Making a fair day’s pay work

23 Jan 13
Matthew Pennycook

Everyone stands to gain from paying employees a decent living wage. The public sector should use its leverage as an employer and procurer of services to extend living wage agreements

An idea first forged in the industrial heartlands of 1870s Britain, unearthed and revived a decade ago by community activists in London’s East End was bound to be somewhat opaque. Yet even now, with the living wage established as a fixture in our national policy debate, the concept is still too often misunderstood.

There is still only a limited understanding of how living wages are calculated, only the most cursory analysis available of the possible effects of living wages on incomes, employment or employer costs, and little practical sense of what role government should have, if any, in extending living wage coverage. A degree of ambiguity was probably necessary when the living wage was confined to the world of grassroots activism, but a continued lack of clarity has become an impediment as the concept has begun to attract serious policy attention.

A new report from the Resolution Foundation and the Institute for Public Policy Research brings some much-needed clarity to the debate as well as offering the first detailed blueprint for using living wages to boost the earnings of Britain's low-paid workforce. What are its key lessons?

First, we need to be clear about precisely what living wages are and what they do. A large part of the allure of the idea – for activists, the public and politicians of all stripes – has been the power of its apparent simplicity: a living wage is an hourly wage rate that lifts its recipient out of poverty. And yet it doesn’t quite do what it says on the tin.

Both the UK (£7.45) and London (£8.55) living wage rates are premised on a full take up of tax credits and other in-work benefits. An hourly wage in London that would guarantee a basic standard of living without recourse to any state support would be well over £10. What living wage rates actually provide is a ‘living income’ in which a larger proportion of the burden is transferred away from the state and towards the employer.

While running the risk of pedantry, points like this are worth making (and repeating) because the belief that living wages are a replacement for state support persists among some. Understanding what living wages are and what they rely on to be effective is crucial to ensuring that support for tax credits (warts and all) and other in-work benefits are not thrown overboard as we look for ways to ensure wages do more to guarantee a basic living standards.

Second, we need to be realistic about what living wages can achieve. They are not, alone, a panacea for Britain’s endemic levels of low pay. For all the success of the living wage campaign to date, only 45,000 out of a total of nearly 5 million low-paid workers in the UK – one in five of all employees – have secured a higher wage as a result of a living wage initiative. This is not a cry of despair. But it is an argument for focusing efforts on making progress in the private sector where four in five low-paid workers reside.

We know that government can do more in this regard (our report proposes amending the UK corporate governance code to require companies to be transparent in their annual reports about the number of low-paid workers they employ) and we know that more large employers can afford to pay a living wage at minimal cost. So the onus is on employers to step up to the mark. Even in today's economy there are opportunities for leadership.

Third, we must be clear that further living wage progress is not only possible, it is necessary. It is not just low earners and their families that bear the cost of low pay in strained household budgets and diminished life chances. The public purse also pays to the tune of around £4 billion a year in in-work cash transfers. While few, if any, believe that the growth in tax credit support that occurred over the past decade can be repeated we must do more to tackle problems at source.

We estimate that the Treasury would make a net gain of just over £2 billion  if everyone was paid at least a living wage (although other parts of the public sector would face higher wage bills) so national and local government has every incentive to do more to boost the coverage of living wage agreements. It can do so by paying directly employed staff the living wage wherever possible, using its leverage as a procurer of billions of pounds of private sector services to drive up wages for sub-contracted staff, and intervening in innovative ways to support non-state living wage initiatives.

At a time when powerful forces are bearing down on wages at the bottom end of the labour market, the living wage is a rare example of countervailing pressure. It also chimes with the fiscally straightened times in which we live and has a record of delivering tangible wage gains to thousands of low-paid workers. It can and should continue to advance.

Yet unless we are clearer about the role, rationale, strengths, limitations and potential of living wages and realistic about where efforts are best targeted we risk setting limits to such progress. At a time when we need wages to do far more of the heavy lifting to secure the living standards of low earners that is not a viable option.

Matthew Pennycook is a senior policy analyst at the Resolution Foundation, and co-author of its report with IPPR on the Living Wage







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