Steve Vale, HR Consultant, sets out the background to the Living Wage and the Living Wage Campaign and speculates on its possible impact on the public and local government sectors.

Introduction

Before the last election, David Cameron described the concept of the living wage as a “good and attractive idea”, but the concept has not been a feature of subsequent government policy, and has not been added to the remit of the Low Pay Commission, which recommends the National Minimum Wage. Cue the opposition highlighting the Living Wage Campaign this November, with Ed Miliband describing it as “an idea whose time has come”, with not inconsiderable help from some unexpected bed-fellows. As a result, the Living Wage has attracted much more publicity than previously, and reaction to the idea has been more favourable than might have been expected.

What is the Living Wage?

The Living Wage stems from a campaign launched by London Citizens in 2001. London Citizens is part of Citizens UK, an alliance of local community groups which operates in a number of cities, including Milton Keynes, Nottingham and Birmingham, as well as London. Citizens UK seeks to bring together religious organisations, schools, colleges, universities, trade unions, housing associations, GP surgeries and charities to work for the common good.

It describes itself as being about building power and participation in democracy and winning key victories to improve the lives of disadvantaged communities across the country.

It operates through a number of national and local campaigns, of which the Living Wage Campaign is probably the largest. This campaign is being conducted by the Living Wage Foundation, whose work is mainly funded by the Trust for London, a large independent charitable foundation funding work which tackles poverty and inequality in the capital.

As well as being sponsored by the Trust for London, the Living Wage Foundation is supported by six other well-known partners: Aviva, KPMG, Save the Children, Linklaters, Queen Mary University of London, and the Resolution Foundation.

The Living Wage Campaign itself is a single- issue campaign which describes itself as being about a number — simply described as enough to make sure that workers and their families can live free from poverty. The objective is to seek the commitment of employers to paying a minimum of the living wage to virtually all their employees.

The Foundation itself has three main objectives.

  1. Accreditation — it offers accreditation to employers that pay the Living Wage, or those committed to an agreed timetable of implementation, by awarding the “Living Wage Employer” mark.

  2. Intelligence — it provides advice and support to employers implementing the Living Wage, including best practice guides, case studies from leading employers, model procurement frameworks, and access to specialist legal and HR advice.

  3. Influence — it provides a forum for leading employers to publicly back the Living Wage. It works with Principal Partners to bring financial and strategic support to the work.

The Living Wage Employer mark recognises and celebrates the leadership displayed by employers who have become early adopters of the Living Wage. The accreditation process is simple and is open to employers already paying the Living Wage, or those committed to an agreed timetable of implementation. An accredited Living Wage Employer ensures that all employees are paid at least the Living Wage. This includes individuals who work on a regular basis at their premises for a subcontractor, such as cleaners or security staff (although there may be issues of legality on this point from both a European (procurement) and UK perspective). Accredited Living Wage Employers will be recognised during Living Wage Week and at the annual Living Wage Awards, hosted by KPMG and the Mayor of London. The first annual Living Wage Week was held between 4 and 10 November 2012, and attracted a large amount of publicity.

The Foundation has published a Guide for Employers, which clarifies which workers must be paid the Living Wage before accreditation can be given. As well as an organisation’s own employees, this includes contracted workers who work on the employer’s premises for two or more hours per week, for eight or more consecutive weeks in the year. It does not include apprentices or interns.

How is it derived?

There are two separate strands to the Living Wage, as follows.

  1. The London Living Wage, which is set annually by the Greater London Authority (GLA) and covers all boroughs in greater London.

  2. The UK Living Wage for outside of London, which is set annually by the Centre for Research in Social Policy at Loughborough University.

This, of course, means that it is based on a fairly crude assessment of the labour market, both London and non-London, but there would be nothing to stop employers outside London from paying a level somewhere between the two rates if this was felt to be necessary to meet local market conditions. They would still be able to obtain accreditation from the Foundation as paying the Living Wage.

Both the London and the non-London hourly rates are announced every November. They are calculated by different means.

The Non-London Living Wage

The latest report from Loughborough University on the level of the Living Wage outside London indicates that the level has been calculated first by using the minimum income standard, based on research funded by the Joseph Rowntree foundation. The minimum income standard identifies what items people need for a minimum acceptable standard of living (exclusive of rent, council tax and child care), and then costs these at national chain stores.

It is used to identify income levels required in nine different non-pensioner, single-unit households (ie single adults or couples living with or without dependent children, but nobody else), with up to three children for lone parents and up to four children for couples. Balanced assumptions are made about the age of the children.

Appropriate additions are then made to the income levels in the nine households to reflect average rents (based on both Council and private sector rents), council tax and childcare payments. A wage requirement for each household type is calculated that produces enough income after taxes, benefits and tax credits to cover the expenses specified above. This assumes that families claim everything that they are entitled to.

A single living wage is then calculated by producing a weighted average hourly rate across all nine household types. However, there are two additional adjustments to this average hourly rate, as follows.

  1. The first limits the increase in the net income (after taxes and benefits) requirement for each household on which the living wage calculation is based, relative to the rise in net income that would be achieved by someone on average earnings.

