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10 July 2015

It’s not a National Living Wage, but it’s a step in the right direction

George Osborne has at least made a start on the problem of low pay, argues Cameron Tait.

By Cameron Tait Cameron Tait

George Osbornes announcement of a new National Living Wageshould be welcomed, but its important to be clear that this will be no panacea for tackling in-work poverty. A stronger National Minimum Wage, which is what this policy is, is a great step in the right direction. But it is only one part of the solution to boosting living standards and addressing the rise of in-work poverty.

First, lets cut through the spin. Osbornes Summer Budget announcement does not constitute a National Living Wage. Instead, it is a strong piece of guidance to the Low Pay Commission (the body of employers, trade unions and experts that sets the level of the National Minimum Wage) to ensure the Minimum Wage rate rises from £6.50 now to £9 in 2020 (though only for those over 25).

On the other hand, the Living Wage the campaign and rate of pay that Osborne has deliberately spiked with his rebranding of the Minimum Wage is set according to the minimum amount of money households need in order to have a minimum acceptable standard of living. Crucially, the rate used by the campaign for the Living Wage takes into account changes in the cost of living (it goes up in line with the prices of rent, food, transport and other costs) and the availability of in-work social security payments (it goes down if social security becomes more generous, and up if social security payments are reduced).

The National Minimum Wage on the other hand has never formally taken into account the cost of living. Instead it has always been set at the highest possible rate that does not hurt jobs or the economy. This is why there is a big gap between Osbornes National Living Wage and the rate used by the Living Wage campaign, coordinated by the Living Wage Foundation and Citizens UK. Whereas Osbornes rate will reach £9 in 2020, the London Living Wage is already £9.15. In five years it will likely be significantly higher. The UK (non-London) Living Wage is currently £7.85, higher than the rate at which Osborne has said the ‘National Living Wage’ will rise to next year: £7.20.

Now, the fact that Osbornes National Living Wage is different to the campaign for the Living Wage does not make it a bad announcement. Quite the opposite – as Osborne said in his speech, six million people will see their pay increase as a consequence of this move. The annual increases up to £9 in 2020 will be bolder and faster than all previous increases of the National Minimum Wage since its introduction in 1998. Critically, this will take those on the ‘National Living Wage’ closer to the average wage and therefore addresses a criticism I made of the Labour Party’s Minimum Wage policy nearly one year ago.

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The problem is that this announcement on its own will not be enough to tackle the rise of in-work poverty.

The first reason, as Gavin Kelly has set out elsewhere, is that in-work social security payments represent a significant chunk of income for low-income households. The Chancellors decision in this budget to cut in-work social security payments such as Child Tax Credit while raising the National Minimum Wage is effectively taking away with one hand while giving with the other. Indeed, because of the methodology behind the Living Wage campaign’s rate described earlier, the in-work social security cuts will likely make the difference between Osbornes National Living Wage rate and the campaign’s rate even larger.

The second issue Osbornes announcement fails to tackle is that while some companies (particularly those in retail, hospitality and social care) will genuinely find it difficult to increase their wages to £9 per hour by 2020, there are many more employers that can go further than this. The Living Wage campaign has accredited over 1,500 employers like Burberry, KPMG and Nationwide, who have pledged to pay all of their staff at least the level of the Living Wage, and raise that every year as the cost of living rises. Osbornes new National Living Wage does not make any reference to a benchmark above the minimum that responsible businesses should aspire to.

The third and final issue is that Osbornes announcement does not adequately address the root causes of low pay that have thus far held back the progression of the National Minimum Wage. This includes raising productivity in the retail sector, amplifying employee voice in the hospitality sector (where only 4% of staff are members of a trade union), and tackling the major public funding barriers within the social care sector. Only by addressing these root causes can the Chancellor guarantee these pay rises are sustainable and will not come at the cost of employment.

So let’s welcome a bold statement of intent on raising pay for millions of people who work hard every day but do not currently get the reward they deserve. But let’s also be very clear: a rise in the National Minimum Wage is not enough on its own to tackle in-work poverty, especially when in-work benefits are being reduced.

 

Cameron Tait is Senior Researcher at the Fabian Society and tweets at @cameronrjtait.