The living wage: new report addresses some basic questions

Close up of a payslip. (c) iStockphotoThe Resolution Foundation/IPPR new report into the living wage does an impressive job of addressing many of the basic questions which often come up about the living wage.

Here are some of those, in my words, along with extracts from the report which answer them. You can read the report on the living wage in full at the end of this post.

What’s the difference between the living wage and the national minimum wage?

“Living wages … by explicitly focusing on living standards, they look beyond the minimum wage, which focuses on what the labour market can bear without a significant effect on employment.”

So does getting a living wage guarantee a decent minimum standard of living?

“A large part of the allure of the living wage – for activists, the public and politicians of all stripes – has been the power of its apparent simplicity: an hourly wage rate that guarantees a basic but acceptable standard of living. In fact, living wages cannot promise this. Family circumstances vary and no realistic hourly pay rate can ever lift every family to an adequate living standard. Importantly, both UK living wages are premised on the full take-up of tax credits and other in-work benefits; without state support, they would be far higher.”

What about jobs? If the minimum wage is meant not to damage job numbers, does that mean the higher living wage costs jobs?

“Far more extensive living wage coverage could be achieved without risking jobs, with many large firms facing an impact on their wage bill as a result of introducing the living wage of less than one per cent. Evidence also makes clear that firms adapt to higher wage costs in a number of ways that are less damaging than disruptive changes to employment or hours. This is not to suggest that the living wage can be adopted by all.”

Is the living wage mainly a public sector or private sector issue?

“The overwhelming majority of low-paid workers in the UK work in the private sector.”

If there’s a roll-out of the living wage more widely, who would that help?

“Modelling an extreme scenario in which the living wage is guaranteed to all UK employees we find that the workforce would see their gross earnings rise by £6.5 billion. These gains would not all flow down to the poorest working households. In fact, households around the middle of the income distribution would gain disproportionately from the living wage as lots of low earners live with others who are not necessarily low paid.”

(As an aside, as with child benefit and similar support, it’s worth remembering that how income is divided between different members of a household can be crucial. Different splits within different households can mean that the same total level of household income results in different levels of money being spent on bringing up children, for example.)

Doesn’t raising wages also help the Treasury?

“The biggest beneficiary of the living wage would be HM Treasury, which would see income tax receipts and national insurance contributions rise, while spending on tax credits and in-work benefits would fall. We estimate that the Treasury would achieve gross savings of around £3.6 billion if the living wage was universally applied. Spending on in-work benefits, particularly in the form of tax credits, grew significantly between 2003 and 2008 and it is unlikely that similar growth can be repeated in these fiscally straitened times. As such, the projected fiscal gains associated with living wages, alongside the material benefits that would flow to low earners, are an important part of what makes the living wage attractive.”

(This also means that there is room for a cost-neutral package of financial support for firms that would otherwise struggle to afford to pay a living wage, such as reducing their national insurance costs in return for them guaranteeing to pay a living wage. Cost neutral but still bringing the other benefits of a living wage including tackling the idea of ‘making work pay’ with the carrot – better pay – rather than the stick – worse benefits.)

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