Opinion: Getting the facts right on the Living Wage

One of the key battlegrounds on which the 2015 General Election will be fought is living costs, especially for those on low and low-to-middle incomes.  With times tough and the cost of many basic items essential for living having outpaced wage inflation for a decade (according to the most comprehensive study of the subject, led by the Resolution Foundation but with considerable input from business and other organisations) – and with no money left in the public purse – answers are not easy.

The Liberal Democrats have, rightly, chosen to address this by a range of measures, and the key steps are both up for debate at Glasgow.  The proposal to raise the threshold at which income tax is paid further – to £12,500 in time – is helpful, if very challenging given a cost of over £10 billion at a time of great pressure on the public purse.  That same reason is why the more redistributive measure of increasing the National Insurance threshold has not been attempted at this point.

The more radical step, however, is the move to embrace the Living Wage movement, however tentatively.  The Balanced Working Life paper calls for a commission to establish a Living Wage, and effectively calls for the public sector to embrace it.  However, accompanying this have been calls from some on the right of the Liberal Democrats that it should not be supported or should be treated with caution, as even its proponents believe it would cost 160,000 jobs to implement.  Others still confuse the measure with the tax and National Insurance reforms above.

Is there any truth in this?  Well, I pressed some of those making this claim for a supporting reference.  Eventually, one of those who had privately made these claims pointed me to a paper jointly produced by the IPPR and Resolution Foundation, ‘Beyond the Bottom Line’.  As with the ‘Gaining for Growth’ report, it is well worth a read.  For a start, it sets out how a living wage may be calculated, and how many people it might affect.  It also makes clear that as well as assisting those on low wages to earn more [to the tune of £6.5 billion, targeted to the 4 million lowest-paid workers: an effect at least as dramatic as the proposed Income Tax increase], introducing a living wage would make a significant contribution to the public purse, not just increasing revenue through tax and National Insurance but also reducing expenditure on tax credits.

And what, exactly, does it say on the effects of the living wage on employment?  This:-

Modelling an extreme scenario in which the living wage is guaranteed to all private sector employees in the UK we find that while four million workers would see their pay rise, overall labour demand would fall by 160,000. The effects would be larger among younger workers and in certain sectors, particularly retail and hospitality. This is an extreme ‘worst case scenario’ (a similar model would have predicted job losses from the National Minimum Wage (NMW), which we now know did not happen) but it confirms that we should not legislate for a statutory living wage, an option which, in any case, few living wage activists advocate.

My underlining is for emphasis.  In fact, the sector-based approach advocated in ‘Gaining from Growth’ is probably the most pragmatic option at present, still benefiting significant numbers of lower-paid workers, but at minimum risk to jobs, and no cost to the public purse.

By contrast, what the proposal going to Glasgow does not do is address the private sector.  Bizarrely, it leaves it almost untouched.  It focuses instead on the public sector, the costs and effects of which are rather less certain (although early evidence from its implementation in London, under a Conservative administration – please note – is that its effects are benign).

I have tabled an amendment to the otherwise excellent Balanced Working Life paper to strengthen Liberal Democrat commitments to helping those working hard on low wages.  I hope it will be supported: the facts are in its favour.

The Balanced Working Life paper will be debated at 3 pm on Saturday.

* Gareth Epps is a member of FPC and FCC, a member of the Fair Deal for your Local campaign coalition committee and is an active member of Britain’s largest consumer campaign, CAMRA. He claims to be marginally better at Aunt Sally than David Cameron, whom he stood against in Witney in 2001.

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28 Comments

  • “The proposal to raise the threshold at which income tax is paid further – to £12,500 in time – is helpful, if very challenging given a cost of over £10 billion at a time of great pressure on the public purse.”

    I’m sorry, but giving a flat-rate tax cut to 85% of income tax payers is not an efficient way of helping those on “low and low-to-middle incomes”.

    Indeed, the danger is that the tax cut will be paid for by spending cuts which hit the low-paid hardest, and that – as has already happened in this parliament – it is those on middle and middle-to-high incomes who benefit, while the low-paid are actually left worse off.

  • You only benefit from the tax cuts if you earn less than £42k, the higher bracket has always been brought down to compensate. I’m not sure we can refer to those earning £42k/year as being on a “high” income. It’s only right that the Lib Dems should be pushing to help the poor and the squeezed middle.

  • Andrew Emmerson 11th Sep '13 - 11:06am

    Let me preface my comments with the following because I know how they’ll be interpreted: I AM NOT AGAINST THE NMW AND I DO NOT WANT IT SCRAPPED (I indeed also would have agreed with LD policy at the time for regional MWs)

    Basically when comparing living wage with no tax on the NMW it seems painfully obvious to me which one we should take. It’s not the living wage one It may mean less tax revenue for the treasury (Which i’m not opposed too really), but it does mean more money in pockets and less likely to be taxed out of oblivion .

    We know initially the NMW didn’t cost lots of jobs – as some models said it would (Partly because It was set at such a low rate) but that it may not be such a stretch to imagine that it probably has slowed down job creation amongst young people.

