innovation and adaption, gave us democracy and helped us understand the need to ‘do the right thing’. If I consider the Greek philosophers of old I do not think they would necessarily advocate a simplistic and narrow approach to procurement but instead would answer the question ‘what is the right thing to do?’ by saying a stronger economy will result from spreading the benefits more widely, having less people struggling to survive and dependent on the state, but using public contracts to deliver public good. Have I misunderstood your argument?