Real Living Wage rates for 2021–2022: what’s behind this year’s increase?

(The below is my foreword to the Resolution Foundation report setting out this year’s Living Wage calculation)

This is the sixth year that the Living Wage Commission (LWC) has set the wage rates for the UK and London and, in the face of the continued economic challenges facing workers and employers in the UK, its role remains vital.

Over 300,000 workers benefit directly from the real Living Wage and 9000 employers are formally accredited while yet others informally shadow the rates. The real Living Wage has grown from an insurgent campaign into a crucial part of the UK’s civic, social and economic infrastructure.

The basic intuition behind the Living Wage is a simple one: to determine the wage rate necessary to ensure that households earn enough to reach a minimum acceptable living standard as defined by the public. Translating this idea into practice, however, requires a wide range of assumptions and judgements to be made on issues ranging from the measurement of household costs, the nature of government support available to households and the appropriate use of data. The Resolution Foundation undertakes this analysis and its work is overseen by the independent Living Wage Commission.

As we do every year we follow our established methodology to calculate the new hourly wage rates. This results in new 2021/2022 Living Wage rates of £9.90 across the UK and £11.05 in London. The body of this report sets out the detail of the calculation.

Let me just highlight three sets of issues that are relevant to this year’s calculation: cost pressures, changes in methodology and wider government policy.

First, the wider inflation picture is crucial and fast-changing. By way of context in April 2021 — the point at which the prices of the goods and services used in the Minimum Income Standard were collected — overall CPIH inflation stood at 1.6 per cent. This is significantly lower than current inflation (CPIH was 2.9 per cent in September 2021), with most forecasters expecting further rises in the months ahead. Recent increases will feed into the calculation of next year’s rates.

Looking specifically at the basket of goods and services used in our calculation we see a substantial divergence in cost pressures between London, which rose by just 1.1 per cent, and the rest of the UK, which increased by 2.5 per cent. This difference was mainly driven by rental costs (0.9 per cent in London versus 2.5 per cent across the UK), with the impact of this gap amplified by the fact that housing costs weigh particularly heavily in the calculation of the London rate. We also saw the cost of other important items — such as childcare and travel — grow more slowly in London than in the rest of the UK. Not surprisingly these different pressures result in a significantly larger increase in the UK Living Wage rate than the London one.

Second, we have seen the continued phasing in of several methodological changes in the calculation. Last year’s report set out a revised approach to how we take account of housing costs and pension contributions. These changes make sure our Living Wage calculation accurately reflects the actual pattern of tenure used by different household types, as well as the now well-established expectation that employees contribute to their workplace pension via auto-enrolment. These revisions create some upward pressure in the rates.

Lastly, there is the wider question of policy changes. Here it is worth highlighting that last year the LWC determined that it would ignore the ‘temporary’ boost to levels of Universal Credit and working tax credits announced by the government in response to the pandemic on the basis that the government was committed to reversing them. The uplift has indeed turned out to be temporary and has recently been removed, so doesn’t affect this year’s rates. Apart from this there were relatively few shifts in the policy framework that influenced this year’s calculation. Significant changes to Universal Credit announced in the recent autumn Budget will be reflected in next year’s calculation.

As workers and employers seek to adjust to the continuing challenges posed by Covid and the aftermath of Brexit it is vital that we have clear yardsticks that can help society navigate towards a more equitable and resilient economy. One of these is the real Living Wage. The LWC will ensure it remains a robust and credible fair pay benchmark available to employers, workers, civil society and public authorities.

Gavin Kelly, Chair, Living Wage Commission

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Gavin Kelly

Gavin Kelly

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Gavin is chair of the Resolution Foundation and chair of the Living Wage Commission. He writes here in a personal capacity.