Living Wage

How it is calculated and what difference it makes

Literature Review:Joseph Rowntree Minimum Income Standard 2014 (Davis et al): based on

‘what members of the public think people need for an acceptable minimum standard of living.’

Or

‘It is about having what you need in order to have the opportunities and choices necessary to participate in society’

Based on focus groups across a range of social classes, ages etc supplemented by experts (nutritionist, heating engineer)Differs from the ESRC Necessities Survey which is based on a large scale UK-wide survey to establish a list of goods and activities (including those specifically for children) which are considered by more than 50% of the population as necessities.

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Key findings:– prices don’t always change uniformly eg prices of lower cost food has risen faster than

the average (this has been understood for a long time eg Scottish Low Pay Unit used to produce a cost of living index based on a basket of goods more closely related to what people on low incomes actually buy)

– Domestic fuel prices rising faster than average prices– Transport costs have risen – inadequacy of public transport– Technology necessary to participate evolving – including pensioners for first time

Compared to 2008, basket of goods (the minimum necessary as viewed by the public) for a family with children has not changed much but the cost has risen fast than inflation and also in terms of the earnings required to pay for it

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Findings in terms of benefits/wages:

Working Age Benefits – falling further behind the MIS

Pensions - closer to MIS but falling

Official Poverty Line (HBAI) falling further below MIS – effect of falling incomes: official poverty estimates are underestimates

HH supported by Minimum Wage – falling further behind – result of wages rising slower than living costs and, for those with children, cuts in in-work benefits.

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• “Currently, inflation has eased and earnings are picking up; but fiscal cuts continue and therefore the ability of low-income households to make ends meet, especially those out of work and those with children, will not necessarily improve during an economic recovery.”

• So what people need is largely the same with some adjustment in terms of technology (keeping cost of technology about the same).

• What it costs them to have it has risen

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April 2014:

Hourly wage rate required to obtain MIS:

HH type Hourly rate

Single working age adult 8.33

I earner couple; 2 children; no childcare

18.94

2 earner couple; 2 children; with childcare

10.37

Lone parent with 1 child with childcare

13.85

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Living Wage v Minimum Wage concepts

Minimum wage is highest floor consistent with avoiding significant job losses

Living Wage is meant to provide workers and their families with a ‘basic but acceptable’ standard of living

and LW is about raising incomes via work rather than cash transfers ie benefits

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NMW London LW UK LW

2011 6.08 8.30 7.20

2012 6.19 8.55 7.45

2013 6.31 8.80 7.65

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• The annual increase in the UK LW is capped at 2 percentage points above the higher of–the rise in average income

–median earnings

• Also assumes full take up of in-work benefits

• Trade-off means that sometimes LW does not keep up with living costs but allows employers to plan wage bill over time.

• There are particular issues in terms of collective bargaining over this and some employers agree to pay it but do not commit to uprating each year (not accredited)

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• Impact of Living Wage on Employment:

• Resolution Foundation, 2013 ‘Beyond the Bottom Line’ commissioned the NIESR to model the extreme scenario of what would happen if all private sector employees in the UK were paid at least the LW.

‘A relatively standard model of labour demand suggests that moving the hourly pay of every low-paid worker in the UK up to the living wage would reduce overall labour demand by around 160,000. Given the scale of the increase in wages at the bottom end of the labour market, this aggregate effect is perhaps surprisingly small – it is equivalent to less than four per cent of the more than four million employees in the private sector that would benefit from a pay rise.’

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Certain sectors/groups would be worse affected than others:–Wholesale and Retail

–Hotel and Catering

–Demand for young workers with no qualifications would fall across all sectors

• This is not only an extreme scenario but it is known that the model used here overestimates labour demand effects. These models predicted job losses caused by the introduction of a NMW which did not come to pass.

• There are other bodies of literature which relate to efficiency wages, incentives and other aspects of wage setting which predict more positive results.

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The actual evidence on the effect of LW on employment in London is, on balance, positive.

The evidence in relation to employer costs is more negative.

Landman, 2013, takes a more positive view.

•Job losses are overestimated in the NIESR research

•Most evidence ignores the stimulating effect of LW on economy (macro effects)

•Overall, predicts no significant job losses