What Impact Does the Living Wage Have on Poverty?

This blog is based upon an article recently published in Social Policy and Society.  You can access the article by clicking here

Low wages have recently been rising faster than inflation as a result of increases in the minimum wage, the introduction of the national living wage and more employers paying the voluntary living wage (VLW). But in-work poverty rates are rising and two-thirds of children in poverty have a working parent. What impact does the VLW have on poverty?

In 2013 three large employers in the City of York became VLW employers. They were the City of York Council, Joseph Rowntree Foundation/Joseph Rowntree Housing Trust and York St John University. Other York employers have subsequently also became VLW employers, including Nestlé and Aviva (but not yet, regretably, the University of York). It was decided that this was a good opportunity to undertake research on the impact of the VLW on poverty, and funding was obtained from the ESRC under their Knowledge Exchange Programme. We undertook a survey of about 500 low paid workers in the three organisations after the introduction of the VLW. The results are published in Social Policy and Society.

There are four main reasons that the Living Wage has a limited impact on poverty.

First, not all the employees who benefited from the introduction of the VLW were living in poor households; they were commonly second or subsequent earners. In our sample only 22 per cent were in households with incomes at or below the 60 per cent median poverty threshold before housing costs and 32 per cent after housing costs. Paying employees a VLW, or more, is likely to reduce the risks of poverty. It was striking that it was single earners and lone parents in this sample who appeared to be most likely to be income poor and deprived. They are also most likely to be more dependent on their own earnings.

Second, and related, these low wage earners were often living in unusually complex households. Indeed it may be that they could only manage as low-paid workers because they were living in units with higher earners, or more than one other earner, or sharing household expenses, or not having sole responsibility for mortgages, rents, utility bills and council taxes. The percentage of working age adults in the sample in multi-unit households was 65.6 per cent. In the Family Resources Survey 2013/14 the equivalent percentages was 39.8 per cent. Only 12 per cent of the respondents were single people without children entirely reliant on their net earnings (and any working tax credit that they claimed). Another 8 per cent were lone parents with children who were reliant on their earnings but with the addition of child benefits and tax credits and other benefits that they claimed. In the multi-unit households, in only 17 per cent was the respondent the only employed person.

Third, VLW employees were often working less than full-time and it was the hours supplied as well as the hourly rate that determined their incomes. Just over a quarter of VLW employees were working for less than 16 hours per week and only just over a third of low wage employees were working more than 30 hours per week. Low wage employment is clearly predominantly part-time. However, in terms of working hours preferences, overall just over 30 per cent of the respondents would have liked to work more hours. This preference was much higher within the part-time (less than 30 hours per week) sample. 38.8 per cent of part-time employees report that they would like more hours, compared with 17.9 per cent of the full-time sample.

Four, calculations of VLW rates in the UK assume that pay is complemented by benefits and tax credits to create total income, and assume that people are aware of and claim benefits successfully. We undertook welfare rights assessments of a sub-sample and found 16 per cent of those inspected were identified as having missing entitlement to means-tested benefits and/or tax credits. Of course in-work benefits have been frozen and most low paid workers who are now moving onto universal credit are going to receive lower payments than they would have had under the old system. Low wages may be rising but they are not compensating for the losses in in-work benefits.

It is clear from this study that there are many factors influencing the respondents’ incomes apart from the hourly gross wage rate. The hours worked are important. It is also clear that the low wages being received by respondents are commonly not the main or only determinant of their living standards. Their living standards are also determined by the unit they live in, other unit income and unit needs. For families with children, especially, benefits and tax credits also make a major contribution to their living standards. Child poverty rates are now rising because these benefits are being cut.

Employers seeking to help their employees reach adequate living standards need to pay at least the VLW, but they also need to seek to offer longer hours employment. Employers could help by stitching together part-time roles into more significant employment. Employers could also play a part in ensuring that their employees are claiming all the in-work benefits to which they are entitled.

About the author

Professor Jonathan Bradshaw is Professor of Social Policy at the University of York.  Click here to learn more about his research.




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