    Indeed NMW was introduced in 1999, and by 2000 after years of falling, youth unemployment started to creep back up again http://www.leftfootforward.org/images/2011/10/Youth-unemployment-rate-12-10-11.gif my worry would be with a living wage that we would double the negative effect that NMW had.

    My other worry would be – that in Gareth’s own piece he notes that the prediction is in the most extreme cases we could lose 160,000 jobs from the economy – even if it was a fraction of that, somehow I doubt they’re going to go from rich southern areas like London. They’ll go from the already suffering north.

    At least we know with the no tax on NMW that this isn’t going to happen.

  • Daniel Henry 11th Sep '13 - 11:17am

    Andrew, it’s not an “either/or” situation – we can do both.

    Chris, anyone working full time on minimum wage will receive full benefit of the tax cut. Is the minimum wage not your idea of “low pay”?

  • “I’m not sure we can refer to those earning £42k/year as being on a “high” income.”

    Really? Then let’s just say it is substantially above a “middle” income. The average full-time salary in the year to April 2012 was £26,500.

    As I said, around 85% of income tax payers are on the basic rate.

  • Daniel

    “Is the minimum wage not your idea of “low pay”?”

    Yes, of course it is. Why do you ask?

  • @Thomas Long
    The higher rate was only brought down when the coalition first raised the allowance in 2011. Subsequent rises in the allowance were not offset by lowering the higher rate so Chris is correct. Furthermore UC will wipe out the majority of the gains for the low paid. Although Coalition tax policy is cunningly designed so it can be presented to the left as helping the poor in reality the intent was to deliver a tax cut to the middle class.

  • Thomas is right, but that does not address Chris’s point about the danger of spending cuts. Many of the people we seem to wish to help are being hugely affected, and it looks like the ham-fisted timing of retrenchment by this Government (at exactly the time that the private sector was most fragile, and least able to sustain cuts in their customers’ incomes, and thus spending) will extend austerity for some years. The living wage idea has merit, butunfortunately it is unlikely to find favour with ministers obsessed by the idea that Public is Bad and Private is Good.

  • Andrew Emmerson 11th Sep '13 - 11:36am

    @Daniel Henry – You are of course right. It;s not either/or

    With what i”ve outlined above I’d much rather keep pushing to raise the tax threshold which can be eventually be offset by decreasing benefit payments needed.

  • Tom Papworth 11th Sep '13 - 11:50am

    @AndrewR: “The higher rate was only brought down when the coalition first raised the allowance in 2011. Subsequent rises in the allowance were not offset by lowering the higher rate…”

    Actually, while the Chancellor only explicitly reduced the higher rate to offset the rise in the PA in his first budget, in practice the corresponding change has been made in every budget. So in reality nobody earning over the higher rate in year Y1 has gained from an increase in the PA in Y2.

  • “I’m not sure we can refer to those earning £42k/year as being on a “high” income”

    You can pick and choose your own definition, but a reasonable definition of middle income might be between the 25th and 75th percentile, which for 2012-2013 (according to wikipedia) is the range from £14,500 to £33,300. Wiki also says that the 90th percentile is £50,500 suggesting 42k is at least the 80th percentile. If earning more than 80%of the population isn’t high then what is? I’ve been quite generous with my definition as well – if low/middle/high incomes are described as equal thirds of the distribution then anything above 67% (probably around 28-30k) would be classed as high.

  • “Actually, while the Chancellor only explicitly reduced the higher rate to offset the rise in the PA in his first budget, in practice the corresponding change has been made in every budget. So in reality nobody earning over the higher rate in year Y1 has gained from an increase in the PA in Y2.”

    But all basic rate taxpayers get the full benefit (apart from some near the bottom end). That is the 85% I was referring to in my initial comment.

  • Peter Davies 11th Sep '13 - 12:05pm

    A problem with the concept:
    You can’t equate a wage rate with a living income because you might be earning for two hours a week or fifty whereas living is stuck at 168 hours a week.

  • Daniel Henry 11th Sep '13 - 12:09pm

    Chris – re-reading what you said again, your complaint was that it was inefficient, that a lot of the money would go to those that didn’t need it as well as the lowest paid.

    That might be so, but I think it’s as efficient as a tax break can be. It’s certainly more efficient than a cut in VAT.

  • Liberal Neil 11th Sep '13 - 12:23pm

    It is true that 85% of income tax payers benefit from raising the income tax threshold – but it’s also true that the vast majority of them are on low or middle incomes because of the way incomes are distributed.

    It’s also the case that those at the higher end of basic rate taxpayers are the ones who have lost most from the reforms to things like tax credits.

    Raising the income tax threshold is a good part of what we should be doing to make the tax and benefits system fairer and simpler but we shouldn’t pretend it’s the whole solution.

    Getting back to Gareth’s original points, I do think that we should look very carefully at the Living Wage as being another part of the solution.

