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5 November 2014

Why the poor pay more, and it’s high time for a living wage

During Living Wage Week, the Joseph Rowntree Foundation’s Katie Schmuecker explores the impact of paying the Living Wage, and why more needs to be done to wipe out the poverty premium.

By Katie Schmuecker

This Living Wage week has sparked considerable discussion of which employers are (or aren’t) paying the Living Wage and how much the hourly rate has increased by.  But we also need to consider the drivers that result in the Living Wage rising, and what we can do about them.

Central here is the cost of essential goods and services. According to JRF’s Minimum Income Standard (which forms the basis for the Living Wage calculation outside of London) the price of what the public think of as a basket of essentials has increased 28 per cent in six years. By way of comparison, the National Minimum Wage has increased by 14 per cent in that time, and average wages by 9 percent. This feeds through into a higher wage requirement to achieve the same standard of living.

Prices rising faster than earnings creates a difficult situation for all working households, but it creates an impossible one for those with the least income, and new research by the IFS published today by JRF casts new light on this problem. Over the last decade the lowest income household have seen their cost of living increase by 50 per cent compared to an increase of 43 per cent among better off households. 

If these differences are fed through into the official poverty measures, it implies an additional 300,000 people are in absolute poverty.

These differences in inflation occur because the budgets of low and high income households differ significantly, with low income family budgets dominated by items like food and energy which have seen steep price rises in recent years.

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The problem for low income households is further intensified by the poverty premium, whereby the poor pay more for some goods and services.  For some groups, such as disabled people, the trap can be especially pernicious if they not only have a low income but also face special additional costs or need higher quantities of particular goods or services – like energy due to spending more time in the home.

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While responses like the Living Wage help to ensure working people have enough income to enable them to cover the cost of essentials, alone they are not sufficient.  We also need to look at what is driving the cost of essentials and what steps policymakers, regulators and individual businesses can undertake to ensure the market serves low income consumers.  If we don’t address this part of the problem we could find ourselves in a vicious cycle whereby the rising cost of essentials for low income families keeps pushing up the Living Wage rate. It is only by taking a comprehensive approach that we will succeed in sustainably reducing poverty in the UK.

Katie Schmuecker is policy and research manager at JRF