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Beyond the Bottom Line: the Challenges and Opportunities of a Living Wage

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Beyond the Bottom Line: the Challenges and Opportunities of a Living Wage BEYOND THE BOTTOM LINE The challenges and opportunities of a living wage Kayte Lawton and Matthew Pennycook January 2013 © IPPR, Resolution Foundation 2013 IPPR & Resolution Foundation ABOUT THE AUTHORS Kayte Lawton is a senior research fellow at IPPR. Matthew Pennycook is a senior research and policy analyst at the Resolution Foundation. ACKNOWLEDGEMENTS Laura Bradley provided background research for chapter one, and Alex Hurrell and Howard Reed contributed to the analysis in chapter five. Original analysis in chapter four was conducted by Rebecca Riley at the National Institute for Economic and Social Research. The authors would like to thank David Coats, Arnie Graf, Rhys Moore, Marc Stears and Matthew Whittaker for input and advice during the project; and Graeme Cooke, Tony Dolphin, Mubin Haq, Gavin Kelly, Nick Pearce and James Plunkett for advice throughout and comments on earlier drafts of this report. IPPR’s work on the project was generously supported by the Trust for London and the TUC. ABOUT IPPR ABOUT THE RESOLUTION FOUNDATION IPPR, the Institute for Public Policy The Resolution Foundation is an independent research and Research, is the UK’s leading progressive policy organisation. thinktank. We produce rigorous research and innovative policy ideas for a fair, Our goal is to improve the lives of people with low to democratic and sustainable world. middle incomes by delivering change in areas where they are currently disadvantaged. We do this by: We are open and independent in how we work and, with offices in London and Undertaking research and economic analysis to the North of England, IPPR spans a full understand the challenges facing people on a low range of local and national policy to middle income. debates. Our international partnerships Developing practical and effective policy proposals extend IPPR’s influence and reputation Engaging with policymakers and stakeholders to. across the world. influence decision-making and bring about change. IPPR Resolution Foundation th 4 Floor, 14 Buckingham Street 23 Savile Row London WC2N 6DF London W1S 2ET T: +44 (0)20 7470 6100 T: +44 (0)20 3372 2960 E: [email protected] E: [email protected] www.ippr.org www.resolutionfoundation.org Registered charity no. 800065 Registered charity no. 1114839 This paper was first published in January 2013. ©2013 The contents and opinions expressed in this paper are those of the authors only. CONTENTS Executive summary ............................................................................................................................................. 4 Introduction .................................................................................................................................................... 8 SECTION 1: EXPLANATIONS AND DEFINITIONS ................................................................................................. 10 Chapter 1: What are living wages? ............................................................................................................... 10 Chapter 2: How are living wages calculated? ............................................................................................... 14 SECTION 2: AN ECONOMIC ANALYSIS OF THE LIVING WAGE ............................................................................ 19 Chapter 3: The UK low pay landscape ........................................................................................................... 19 Chapter 4: The impact on employment and employer costs ........................................................................ 27 Chapter 5: Who benefits from the living wage? ........................................................................................... 35 SECTION 3: IMPLICATIONS FOR POLICY............................................................................................................. 44 Chapter 6: Lessons and policy proposals ...................................................................................................... 44 Conclusion ..................................................................................................................................................... 60 Reference ...................................................................................................................................................... 61 Appendix 1: Additional low pay data ............................................................................................................ 66 Appendix 2: Calculating the impact of the living wage on firm-level wage bills........................................... 69 Appendix 3: Comparing data sources ........................................................................................................... 75 Appendix 4: Costs for a range of local authorities ........................................................................................ 77 Executive summary Eleven years after it was revived by a broad-based community campaign in East London, the living wage is now an established fixture of our national policy debate. Representatives from across the political spectrum compete to associate themselves with the idea and few discussions about living standards are complete without the living wage being floated as a potential solution. And with good reason: at a time when powerful forces are bearing down on wages at the bottom end of the labour market, living wages are a rare example of countervailing pressure; a rallying cry against low pay that has harnessed the power of social norms to reframe perspectives and deliver tangible gains for thousands of low-paid workers. Yet in some senses, living wages have generated more heat than light. Despite the campaign’s resonance, and although the methodology behind the calculation is published each year, in practice there is limited knowledge of how living wages are calculated; little detailed understanding of the role that living wages might play in addressing endemic levels of low-paid work; only the most cursory analysis of the possible effect of living wages on incomes, employment, or employer costs; and almost no debate about how public policy might be used to extend coverage of living wage agreements. As the living wage campaign gathers momentum and the concept begins to attract serious scrutiny, the time is ripe for a far more rigorous and informed discussion. This report begins that discussion and brings new evidence to bear on the likely economic and social impact of more extensive living wage coverage. It starts by clarifying what living wages (as of November 2012, set at £8.55 in London and £7.45 outside the capital compared with the current National Minimum Wage of £6.19) are and correcting some common misconceptions. A large part of the allure of the living wage – for activists, the public and politicians of all stripes – has been the power of its apparent simplicity: an hourly wage rate that guarantees a basic but acceptable standard of living. In fact, living wages cannot promise this. Family circumstances vary and no realistic hourly pay rate can ever lift every family to an adequate living standard. Importantly, both UK living wages are premised on the full take-up of tax credits and other in-work benefits; without state support, they would be far higher. So living wages do not precisely do what they say on the tin. Yet by explicitly focusing on living standards, they look beyond the minimum wage, which focuses on what the labour market can bear without a significant effect on employment. At their best, living wage campaigns are also about more than just pay. The living wage movement that originated in the United States (US) sought to involve low-paid workers in their own struggles for better pay, through new forms of community organising that can help to empower workers who otherwise lack representation in the workplace. The attraction of the living wage is explained by a simple fact: far too many people in the UK earn far too little to get by. While low pay is a feature of all advanced economies, the UK has a particularly high share of low-paid workers, with one in five employees in low-paid work. After falling in the early 1970s, the rate of low pay has risen gradually for the past 30 years. It is most prevalent among women, part-time and younger workers. In some sectors it is endemic; in hospitality, 69 per cent of workers are low paid, in retail 41 per cent. Recent years have also seen gradually rising rates of in-work poverty, in part the result of a public policy focus on “work first” that converted a significant minority of poor workless households into poor working households reliant on one or more low-paid jobs. While the minimum wage continues to play a vital role in safeguarding around one million of these workers from extreme low pay, on its own it is not a solution to the wider problem of endemic low-paid work. 4 How much scope is there to extend living wage agreements and what are the likely effects on employment? Far more extensive living wage coverage could be achieved without risking jobs, with many large firms facing an impact on their wage bill as a result of introducing the living wage of less than one per cent. Evidence also makes clear that firms adapt to higher wage costs in a number of ways that are less damaging than disruptive changes to employment or hours. This is not to suggest that the living wage can be adopted by all. Modelling an extreme scenario in which the living wage is guaranteed to all private sector employees in the UK we find
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