Work and Pay

The real benefit of the living wage

  • Published: Nov 08, 2012
  • Author: Tom MacInnes
  • Category: Work and Pay

The new living wage figure, of £7.45 per hour (£8.55 in London) was announced on Monday, to kick off Living Wage Week. The new figure is 20% higher than the minimum wage. It has cross party and cross- Miliband support –Boris, Ed and David are all signed up.

The announcement was made by Julia Unwin, of the Joseph Rowntree Foundation. For ten years, our work with the JRF has persistently pointed out the high and rising levels of in-work poverty. (For what it’s worth, we worked with TELCO, part of London Citizens, back in 2001, to calculate the level at which the living wage should be set). Improving wages for low paid people is certainly one part of the response to in-work poverty. 

The first, and slightly surprising thing, to point out about the living wage is that it will not, by itself, lift many people out of poverty. The main reason for this is that the tax credit system already tops up the incomes of the low paid. As pay rises, tax credits (and, in the future, Universal Credit) decreases. At the moment, for every extra pound earned, someone claiming working tax credits gains only 27p. The remaining 73p is lost in tax, national insurance and reduced tax credits. For those receiving housing benefit, the gains are even smaller, since housing benefit is reduced as earned income rises. 

The second, connected point, is that the HM Treasury stands to gain from a higher living wage since those lower tax credits represent reduced expenditure for central government. This gain means that there is room to offer incentives for Living Wage employers, either through lower employers’ national insurance (as suggested here ). Similarly, local authorities could be offered incentives to become living wage employers in much the same way as they are currently paid to keep council tax frozen. 

There are other less obvious gains, too. A new report by Queen Mary University for the Trust for London shows a range of different benefits for both employees and employers. Staff leaving rates fell by a quarter in living wage employers, and those who had brought in the living wage felt it had benefited their reputation and helped them attract new business. A third of employees said that their family life had improved because, for example, they had been able to spend more time with their families. These non-financial benefits matter, too. 

But the main reason why the living wage is a useful tool in tackling poverty is that it moves us away from further endless tinkering with the benefit system as the only way of making work pay. By concentrating on wages, rather than the carrots and sticks of out of work benefits, it starts to look at the structural causes of poverty. Vitally, it brings employers into a discussion that was previously between the individual and the state. 

It is not the only such cause – this excellent piece by Antonia Bance of Shelter points out the centrality of affordable housing in any serious attempt to reduce poverty in the UK. The Resolution Foundation report last week highlighted the desperate need for more affordable childcare. But after what feels like years in which the discussion of poverty has centred on blaming the poor for their poverty, the new high profile of the living wage feels like a breath of fresh air. 

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