The Independent View: The Living Wage can be fair but affordable in tough economic times

On Saturday, Adam Corlett outlined his concern that how the Living Wage is calculated could cause problematic increases over the next few years. He raises some valid issues. However, the Living Wage has been designed so that it cannot rise uncontrollably, and in reality it is likely to rise much less, relative to general pay, than Adam is suggesting.

The Living Wage’s growing popularity shows so many employers have been willing to take on the commitment to pay enough for a decent living standard, even though times are tough. With average living standards going down, this reflects a widespread moral view that workers struggling most on low pay need protection.

Nevertheless, in devising a sustainable formula for calculating it, the Centre for Research in Social Policy (CRSP) recognised that it must reflect the economic pressures facing employers in giving workers a socially just standard of living.

As Adam Corlett says, this means that in the next few years, the Living Wage is likely to increase faster than general wages. But it would be hard to argue that any time the living wage goes up faster than general pay is problematic. The point of the living wage is that it reflects what is happening to living costs, and these will not always move identically to pay rates. Sometimes (as in long periods of growth), living costs increase more slowly than average earnings; it is only recently that the opposite has occurred.

It is true that when the ’applied rate‘ is catching up with where the living wage should really be (the ’reference‘ rate), the living wage will be determined by what is happening to earnings (through the ’cap‘ formula). But this doesn’t mean the link with living costs has been broken. Seen longer-term, it is the recent increase in living costs above earnings growth that will cause the living wage to grow faster than average earnings, but to provide some stability, the cap has caused this increase to be postponed.

Moreover, Adam’s projections of high cumulative increases over the next six years are likely to overstate reality, in two important ways.

First of all, one in three people currently earning below the present ’reference‘ rate of the living wage, £8.80, does not mean that future increases will require pay rises for a third of employees. If, as is likely, earnings rise faster than living costs in the coming years, when the Living Wage gets to where it should be, earnings too will have risen substantially in real terms.

Second, significant new Government help with childcare costs will lower the ’reference‘ level of the Living Wage substantially. From 2016 support will halve what low -earning families working full time on the living wage level would need to contribute to childcare – today that would reduce the £8.80 figure to £7.70.

Beyond technicalities, what we see is that the living costs squeeze has been particularly painful for working families on low wages. Living wage employers see they have a part to play in addressing this. All political parties are also committed to addressing the rapidly rising cost of childcare.

We cannot predict accurately what will happen to the living wage. But what we can say is that it offers the opportunity for government – not least Liberal Democrats –and employers to play complementary roles in making work pay enough for families to live on.

 

* Donald Hirsch is Director of the Centre for Research in Social Policy, who calculate the annual Living Wage rate for the Living Wage Foundation.

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3 Comments

  • Adam Corlett 23rd Oct '13 - 11:36am

    Thank you very much for responding to my piece, Donald.

    I think my basic points remain untouched: that the living wage does not currently cover the cost of living, and that the wage will rise faster than inflation (except this year) and average pay, and so cost more (and do more for those on it) in future than its current figure suggests. Hopefully my £7.65 prediction for next month will prove correct too! Your points are very useful though.

    If, as you predict, earnings rise faster than living costs, I accept the living wage may not end up covering 1 in 3 workers. It’s still notable however, that 1 in 3 at present earn below your calculated cost of living, and that the number below the current living wage will inevitably rise from 20%.

    My work did not attempt to guess how the cost of living might change. Your stat about new childcare help eventually lowering the reference living wage from £8.80 to £7.70 (using today’s figures) is astonishing – and I’m sure many in the party would like to know more about that. I hope your LW report or others will cover this in more detail. The reference living wage may presumably also be pushed up – or down – by other policies, price changes and living standards.

    More broadly, a sort of sensitivity analysis of the living wage would be fascinating: which policies and price changes would most affect the living wage (and at what cost). I wonder what further or better targeted childcare support would do!

    I think there’s an interesting question here too about whether people would respond just as positively to reductions in the cost of living as to increases in pay (obviously we’d like to see both). With more childcare help, tax cuts, and higher benefits, perhaps we could bring down the living wage to the level of the minimum wage or below: would that be just as satisfying, and does that depend on whether this involves new public spending ‘subsidising low pay’? Your childcare example also raises the possibility that the applied LW could one day fall in nominal terms. Would we probably then expect LW employers to ignore that drop?

    Finally, I wonder Donald what you think of the new LD policy to establish an official living wage (or several). Could that add any methodological improvements or greater legitimacy, or would it be pointless? Similarly, is there scope for the London and non-London LW to use the same method (I note the non-London reference LW is greater than the London LW!), or to introduce even greater regional variation?

    Thanks again,
    Adam

  • “I think there’s an interesting question here too about whether people would respond just as positively to reductions in the cost of living as to increases in pay”

    Adam I think you will find the coalition government has been taking extensive measures to reduce the cost of living. For example, have you noticed how housing costs are so much lower for homeless people?

  • Stephen Dockerill 4th Nov '13 - 9:26pm

    How many hours per week do you have to do to earn a living wage ? is it 40, 48 or 60 hours?

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