The Independent View: I know what next month’s living wage will be and it doesn’t relate to the cost of living

On 4 November we will learn the level of the new Living Wage, which many employers have volunteered to pay as a minimum. At present it is £7.45 an hour outside London. I’m betting that next month it will rise to £7.65.* How do I know? Well, the current calculation is remarkably simple, and it has nothing to do with the cost of living. What’s more, future increases risk making proposed living wage policies unaffordable or even damaging.

Academics at Loughborough University do calculate the wage needed to fund, after tax and benefits, what members of the public consider a basic standard of living (attempting to account for different household sizes). This figure, “reflecting actual minimum living costs”, is £8.80 – much higher than the current living wage. Around 1 in 3 earn below this figure, rather than the 1 in 5 below the current living wage, and this should be cause for concern.

For various reasons, a large gap has opened up between the ‘reference’ living wage (£8.80) and the ‘applied’ living wage (£7.45). (Compare these to the minimum wage, which was £6.19 until this month.) As the academics say

…for the time being, it must be accepted that the applied Living Wage, while originating from a benchmark representing real minimum living costs, has for the time being been restricted to a level that is lower than these costs. […] by keeping track of a ‘reference’ level that reflects minimum living costs in full, it will be possible to see what would be needed in better times for the Living Wage to be restored to this level.

Rather than jumping up from £7.45 to £8.80 or more to close the gap, increases are artificially capped. If last year’s methodology is followed, the increase will be 2% above average pay growth (which was an awful 0.7% in the year to August). That means a reasonable increase of 2.7%, coincidentally in line with inflation, giving £7.65. Looking ahead, we should expect many, many years of above-inflation Living Wage increases. Certainly, it will increase faster than average earnings, each year increasing the number of people under the threshold.

This means policies to roll out the Living Wage further would prove even better for many employees (and their tax/benefit levels), but would also cost public and private sector employers far more than expected. The extreme suggestion is for a blanket increase in the minimum wage. Such a move from £6.19 to £7.45 would risk up to 160,000 job losses: moving to £8.80 might be catastrophic.

As well as suggesting caution around policies to extend this national Living Wage, it’s also a reminder to question the methodologies of ‘living wages’, particularly as their political profile grows. The analysis above refers only to the rate outside London. The London rate calculation involves using two entirely separate methods, averaging them, and then adding 15%: these living wages are effective tools for boosting low pay but not a precision guide to living standards.

Liberal Democrats should be especially wary, having adopted as policy the creation of a “commission to establish an official Living Wage”. If this matches the reference living wage, it may now be around £9. If it used a different method, or had a different view of, say, spending on clothes or cars, who knows how much higher or lower it could be?

The Living Wage Campaign is no bad thing, encouraging employers who can afford to pay more to do so, but policymakers and employers should be aware of just how far the national living wage must rise to reach its ‘reference’ living wage.

* I haven’t had any takers yet, but I’m sure this prediction will somehow leave me with egg on my face!

The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.

* Adam Corlett is an economic analyst and Lib Dem member

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