The real Living Wage increases explained

The below is my foreword to the Resolution Foundation report setting out the 2023/24 Living Wage rates.

Foreword

This marks the eighth year that the Living Wage Commission (LWC) has overseen the calculation of the Living Wage rates for the UK and London. This report, from the Resolution Foundation, sets out the Living Wage rates for 2023–24, and the details of the underpinning the calculation.

The new rates are: £12.00 across the UK and £13.15 in London (a 10.1 per cent rise for the UK rate, and 10.0 per cent in London).

Although the headline rate of inflation is now falling the context for this year’s rates is still the cost of living crisis that has gripped the UK for the past two years. The current rate of inflation — 6.7 per cent in September 2023 — is still higher than at any point since 1992, outside of the even more elevated rates of the past 12 months.

In this context the Living Wage campaign is more important than ever. Over the past two years, the overall cost of living (as measured by the Consumer Prices Index) has risen by 17.4 per cent (comparing September 2021 with September 2023). The rise has been even higher for low income households, whose consumption patterns are more weighted to basic goods and services like food and energy where prices have surged the most. The cost of living for the poorest households has risen 18.8 per cent over these past two years. Against this, the Living Wage rates for 2023–24 are 21.2 per cent and 19.0 per cent (in the UK and London, respectively) higher than two years ago. In both cases it has gone up by more than inflation. In this sense the Living Wage has done its job: protecting workers from a rising cost of living.

This has happened at the same time as average wages (up 13.9 per cent over the past two years) have lagged behind inflation. Even the minimum wage, which has been subject to significant uprating in recent years, has not quite kept up with the cost of living (rising 16.9 per cent between April 2021 and April 2023).

While the cost of living is the primary driver of the LW rates, there are, as ever, other important factors to consider. The job of the Living Wage is to determine the wage rate necessary to ensure that households earn enough to reach a minimum acceptable living standard as defined by the public. This means that the rates are affected by the Government’s stance on taxes and benefits, because these set the relationship between earnings and incomes.

There are a few points worth highlighting when it comes to the effect of policy. First, there are some elements of tax and benefit policy which, though not new, continue to affect the rates. One is the Government’s decision to keep tax thresholds frozen in nominal terms, which places upwards pressure on the LW rates because it lowers households’ disposable incomes. Another is the 2-child limit on the family elements of means-tested benefits which have applied to children born after 2017. This covers a larger share of children with every passing year and, again, places upwards pressure on the wage requirements for families with three or more children. A third ongoing factor, which pushes in the opposite direction, is the rollout of Universal Credit. This is more generous to working families than the tax credit system, so places downwards pressure on the rates as more families are brought into this system (the rollout has reached two-thirds of the total this year).

Alongside these ongoing factors are two new issues that also had a bearing on our calculations this year. One is the fact that ‘Local Housing Allowance’ (LHA) has since 2021 been frozen in nominal terms. The LHA determines how much housing support low income families can receive. Freezing these allowances while rents rise reduces support, placing upwards pressure on LW rates. The nature of the cost inputs used in our LW calculation (private rents are set at the 30th percentile) means this is the first year this policy freeze has affected the LW rates. The impact was relatively modest this year, but if the LHA freeze continues it can be expected to grow each year.

A second new factor concerns the assumption used in the calculation for working hours. Although most parts of the LW methodology have been unchanged since 2016, part of the job of the LWC is to keep the methodology and underpinning assumptions under review, and to make revisions when doing so means the LW rates better reflect their remit.

Several years ago the LWC first considered the issue of working hours. In particular, it decided to review the assumption that all adults in the calculation work full-time with a particular focus on the position of single parents and second earners in families. To better reflect the reality of working patterns among these two groups, and to better align the UK methodology with the approach taken on this issue in other countries, the LWC have decided to relax the assumption that these two groups work full-time. Single parents and second earners will now be assumed to work part-time. This is clearly in keeping with reality of low-earning workers: among families where the main earner is in the bottom quarter of the earnings distribution, seven-in-ten single parents work part-time, as do six-in-ten second earners in families with children. There will be no change for other groups: single adults without children, couples without children, and main earners in families will all be assumed to work full-time. Reducing the number of hours worked for single parents and second earners places upwards pressure on the rates. As such, and in keeping with previous methodology changes, the LWC plan to phase in this change over a number of years rather than introduce it all at once.

The cost of living crisis over the last two years has presented acute challenges for workers struggling to get by, as well as employers having to navigate surging costs. The Living Wage has done in its job in helping ensure that pay keeps up with the underlying pressures on households. The Resolution Foundation, together with the Living Wage Commission, will make sure it remains a credible benchmark available to workers, employers, civil society and public authorities.