  • Part of the problem I see (and I stand to be corrected if I’m wrong) is that often people on low wages receiving more in their paypacket, either through a small rise or a tax reduction, often lose this through a reduction in benefits. How much extra someone gets in their pocket is how we need to judge the effectiveness of any policy in this area.

    As an example, my father spent his last three years in a nursing home which meant the majority of his state pension was diverted. Following his death, my mother was awarded a proportion of his pension, but the rise in income led to the loss of council tax benefit meaning she only very marginally benefited. I’m not saying this is wrong, but it is worth remembering that a rise in income does not always equate to more money in ones pocket…

  • Peter – AIUI the living wage is an hourly rate. http://www.livingwage.org.uk/home

  • “It is true that 85% of income tax payers benefit from raising the income tax threshold – but it’s also true that the vast majority of them are on low or middle incomes because of the way incomes are distributed.
    It’s also the case that those at the higher end of basic rate taxpayers are the ones who have lost most from the reforms to things like tax credits.”

    On the contrary, if you look at the analyses by the IFS you’ll see that those who have come out best (or least worst) from the overall tax and benefit changes made by this government are deciles 6 to 9 – that is, precisely, “those at the higher end of basic rate taxpayers”.

  • Peter Davies 11th Sep '13 - 1:15pm

    @GPPurnell
    It is indeed which means that if 40hpw gives you enough income to live on (presumably hence the term ‘living’) then 30hpw doesn’t while 40 basic at minimum wage plus 10 time-and-a-half would be relative comfort.

    Equally, a ‘living income’ that supports a family of four in a private rental is not the same as that for a single home-owner but you can hardly expect an employer to pay one twice as much as the other.

  • Just a brief point but the people I know who are struggling most to make ends meet are those with part time jobs on limited hours. They won’t benefit from any increase in the personal allowance, but would from their wages being increased in line with a minimum wages.

    So the question we need to answer is ‘who do we most want to help?’ My answer is that part time workers should be at the top of the list, so I would support a living wage AHEAD of any increase in the threshold over £10k, while in an ideal world wanting both.

  • @ nuclear cockroach

    I get it now, you are a deliberate parody.

    Well done, funny and well executed!

    If everyone agrees that Minimum wage is low pay then it can’t be appropriate to tax and NI that salary. That should be the primary focus.

    Living wage has some points to consider but it must be solely on the basis if the “need” not the proportion of other incomes measures which is pointless. Though the need does need to be on the basis of minimum to be included in society, not just subsistence. Though it can’t be implemented as a replacement for NMW as the damage entry level jobs.

    I would point, the lost revenue of tax threshold adjustments is big, but “embracing living wage” will be very costly too. Best to focus on getting the tax paid by those at the bottom down.

  • The merest notion of a “living wage” demands we assess a “cost” of that living the wage has to cover. In doing so, we should focus on the issues that push that cost up, most usually to the benefit of the wealthiest and the detriment of the poorest: the gains from rent seeking, privilege and regulatory capture. Milliband and his mentors have got pre-distribution all wrong if he thinks that a policy forcing up labour costs is part of it. Pre-distribution should be about eradicating the privilege that makes living so expensive before working out who needs help even with these costs stripped out.

  • nuclear cockroach 11th Sep '13 - 8:51pm

    @Psi

    Given I haven’t posted to this thread until now, your previous comment is clearly an unwarranted personal attack. Never mind.

    @Jock Coats

    I tend to agree with your analysis in this instance.

  • @ nuclear cockroach

    The top 3 lines were a transfer error I tend to write in word (spell check). I was responding to your comment on:

    https://www.libdemvoice.org/stephen-williams-writes-stand-up-to-big-tobacco-and-help-us-win-a-vote-in-parliament-36095.html#comments

    On that thread a valid response to the comment you were making on that thread.

  • nuclear cockroach 11th Sep '13 - 10:01pm

    Clearly you were wrong on that thread too.

  • Firstly I support the Living Wage as a way of trying to improve wages for the low paid and reducing the amount the Government subsidies low pay, however there are a few issues with supporting the proposed policies regarding the Living Wage and the changes to the tax system.

    Gareth states that there are benefits to government from having the Living Wage, but does not point out that if it is only applied to central and local Government these benefits will not apply because the costs to government will be greater than the benefits. Gareth’s amendment seems to recognise that the proposal does not apply to the private sector there being only measures to encourage companies that employ over 250 people to apply it because they have to state how many employees are not receiving it. The proposal also does not even make it a requirement that organisations that supply the Government have to pay the Living Wage. Therefore party policy should really include a commitment to increase the Minimum Wage above inflation to ensure that by 2020 it has reached at least the non-London rate for 2015 so that the difference between the Minimum Wage and the Living Wage is reduced.

    It seems that the working party and Policy Committee have gone for a headline policy rather than applying the policy’s logical application, which would have meant increasing the threshold for National Insurance to £10,000 so that the very poorest benefit and then increasing both the thresholds for National Insurance and Income Tax above £10,000 to the amount the proposed policy would cost.

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