Why the Living Wage matters for poverty

Economy A man working
ViewsNovember 7th, 2014

This week the Living Wage went up to £7.85 an hour. At the same time, the Living Wage Foundation announced that more than 1,000 employers across the UK are accredited as Living Wage organisations.

The need for more people in Wales to be paid the Living Wage could not be clearer – KPMG estimates that a massive 25% of workers are paid less than the 2013 Living Wage rate, the highest proportion in Britain.  Wales also has only 33 accredited Living Wage employers, fewer than would be expected if Wales had the proportion of Living Wage accredited businesses as the UK as a whole.

The benefits of the Living Wage to employers and employees alike are proven, so why are we so lukewarm to the idea?

Well, it is sometimes claimed that the Living Wage doesn’t reduce poverty. Experts point to the lowly-paid workers who live with partners who have relatively high earnings. They say that paying these workers more would be ‘deadweight’, because the additional earnings would simply boost already high incomes.  At face value they are right – the graph below, from the Joseph Rowntree Foundation’s 2013 Monitoring Poverty and Social Exclusion, seems to confirm that low-paid employees are found in high- and median-income households as well as poor low income ones.  Paying the Living Wage to the 25% of low paid workers who live in poor households is, it is argued, wasted because the other 75% low paid workers aren’t poor.

JRF Graph

But there is more to this graph than meets the eye – and at least three reasons why experts are wrong.

First, it is clear that low pay is one of the main factors in poverty amongst poor working households.  Eight out of ten workers in the poorest fifth of families are low paid (about 71,000 people). For them, a shift to the Living Wage would be hugely important and could well take them over the poverty threshold.  A further 95,000 people in the second poorest fifth of households are also low paid.  It is a strange argument indeed, especially from those who support universal benefits such as child benefit, winter fuel allowance and concessionary fares, that about 160,000 low-paid workers in less well-off households should suffer because about 95,000 workers in better-off households will gain.

Second, income poverty is not static. Over time there are significant movements of households in and out of poverty as their incomes fluctuate. Those moving out of poverty typically make only marginal gains in income, moving into the next quintile rather than making a massive leap to achieve median incomes or above.  Similarly, those moving into income poverty have usually previously had incomes just above the poverty threshold.

Rather than thinking only about the poorest fifth of households, we should be looking more broadly and thinking about the circumstances of those in the second quintile as well.  The Living Wage could reduce the risks of substantial numbers of households falling into poverty if their circumstances change, by providing them with enough income to build some resilience, such as modest savings to pay unexpected bills or to cover delays or errors in benefit payments.

And third, the Living Wage matters for people’s – and especially women’s – independence and freedom from poverty over their lifetimes.  The low-paid woman – let’s call her Ms Jones – in the well-off household only avoids poverty because of her relationship with her partner. The partner may not share his or her resources equally with Ms Jones, and if the relationship breaks down or the partner dies, then Ms Jones has only her own low pay to rely on, and possibly faces old age with only her own meagre pension.  Lone parenthood (which in turn is primarily caused by relationship breakdown) is one of the greatest risk factors for a move into poverty.  So to describe paying the Living Wage to people in better-off households as ‘deadweight’ misses the point – it might not make a difference to the income distribution in the short term, but it makes a great deal of difference in the longer term.

The argument for the Living Wage to be more widely introduced in Wales is overwhelming. If more, large employers moved to the Living Wage it would without question help more than 70,000 workers currently paid less. But crucially, it would help to protect against the risks of poverty in the longer term, by giving households and individuals a bit of spare capacity to build their resilience against poverty.

Victoria Winckler is Director of the Bevan Foundation.  Find out more about what we do by signing up to our free monthly e-newsletter. 

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