  2. The second limits the increase in the Living Wage itself (representing gross income) relative to the increase in average earnings.

These adjustments are obviously important to the credibility of the Living Wage by linking it to wider developments in the economy and labour market.

Using the above calculations, the unadjusted level of the Living Wage, reflecting actual minimum living costs, would be £8.80 per hour in 2012, but the “applied” Living Wage, resulting from the limitations on the increase, is £7.45 per hour.

There is a large discrepancy between the unadjusted and “applied” figure, but this reflects the fact that the UK is going through an unprecedented period during which wage increases are falling behind living costs and that living costs at the minimum have risen more steeply than general living costs.

The London Living Wage

The latest report to the GLA on the London Living Wage uses a slightly different methodology, calculating it by a combination of two approaches. The first, developed by the Family Budget Unit (FBU), estimates the costs of a “Low Cost but Acceptable” (LCA) budget for a selection of households and calculates the wage required to meet these costs. This is termed the “Basic Living Costs” approach.

The second — the “Income Distribution” approach — simply identifies the median income for London (appropriately weighted for 11 household types) and then takes 60% of it.

The Basic Living Costs approach yields an hourly wage of £7.10 per hour and the Income Distribution approach one of £7.80.

The average of these two wages (called the “poverty threshold wage”) is £7.45 per hour. In order to protect workers against unforeseen events and expenses in their lives, a margin of 15% is added to the poverty threshold wage. This gives a figure of £8.55 per hour (when rounded to the nearest five pence) as the London Living Wage for 2012.

It will be seen that both these methodologies are distinct from the terms of reference and calculations used for the National Minimum Wage, which is set annually by the Government, in response to advice from the Low Pay Commission based on terms of reference set out by the Chancellor.

Who are its advocates?

One of the features of the Living Wage is that it is advocated by a range of individuals from across the political and business spectrum, and support for the concept does not align neatly with more traditional political opinion.

Thus when the new rates were announced in November 2012, their launch featured Ed Miliband on behalf of the Labour Party, as well as Dave Prentis from Unison, but also Boris Johnson and a representative from KPMG.

There is no formal endorsement from the Government, but a number of ministers have made statements which are by no means unfriendly to the idea, including the Work and Pensions Secretary Iain Duncan Smith (who saw it as part of the measures to ensure that work should offer a higher income than benefits).

Both the Work and Pensions Secretary and the Deputy Prime Minister have taken much-publicised action to ensure that contractors in their own departments offer the London Living Wage. In December 2012, the Department for Work and Pensions (DWP) became the first Whitehall department to commit to the London Living Wage. This move will bring 500 cleaners and catering staff currently paid the National Minimum Wage of £6.19 per hour, or just above, on to the London Living Wage of £8.55 per hour. Implementation will be carried out by the facilities management company, TelerealTrillium, and will be complete by April 2014. There is speculation in the press that the Cabinet Office and Ministry of Justice will soon follow suit.

There is, of course, a big difference between such gestures and any policy move to bring the National Minimum Wage closer to, or into line with, the Living Wage. Any such move seems unlikely in the current climate, and would be regarded as unwelcome by many private sector employers (as well as causing problems for public and voluntary sector bodies facing funding reductions). At this stage, therefore, a voluntary approach seems much more likely. A key issue will be the extent to which employers feel that they should consider offering their workers the Living Wage as publicity and support for it continue to grow.

Surveys of public opinion appear to indicate growing popular support for the Living Wage. A poll conducted for the Observer newspaper by Opinium in mid-December asked people if they would be prepared to pay more for goods if they knew the company producing them paid a living wage of £7.45 per hour across the UK, and £8.55 in London. Forty seven per cent said they would probably or definitely be prepared to do so, while 37% said they probably or definitely would not. Sixteen per cent were undecided.

It is interesting to speculate what the response to the question would have been if it had asked whether respondents were willing to pay higher income or council tax to support the Living Wage. However, it is true to say that press and public reaction to the idea of the living wage has been surprisingly favourable. Press reaction has been much less hostile that it was, initially, to the prospect of the national minimum wage.

So far as signing up for living wage accreditation is concerned, the most prominent local authority has been the Greater London Authority (GLA), with the Mayor stating that: “Paying the London Living Wage is the right thing to do — it can make all the difference for low-income families. But it also makes sound business sense. There is increasing evidence that organisations that pay the Living Wage experience lower staff turnover and higher staff morale, health and productivity, as well as being seen as good places to work and acquiring reputational benefits.”

Birmingham City Council (the country’s largest local authority employer) and the London Boroughs of Camden, Hounslow, Islington, Lambeth, Lewisham, and Southwark are also accredited, as are Oxford, and Preston Councils. A number of local authorities, both within and outside London, have also made a policy commitment to work towards this objective.

What would its impact be?

The Living Wage Campaign’s website assembles an array of evidence aimed at demonstrating that paying the Living Wage is an investment that makes sound business sense.

It points to studies by the Greater London Authority and Queen Mary, University of London, that found clear evidence that employers have benefited across a wide range of areas after implementing the Living Wage.

The most significant impacts noted were improved recruitment and retention, higher worker morale, motivation and productivity, in addition to the reputational benefits of being an ethical employer. Living Wage employers report improved morale, lower turn-over of staff, reduced absenteeism, increased productivity and improved customer service.

Good for business

An independent study of employers in London found that more than 80% believe that the Living Wage had enhanced the quality of the work of their staff, while absenteeism had fallen by approximately 25%. Sixty-six per cent of employers reported a significant impact on recruitment and retention within their organisation. Seventy per cent felt that the Living Wage had increased consumer awareness of their organisation’s commitment to be an ethical employer.

Following the adoption of the Living Wage, PwC found turnover of contractors fell from 4% to 1%.

Good for the individual

The Living Wage affords people the opportunity to provide for themselves and their families. Seventy five per cent of employees reported increases in their work quality as a result of receiving the Living Wage. Fifty per cent of employees felt it made them more willing to implement changes in their working practices; enabled them to require fewer concessions to effect change; and made them more likely to adopt changes more quickly.

Good for society

The causes of poverty are complex and in order to improve lives there should be a package of solutions across policy areas. The Living Wage can be part of the solution. Over 45,000 families have been lifted out of working poverty as a direct result of the Living Wage.

The latter point raises another issue in relation to the relationship between the Living Wage and the global cost of in-work benefits. Widespread payment of the Living Wage must, perforce, reduce the latter. Arguably, so far as the private sector is concerned, this would operate to remove a distortion in the UK economy, whereby the state effectively subsidises employers who offer low wages.

The public sector picture is more complex. The key question would be how far the increase in the public sector wage bill from universal payment of the Living Wage would reduce the cost of in-work benefits paid to public sector employees. It is not clear at this stage whether any analysis or study of this issue has been undertaken or commissioned. The distribution of the costs and benefits across government would also be complicated — eg the universal payment of the living wage across local government would increase costs for the Department for Communities and Local Government (DCLG), but the savings in benefits would mainly accrue to the DWP.

A further area where the payment of the Living Wage could have a substantial impact is on the gender pay gap. We know that female employees predominate in low-paid jobs, especially low-paid part-time jobs, and that this is a major factor in the overall gender pay gap remaining stubbornly high in the UK economy. Implementation of the living wage could serve only to reduce the gap, although, again, more research is needed on the extent of the likely reduction, to permit proper cost-benefit analysis.

The gender pay gap issue can, however, be assessed and analysed within particular sectors or even for individual employers. Thus, in local government, while the gender pay gap is smaller than in the economy as a whole, females remain predominant at the lower-paid end of the spectrum — in National Joint Council (NJC) terms (outside London) spinal column points (scps) 4–10 are below the living wage threshold for a 37-hour week. For most councils, increasing the pay of employees at this level to the Living Wage could only act to reduce the gender pay gap, and it is a fairly simple task to calculate the extent of the reduction in comparison to the cost for a single local authority employer.

How might it affect the public and local government sectors?

The problem for many public sector organisations is that, whatever the benefits, they simply cannot contemplate paying the Living Wage in the current climate because of the immediate financial implications and the potential impact on service levels.

So far as local government is concerned, the impact of any country-wide implementation of the Living Wage would be very different for different councils. Some councils (especially in the South East) may have hardly any employees on scps 4–10 (or equivalent) so that the impact would probably be very minimal. In others, however, the costs would be substantial, and the abolition of scps 4–10 would also require restructuring of pay and grading systems to ensure that desirable differentials were maintained.

With this background, the status quo in local government would appear to have much to commend it, since it gives the flexibility for those authorities who wish to pay the Living Wage to implement wage structures which do so, without compelling the others. (It should not be forgotten that all employers are bound by the National Minimum Wage in any case).

As well as their own staff, there is the issue of pay rates offered by contractors working for local government, and another set of very complex issues could arise if there was an attempt to ensure that all contractors offered the Living Wage (and thereby achieve living wage accreditation). Some authorities may lack the resources (or the political will) to tackle these.

But there may be a view that says that, if Birmingham City Council and a number of London Boroughs can manage it, why can’t the rest of local government deliver?

A more immediate concern is perhaps the impact of the current debate about, and interest in, the living wage on pay negotiations in the public sector (where these still take place), and particularly the forthcoming local government negotiations. This impact is likely to be sharpest on the perennial issue about the bottom-loading of any pay award — something to which employers have been traditionally resistant, but which has become a key part of the trade union drive against what they see as low pay in local government, including in comparison with comparative rates in other parts of the public sector such as the NHS.

The prominent debate around the Living Wage, and its advocacy in some unlikely quarters, will, combined with other factors, give the trade unions stronger arguments than usual for bottom-loading (which could take the form of a higher percentage increase on the lower points in the national pay spine or, at its most extreme, the abolition of scps 4–10 (or some of these), with a new minimum of scp 11 or other lower threshold). These arguments are as follows.

  • The hourly-rate (non-London) living wage produces an annual salary for a 37-hour week of £14,300, which means that the salaries currently associated with scps 4–10 are below the living wage threshold.

  • