Posted: February 18th, 2022

Voluntary ‘Real Living Wage’ in the UK

 

 

 

 

Voluntary ‘Real Living Wage’ in the UK

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Introduction

            The emergence of Covid-19 revealed the inequalities that characterize the labor market in the UK. Various studies revealed that the pandemic impacted low-paid workers more severely than high-income people. As a result, Covid-19 exposed the insecurities and inequalities of life on low pay. Hence, the UK’s “levelling-up” agenda has majorly focused on tackling the problem of insecure work and low pay within the communities and ensuring improvements on pay rates at various geographical scales within the UK. This initiative will involve securing sufficient wage increases among accredited local living wages employers to establish a greater economy that benefits the majority. According to (Dobbins & Prowse, p.3, 2021), real living wage refers to an independently calculated voluntary pay rate relative to what people receive from their jobs. The campaign often intends to persuade employers to pay their employees a sufficient amount to provide a decent living standard besides its relevance. A real living wage is also a critical tool in creating a fair local economy. For this reason, there is a need to quantify and explore the current situation regarding the voluntary living wage in the UK to understand the wage inequalities which can be used within the UK economy to facilitate local growth.

Estimating the impact of the Living Wage on local economies

            This report will determine the living wage impact on people using the uplift scale, the amount remaining in the economy, and how it is paid for. The report will use this analysis to estimate the impact it has on the UK economy.

 

 

The uplift scale

            The Living wage in the UK is set at a scale that is sufficient to meet the workers’ cost of living. This way, it is greater than the minimum wage and majorly emphasizes what the workers require to satisfy their daily requirements. Hence, the living wage represents significant wage uplift for employees. The Labor Force Survey data reveal that 0.97 Euros will be the average wage increase for workers who receive payment below the living wage in London, with the rest of the country receiving a 0.56 Euros wage increase (Cominetti, p. 10, 2020). The average work hours for people living below the living wage is 31 hours in other capitals within the UK and 30 hours in London. Therefore, the average increase in gross wage for workers moving towards living wage is 875 Euros in other parts of the UK and 1,560 in London. This represents a pay increase of 6% in other capitals in the UK and 10% in London. Moreover, the Living Wage Foundation data (2021) reveal the difference created by paying the living wage compared to the national wage. The analysis established that the difference equals thirty-one weeks’ council tax bill, twenty-three weeks’ food cost, and eleven weeks’ rent for workers outside London. At the onset of an initiative to reduce the Universal Credit, the emergence of Covid-19 led to an increase in household debts and energy prices. This way, increasing the wage to living wage will significantly increase income for many households experiencing financial challenges.

            Not all workers will receive the whole wage increase. Some workers will have to pay additional income tax and national insurance. They will potentially see a reduction in tax credit and means-tested benefits. Using the Family Resources Survey to analyze the likely impact highlight that workers receiving wages below the living wage will see an average 37% wage uplift reduction (Hirsch, p 20, 2017). The marginal reduction rate will be consistent across the UK but will vary based on age, with older people having a higher wage reduction. The rate aligns with other calculations evaluating the minimum wage increase or possible benefits of increased living wage uplift. In relative terms, the living wage uplift will mostly benefit the low-income household after the benefits and taxes reduction. As illustrated in the graphs below, the lowest income people receive the highest proportionate increase in living wages. 

            The living wage will greater impact the employees and the local economies compared to those receiving a pay rise. In addition, the employees who slightly exceed the living wage may also receive pay uplift to ensure that the wage differentials depict their skills and experience. This way, the living wage would be referred to as the “spillover effect.” Wage rate analysis notes the spillover effect when comparing the expected number moving to uplifted minimum wage. The impact can be used to estimate the potential effect of increasing the amount paid to employees on living wages. The report analysis reveals that the gross wage increase is slightly 15$ below the spillover effect. 

