What price a living wage?

As inequality grows and downward pressure on real wages continues to affect households across the UK, the idea of a living wage has gained momentum in recent months.

However, what do we actually understand about the concept, the campaigns which advocate it and the possible trade-offs delivering a living wage might involve? The Centre for Economic Empowerment explored these issues on 25 January 2013 at the fourth masterclass of its current series. Presentations were provided byKayte Lawton, Senior Research Fellow at the Institute for Public Policy and Research (IPPR), and Dr Esmond Birnie, PwC Northern Ireland’s Chief Economist.

Kayte Lawton outlined the findings of her recent research report carried out in conjunction with the Resolution Foundation – Beyond the Bottom Line – the challenges and opportunities of a living wage. Kayte explained what living wages are and how are they calculated; the potential impacts of a living wage, the policy implications and the report’s recommendations.

 A Living wage – the basics
  • A living wage is aimed at those on low incomes;
  • It is not the same as the minimum wage;
  • It is calculated on what is considered a socially acceptable minimum standard of living;
  • Assumes full take up of in-work benefits;
  • It is sensitive to changes in prices and tax/benefit policy;
  • It takes no account of labour market context;
  • It is a voluntary scheme aimed at employers throughout the private and public sectors
  • Current rates: £8.55 for London and £7.45 for the rest of the UK.

If a living wage was universally introduced the report concluded that:  on average, households with affected workers would be better off by £850 a year; those households in the middle of income distribution would gain most; gross wages would rise by £6.5bn; the Treasury would take £3.6bn of this in higher taxes; public sector wages would rise by £1.3bn with net savings to the state of around 2.3bn; whilst a worst case scenario would see 160,000 job losses due to wage pressure on employers.

However, Kayte concluded that: the living wage should be a voluntary policy aimed at the private and public sector; empowering workers and communities is an important aspect of the campaign; many more people could benefit from a living wage without significant employment effects and that Government may have to help incentivise a living wage amongst the SME sectors.

Dr Esmond Birnie gave an overview of changes in income inequality and poverty across the UK and Northern Ireland – illustrating that we have one of the highest rates of income inequality amongst OECD countries. He outlined how economic theory describes the relationship between wage levels and employment, with exceptions, as wages go up employment will fall. Building on this theory he suggested that the sectors where a living wage might be most appropriate, such as retail and hotels are the least likely to introduce it due to competitive pressures; and that a living wage might be particularly difficult to promote in Northern Ireland’s private sector which has such a high proportion of SMEs.

Speaking after the event, Peter Hutchinson CEE Co-ordinator said:

This was a very interesting seminar which provided a rounded understanding of a living wage, its implications, and the dilemmas it raises. Group discussion focused on issues such as the ability of companies to absorb growing wage costs, the overall impact a living wage might have on aggregate demand, and the merits of increasing the minimum wage.

There was a general acceptance that current levels of working poverty and inequality are too high. However, there was also a recognition that policies such as the living wage are complex and that potential trade-offs need to be considered. This is exactly what these seminars are about – giving people the information they need to understand pressing economic issues and allowing them to make informed decisions about potential policies”.

Interviews from Dr. Esmond Birnie and Kayte Lawton:

Presentation from Kayte Lawton - Senior Research Fellow IPPR with introduction from Peter Hutchinson - Centre for Economic Empowerment Coordinator

Presentation from Dr. Esmond Birnie - Chief Economist PwC Northern Ireland

Panel discussion with Dr. Esmond Birnie and Kayte Lawton

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