The real Living Wage is rising — here’s why
The below is the foreword to the Resolution Foundation report setting out the calculation of the new Living Wage rates for 2017/18. It’s written in my capacity as Chair of the independent Living Wage Commission.
The Living Wage Foundation created the independent Living Wage Commission at the start of 2016 in order to oversee the rates of the voluntary Living Wage.
The Commission — made up 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 number of changes to ensure an integrated approach to calculating the rates that properly reflects changes in the cost of living. The Living Wage rates announced last autumn for 2016/17 reflected these changes in methodology. 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.
The new 2017/18 Living Wage rates are £8.75 across the UK and £10.20 in London, representing a 3.6% and 4.6% increase respectively. This means that a full-time worker on the real Living Wage will now earn an extra £2,400, rising to £5,200 in London, compared to someone on the legal wage floor. For many this will amount to a life-changing difference.
There have been several important factors that have influenced this year’s calculation. First, and above all, there is the wider inflation context. Inflation has been above the Bank of England’s 2 per cent target for much of 2017. This is in no small part due to the fall in the value of the pound following the EU referendum. These faster price rises have fed through to the specific basket of goods and services used in the calculation of the Living Wage rates. The overall CPI rate was 2.7 per cent in April 2017 (the month on which the increase in Living Wage basket is based). But the cost of the goods and services that low-income households spend most on have typically risen faster than CPI, meaning that both the Living Wage rates are rising by significantly more than the standard measure of inflation.
Second, there have been a number of important policy changes that need to be taken into account. Some of these changes offer more support to working individuals and families and therefore act as a downward pressure on the Living Wage rates (for instance, the increase in the personal tax allowance, reduction in social housing rents and additional childcare support). Other significant policy changes withdraw support from households and act as an upward pressure on the Living Wage rates (the continued freeze in working-age benefits, removal of the ‘family element’ of tax credits and the two-child limit on means tested benefits). The impact of these policy changes varies greatly for different household types, depending on whether they have children (and their age). To a significant degree, however, the net impact of these different policy changes on the new Living Wage rates is relatively modest in that they tend to cancel each other out. It is also worth highlighting that there are some policy changes where the success of implementation remains particularly unclear — for instance, the increased free childcare support for 3 and 4 year olds in England and Wales. The Commission will closely monitor implementation and uptake of this important policy.
Third, there is a specific and time-limited transition affecting the London rate. The 2016 review of the Living Wage rates concluded that the approach previously used in London resulted in too low a rate and proposed a new methodology to remedy this. As agreed by the Living Wage Commission, the implementation of this new approach is being phased in resulting in a temporary additional upward pressure on the London rate. This is the main reason the London rate is rising faster than the UK one in 2017/18.
There is currently significant uncertainty surrounding our future economic prospects. Despite record employment figures there are high levels of working poverty and real pay is falling. More than one in five employees get paid less than the real Living Wage. Against this challenging backdrop it is more important than ever that there is an independent and credible fair pay benchmark that is well understood by employers and workers that informs our national discussion. It is the role of the Living Wage Commission to maintain this.