How the uplift will be paid for 

            Significantly, the increased number of employees receiving the living wage will potentially increase the local workers’ purchasing power and impact the economy due to increased spending. However, these benefits might be negative and reversed if it leads to lower profits, less employment, and increased product prices. Therefore, the assumption regarding the effect of the living wage will reflect the estimated local economies gain or loss. In the 1990s, the opposition to implementing the national minimum wage was based on the assumption that it might trigger an increased rate of unemployment, thus ending up affecting the people it is intended to support and protect. Standard microeconomics demonstrates how wage floors in a competitive market inflate wages, thus lowering the demand for labor. However, as much as the minimum wage might lead to lower labor demand, the UK labor market is not competitive enough. Various studies have explored the impact of wage floors on unemployment and hours. The Treasury commissioned an international evidence study in 2019 that intended to explore the potential issues that might arise following the uplifting of the minimum wage. The study established that the labor demand elasticity ranged between –0.04 and -0.17, implying that, for every 1% wage increase, there would be a relative reduction in hours between 0.04 and 0.17 (Heery et al., p.30, 2017). Therefore, this report used the lower bound hour reduction to model the local impact. The living wage is voluntary, and the expectation that the employers intending to become living wage employers would have to align with the living wage spirit and not lower the employees’ working hours. While emphasizing this issue, the Living Wage Foundation (2021) requires employers to provide a real living wage and living hours while emphasizing this issue.

            Another impact of the Living wage is that consumers might payback through increased prices. Various studies have examined this issue, including the Frontier Economics for the Low Pay Commission that recently conducted a study on the impact of minimum wages. The study concluded that the price elasticity relative to minimum wage is between 0.02 and 0.11 (Johnson et al., p.330, 2019). This assumption concerns the impact of the living wage increase since the employers proving the living wage will start competing against the employers who have not yet signed up for the program. Moreover, the uplifted living wage might also be met through reduced profits. After price effects and employment, it is assumed that 30% of the additional wage cost is met through lowering profits, which aligns with the provision of the Office for Budget Responsibility (OBR) concerning the effect of the uplift in minimum wages. 

Multiplier effects and leakages    

            The effect of uplifting the living way will consequently affect the local economy. The living wage will facilitate economic growth if only it positively impacts it. As such, the UK economy would incur an induced multiplier effect since increased wage leads to increased consumer spending, leading to economic growth. The multiplier effect is likely to be greater if the funds are channeled towards the low-income households who tend to save more than the higher-income households. The Treasury has provided the potential multiplier effect of changes in spending and taxes. The table below represents the differences between the changes in welfare measures and personal allowances. Estimate, any additional income tax generates 30p of economic activity. For welfare, extra 1 Euro leads to 60p of economic activity.

(D’Arcy and Finch, p. 310. 2019)

            The examination of the distributional effects of increasing employees’ living wage demonstrates that it was progressive in proportionate terms. Low-income households are likely to incur the highest increase in living wage income relative to their income. The benefits are evenly distributed since it is less likely that the low-income households will be at work to benefit from the living wage. Nonetheless, the gains will be directed towards the low-income households, who tend to be paid lowly. Therefore, it is assumed that there would be a 0.45 multiplier effect for increasing the living wage. 

            (Johnson et al., p.327, 2019)

In conclusion, living wage uplift seems to have a transformative effect on low-income households. The living wage helps low-income households to create resilience for unexpected financial shock and meet their daily needs. It has been established that at least one employee out of five receives income below the living wage. This statistic became more powerful with the emergence of Covid-19, which encouraged inequalities in the labor market. The pandemic reveals the relevance of low-income households to the prosperity of the UK economy. This report has also quantified the potential impact of low-paid workers on the UK economy if they were paid the living wage. The local authorities and the local economic strategies have recognized the benefits of a living wage to the UK economy. For this reason, they require employers to sign up as Living Wage Employers to enable employees to receive wages that improve their living standards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

D’Arcy, C. and Finch, D., 2019. The calculation of a living wage: the UK’s experience. Transfer: European Review of Labour and Research, 25(3), pp.301-317.

Dobbins, T. and Prowse, P. eds., 2021. The Living Wage: Advancing a Global Movement. Routledge.

Cominetti, N., 2020. Calculating the Real Living Wage for London and the Rest of the UK 2020-2021.

Living Wage Foundation (2021). https://www.livingwage.org.uk/publications

Johnson, M., Koukiadaki, A. and Grimshaw, D., 2019. The Living Wage in the UK: testing the limits of soft regulation?. Transfer: European Review of Labour and Research, 25(3), pp.319-333.

Hirsch, D., 2017. Contemporary UK wage floors and the calculation of a living wage. Employee Relations.

Heery, E., Hann, D. and Nash, D., 2017. The Living Wage Campaign in the UK. Employee Relations.

   

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