Explaining this year’s Living Wage Rates
This is my foreword to Resolution Foundation’s report: Calculating a Living Wage for London and the rest of the UK
The independent Living Wage Commission was created at the start of 2016 to oversee the rates of the voluntary real Living Wage. The Commission — comprised of leaders from the private, public and voluntary sectors as well as academic experts — started its work by reviewing the different approaches that had hitherto been used to set the UK and London Living Wage rates.
It recommended a series of changes that were then made to ensure an integrated approach to calculating the rates that properly reflects changes in the cost of living. It is the ongoing role of the Living Wage Commission to oversee the approach taken to rate-setting, determine how to take account of policy shifts and consider whether the appropriate data is being used.
This year, there have been several important factors that have influenced the announced increases to £10.55 per hour in London and £9.00 per hour in the rest of the UK.
First, there is the wider inflation context and changes in what families require to meet a minimum acceptable standard of living. Inflation has been above the Bank of England’s 2 per cent target over the past year, with CPI rising by 2.4 per cent over the most recent 12 months. These price rises have fed through to the specific basket of goods and services used in the calculation of the Living Wage rates. Some components of that basket have risen more quickly, for instance, the average council tax bill across the family types included in the Living Wage calculation rose by 5 per cent.
The nature of that basket evolves over time. Its contents are agreed by members of the public taking part in ongoing research carried out by a team at Loughborough University, supported by the Joseph Rowntree Foundation. Though changes from one year to the next tend to be relatively minor, in some cases these can be meaningful. In this year’s calculation, for instance, the transport budget for some households increased by one-fifth due to a mixture of higher travel fares and the public’s view that less reliable public transport provision means that some families need to set aside more cash for occasional taxi use.
Second, a number of important policies — some new, some continuing — have affected the Living Wage rates this year. Some of these changes act as a downward pressure on the rates, for instance, the increase in the personal tax allowance, reduction in social housing rents and additional childcare support. But other policy changes create upward pressure as they mean that families now need higher earnings to achieve an acceptable standard of living. An example of this has been the ongoing freeze in working-age benefits. And, of course, the relative impact of each of these different policy changes varies considerably between household types according to factors like the number of children in the family.
It is also worth highlighting that there are important policy changes where the pace and success of implementation remains unclear. Significant uncertainty continues to surround Universal Credit. While the roll-out of the policy has been repeatedly delayed, it is nonetheless a reality for a growing number of households across the UK. As such, this year’s calculation for the first time assumes a proportion of families receive UC with the majority remaining on the existing system. The introduction of the policy will be carefully reviewed each year to ensure that our calculation reflects the circumstances that families are actually facing.
Third, there is the specific and time-limited transition that impacts on the London rate. The 2016 review undertaken by the Living Wage Commission concluded that the approach previously used in London resulted in too low a rate. Hence a revised methodology was proposed to remedy this along with an agreed timetable for phasing-in the new approach. The increase in this year’s London rate partly reflects the extra pressure created by this transitional adjustment — indeed this is the main reason that the London Living Wage is rising faster than the UK rate. However, we have reached the end of this transitional period and the announced rates now fully reflect the new methodology.
The past year has been a mixed one for hard-pressed families. One in five workers still get paid less than the real Living Wage at a time when in-work support is being reduced. Pay more generally only recently started growing again in real terms after a renewed squeeze began in 2017. At the same time, employment is at a record high and a tighter jobs market, together with growing recognition of the real Living Wage, has led some key employers like Amazon to announce major increases in wages for low-paid workers. It is vital that these welcome moves are built on and that these and other employers lift low-end pay to reflect the new Living Wage rates. Over the last year the debate on the changing nature of work and pay in our economy has gained new momentum. It is crucial that we have an independent and credible fair pay benchmark, widely understood by employers and workers alike, that can help inform this national discussion. It is the role of the Living Wage Commission to maintain this.
