The real Living Wage increases explained

The below is my foreword to the Resolution Foundation report setting out the 2022/23 Living Wage rates.

This is the seventh year that the Living Wage Commission (LWC) has overseen the wage rates for the UK and London.

This year’s rates are being announced in the middle of the worst cost of living crisis in a generation. Near double-digit inflation is the highest it has been since the early 1980s and wages — currently rising at around 5 per cent — aren’t keeping pace. At the same time the government is undertaking intervention on an unprecedented scale to limit the energy price increases that households face. Against this volatile backdrop the stability offered by the real Living Wage is more important than ever.

This context also makes it a challenging year to set the real Living Wage rates. There is a huge amount of flux: both prices and policy are shifting from month to month.

This report, from the Resolution Foundation, sets out the Living Wage rates for 2022- 23, and the details underpinning the calculation. The new hourly wage rates are £10.90 across the UK and £11.95 in London.

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 intuitive idea into practice, however, requires a wide range of data, assumptions and judgements to be brought together on issues ranging from the appropriate measurement of various household costs, to the nature of government support available to different families.

The Resolution Foundation undertakes this task according to a well-established approach, and its work is overseen by the independent Living Wage Commission. The Commission’s role is an important one. The calculation of the Living Wage is rooted in a clear methodology, but changes in the economic and policy context mean there are inevitably judgements to be made each year. The fast-changing context this year has thrown up more questions than usual. I would like to thank my fellow Commissioners for the conscientious and collegiate manner in which they have worked through all the issues.

This report sets out the issues impacting on this year’s rates — here I will briefly mention two key ones: rising prices and increases in government support.

The biggest driver of changes in the rates this year is, of course, high inflation, caused in large part by surging energy costs following the invasion of Ukraine. Even though the energy prices used in the Living Wage calculation reflect the government’s new energy cap they are still dramatically higher than those in last year’s calculation (more than 2.5 times higher). That said, if the government hadn’t introduced its new cap policy the upward pressure on the Living Wage rates would have been significantly greater.

Rising prices have, not surprisingly, generated by some way the largest ever increase in Living Wage rates both in percentage and cash terms. The new rates are now worth almost £3,000 more per year across the UK than the minimum wage for a full-time worker, and almost £5,000 more in London. The increases of 10.1 per cent in the UK and 8.1% in London compare to CPI inflation of 9 per cent in April 2022 (the point at which the prices in the Minimum Income Standard basket were collected), 9.9 per cent today, and Resolution Foundation projections of 8 per cent next May (by which point the new rates must be paid by accredited employers), with inflation then expected to fall steadily through 2023.

In keeping with the pattern last year, and contrary to the trends in the immediate pre- pandemic period, there has been more upward pressure from prices in the UK rate than in London. For instance, rents and childcare costs have risen faster outside London.

The other critical factor shaping this year’s rates has been major changes in the benefits system, including support to help with surging energy costs. The overall effect of these benefit changes has been to give significantly more support to low-and-moderate income households, particularly working households (i.e. the Living Wage population group). Even before the energy price crisis hit, changes to the ‘taper rate’ and ‘working allowances’ within Universal Credit both increased cash support, creating downward pressure on the Living Wage rates. More recently, the Government has committed to cash support for households to help with energy costs — £400 for all households, and an additional flat-rate £650 for all households on means-tested benefits.

Taken together these payments play a big role in offsetting some of the upward price pressure on the rates (which would otherwise have been much larger). Again, changes in Universal Credit and the new support for energy bills play out differently in London compared to the rest of the UK. In London, a significantly higher share of households in our calculation are eligible for means-tested benefits (by virtue of their high costs) compared to the rest of the UK, where costs (such as for housing) are typically lower. This is a second reason why the underlying increase in the London rate was lower than the UK rate this year.

Looking ahead to next year there remains a huge amount of uncertainty. In no small part this concerns the future path of inflation and global energy prices. But it is also about what happens to some key costs which appear to be picking up after having been relatively flat — such as London rents. And there are some major unresolved policy questions: will benefits be uprated in line with inflation, and will current cash support for energy bills be continued after April 2023? A lot hinges on these choices.

What we can say with certainty is that this will be an extremely challenging year for workers as well as for many employers who back the Living Wage. The Living Wage campaign approaches the year ahead from a position of strength. It has grown rapidly from a small, insurgent movement into a building block of the UK’s civic, social and economic infrastructure. Almost 400,000 workers benefit directly from the real Living Wage and over 11,000 employers are formally accredited, while many others informally shadow the rates. Year by year it is bending social norms towards fairer pay.

As workers and employers seek to adjust to the continuing challenges posed by this energy price surge, together with the aftershocks from the pandemic, it is vital that we have clear yardsticks that help society navigate towards a more equitable and resilient economy. One of these is the real Living Wage, which now stands at over 70% of the typical UK wage.

The Resolution Foundation, together with the Living Wage Commission, will ensure it remains a robust and credible benchmark available to workers, employers, 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.