Making sure work pays

6^th November 2013

ResPublica’s Lorena Papamanci pushes for a new offer on the Living Wage

Poverty is costly for the British Government. It has to cover large parts of the living costs for millions of people who earn less than the defined living standards; in the meantime this keeps the poor stuck in a poverty trap. The Living Wage on the other hand would insure greater financial independence for those on low pay as well as provide them with greater incentives to work, which falls in line with the Government’s own pledge to “make work pay”. Therefore, the question for policy makers shouldn’t be whether or not the Living Wage is good, but rather how to encourage more employers to take it up.

In an era of never-ending austerity, growing inequality and increasing concentrations of wealth, the Government should be aiming to cut unnecessary expenditure in the areas where it can. In-work poverty is one of those areas. With 5.2 million people getting paid less than the Living Wage (up from 4.8 million last year) and close to 2 million children living in poverty (also up from 1.82 million in 2012), the Living Wage has both a social and an economic case for enforcement. It would solve such issues as in-work benefits, which the IFS estimated to be close to just over 20% of total benefits budget. This added up to around £41 billion last year, as government expenditure is higher for in-work benefits than the full cost of Job Seekers Allowance. Instead, the Treasury would be able to save up to 50 pence in every pound employers use to pay workers the difference between the minimum wage and the Living Wage. This would also be reflected in lower social security payments and higher tax revenues.

The minimum wage is far from sufficient. While it has been described as a ‘basic survival’ income, independent research and academics, as well as over 60 per cent of British people surveyed suggest that its current levels are too low to meet the Minimum Income Standard (MIS). This index, currently calculated by the Centre for Research and Social Policy at Loughborough University, is based on household needs in order to have a minimum acceptable standard of living. Furthermore, the MIS is rooted in social consensus, as calculations and decisions on what to include in the standard are grounded on discussions with members of the public instead of drawing arbitrary poverty lines that fail to account for the many dimensions of poverty. Accordingly, MIS highlights the gap between minimum wage, currently at £6.31 an hour and the pay rates required to reach an adequate living standard.

Given the living standards debate, the political context is clearly favourable to the Living Wage, with cross-party ‘support’ from both the Conservatives and the Labour Party. The Opposition recently confirmed its support for the Living Wage, with Ed Miliband announcing plans to introduce a new offer for firms which voluntarily sign up for the Living Wage. Labour has pledged to offer employers a 12-month tax break in 2016 for matching the minimum wage with the Living Wage. Under this proposal, private firms would be able to claim back about a third of the costs associated with the pay rise, amounting to £445 per worker and £21,000 per firm on average.

To date the Conservatives have made no specific announcement on legislating for the replacement of the minimum wage with the Living Wage, yet media reports in the lead up to the 2013 Conservative Party Conference suggested the party would strengthen its commitment to make work pay through support for the Living Wage. The ideas put forward included tax breaks, thresholds for requiring companies to become living wage employers and even the possibility of introducing the Living Wage for the public sector or those firms partnering with local government.

ResPublica will be exploring policy solutions for eliminating in-work poverty in a future research project on the Living Wage. Ed Miliband’s speech last week in support of the Living Wage is a good start, yet it is unlikely to meet the support of the business sector for something more than a voluntary adoption. Employers have been reluctant to take on even the minimum wage before its enforcement by law, for fear it would damage profitability. For the Living Wage to make economic sense for businesses, we need a permanent solution rather than temporary relief.

ResPublica supports the idea of a tax credit or a decrease in corporation tax, yet this has to be carefully thought through and compatible with the needs of business. By making the incentives to adopting the Living Wage clear and permanent, this new policy offer would ensure business as well as public support. Alternatively, a new provision within the Social Value Act for procurement and commissioning of public services could encourage organisations who wish to partner with central and local government to adhere to the Living Wage as an additional method of adding social value in the community.