Low Pay Britain – Is the Living Wage the answer?

This week marks the launch of living wage week, which according to Citizens UK (the organisation responsible for the Living Wage) is a celebration of the living wage and living wage employers. As such, it appears to be garnering a good deal of publicity on social media (it has its own hashtag don’t you know?!) and has attracted attention from the political and media elite. Indeed, Ed Milliband earlier this week pledged to give companies who pay the living wage a 12 month tax break of £1,000 per employee. Labour have also launched their ’Living Wage plan’ which the party claim will help businesses raise wages for millions of low-paid workers, whilst also help the ‘next Labour Government’ cut social security bills for the taxpayer.

Those who have opined about the Living Wage haven’t just come from the ‘Red Corner’ though, Mayor of London Boris Johnson has also expressed his support for the measure, saying ‘Paying the London Living Wage ensures hard-working Londoners are helped to make ends meet, providing a boost not only for their personal quality of life but delivering indisputable economic dividends to employers too.’ Other Tory MP’s are also said to be considering ways in which they can encourage the Coalition leadership to support the wage. Thus, it’s fair to say this proposal has a good deal of cross-party support

For those unaware, the Living Wage is an hourly wage which supporters argue to be the wage required for an individual to earn a basic standard of living. It has just been uprated to £8.80 for London and £7.65 for those living elsewhere in the UK. It is my contention that those of all political colours should be interested in both this initiative, and the wider issue of low pay in general for a whole plethora of reasons. Not least, as I noted last week, poverty in Britain isn’t just confined to those out of work, but those in-work too. Ex-Labour Minister Alan Milburn in his recent social mobility report revealed for instance that two thirds of those in poverty are actually in work. This is bad news for a Prime Minister who wants Britain to become an ‘Aspiration Nation’ and for a Party who at its very core believe in the value of work as a way of pulling one’s self up out of poverty. That’s even before we mention the negative effect that arguments around money can have on marriage and family life!

The question is though, is the living wage the answer to the ills currently facing ‘low pay Britain’? Whilst I believe wages should be a key part of any solution, hence why I am personally in support of this measure in principle, the Living Wage cannot be seen as the cure in and of itself, this is so for at least two reasons, and they relate not to the wage directly but the current Tax and Benefits system surrounding it.

Firstly, there is the issue of how much someone would actually see come into their household from any increase in hourly wage. Let’s assume for instance that a London based employee is working full time on the minimum wage (currently £6.31 per hour) and earning about £247 per week[1], which works out at £12,865 per year[2]. Let’s then say that their employer decides to introduce the London Living Wage, resulting in an increase in their hourly rate to £8.80, which represents an increase of £2.49, how much of this rise would the employee see come into the household? Well in short, not as much as you might expect. Due to Income Tax and National Insurance increases and tax credit cuts (the most important factor of the three), the household would only see around 27 pence come into the household. [3] This, I feel, is something that is often missed in the debate regarding low pay and increasing earnings. Only when families in the lower half of the income distribution are able to keep more of their wages, supported by a benefits system that better supports families as they move up the earnings ladder will we see progress in this area.

This flows neatly onto the second area, the family. I note with interest that the living wage of £7.65 (the London rate is calculated separately by the Greater London Authority) would according to the Minimum Income Standard (MIS)[4] which is considered when calculating the Living Wage outside of London, would cover 93% of the MIS for a single person without any children (they would need about £8.27 per hour[5]). However, for one-earner couple families with children, where for example one person is at work and the other is at home with unpaid caring responsibilities, the wage doesn’t go nearly far enough. A family structured in this way would need to be earning about £17.68 per hour in order to reach a MIS[6], meaning the living wage outside of London would cover just 43% of the costs required for a MIS.

This stark reality means that it any debate in how to deal with the problems of low pay and poverty, we have to realise that different households require different levels of income. Put like this, this sounds like basic common sense, however too often it seems that income is viewed on an entirely individual basis. That is, in assessing how well off someone is, we often disregard family responsibility. This matters hugely because even when tax credits (the sole way in which we financially recognise family responsibility today) are taken into account, the levels of income required for different households are very different. Put another way, all other things equal, an earner with no spouse/partner will require much less to live on than an earner with a spouse/partner with children. For this reason, as CARE’s recently published ‘independent taxation – 25 years on’ says, different households on the same income, will be at very different places in the income distribution, even when tax credits and child benefit are taken into account. Take a look at the graph below which illustrates this point.[7]

Likely position of households in the income distribution in 2013/14

income dist chart

To conclude, it is my view any strategy tackling low pay and associated in-work poverty must include a wage that sufficiently provides for the needs of those who earn it. That is why in principle I am in support of a Living Wage. However, as raised in this article, there are at least two issues that should be overcome in order to essentially make the Living Wage better and more effective in tackling low pay and in-work poverty. The first is the issue of the UK’s high effective marginal tax rates, which effect many families with children. These frankly prohibitive rates mean that even if a low earner was to see an increase in their hourly wage to the Living Wage, they wouldn’t see that much come into the household. Secondly, we must see wages in light any family responsibilities and not on a purely individual basis.  If we do latter, the Living Wage whilst potentially significantly benefitting those without children in particular, is in danger of making an unacceptably small impact on those with family responsibilities. Whilst I recognise that a Living wage for one-earner couple families might not be able to reach the levels mooted earlier, why not still consider having different Living Wages for different family types? This would go a long way in demonstrating that different families have different financial needs. All in all then, rather than being an idea that needs throwing out altogether, the Living Wage, albeit with some modifications can be something that is effective in the war against low pay.

[1] Based on someone working full time (39.1 hours per week according to the 2012 ASHE survey)

[2] £247 divided by 7, multiplied by 365.

[3] According to Department of Pensions Tax Benefit Model Tables, which have been modified for the tax year 2013/14.

[5] This figure is based dividing the living wage outside London by 7, multiplying by 365 and calculating the what proportion of the Minimum income Standard for a single person without children this figure would cover

[6] Calculated as above, but for a one-earner couple with a child aged 2-4, and a primary school aged child

[7] Taken from ‘independent taxation – 25 years on. Does it meet today’s needs?’, Draper and Beighton, 2013, CARE, Chart 2.1, p.19.

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