George Osborne today took the biggest step forward since the introduction of the National Minimum Wage (NMW) in 1999 to commit the government to tackling low pay. His announcement of a “Living Wage” of £7.20, rising to £9 by 2020, was more than just a rebranding and raising of the NMW. Crucially, it was an acceptance that the setting of a wage floor is relevant in attempts to raise living standards for low-paid workers. Up to now, the Low Pay Commission has scrupulously avoided that issue, with a brief to set the NMW only on the basis of what the labour market can safely support. The calculation by my team at Loughborough University of the national Living Wage supported by campaigners has been based on our observation that the NMW is insufficient to support what the public regard as a Minimum Income Standard allowing you a decent standard of living.
The new official Living Wage draws on political rather than academic calculations, but is clearly subject to the idea that, in the words of TUC, “Britain needs a pay rise” in the wake of a living standards crisis. Its eventual rate in 2020 will be 15 per cent higher than the present Living Wage of £7.85 outside London, and thus more than it would have been had it risen by (projected) inflation.
Yet it’s also essential to acknowledge that the combination of higher wages and reduced in-work support, the two sides of today’s budget for low-income workers, will actually leave many of them considerably worse off.
This can be illustrated very simply by considering just what will happen to a parent working full time on the minimum wage in the next year. The jump from a £6.50 to a £7.20 minimum will give them a handsome pay rise – from £12,710 a year to £14,080 a year, an increase of £1,370. However, this will reduce the family’s entitlement to tax credits for three reasons: first, because higher earnings reduce tax credit entitlements anyway; second because the rate at which this happens was cranked up in the budget (from 41% to 48% of relevant earnings) and third because the amount you can earn before that clawback takes place was more than halved. The result? Tax credits for this family will be £2330 lower by this time next year, more than wiping out the pay rise and causing a net loss of £960.
This is just one example of how reductions in support for working families’ incomes can more than wipe out gains from better pay. This has been a huge tension in the story of the Living Wage over the past few years. According to our latest calculations, families on the Minimum Wage are typically around £2000 a year further short of meeting our Minimum Income Standard now than in 2008 – even though wages net of taxes are actually at a similar level now in real terms as they were then.
This Budget thus helps mark a turning point in the debate about living standards, pay and benefits. The case for employers to pay a decent rate is now being accepted by society and by government. But this doesn’t solve the problem of low family income, for which support needs to be sustained in order to avoid making families a lot worse off. It will now be easier to separate out these two issues. The bad news is that this greater clarity will not be of much solace to those currently suffering severe cuts.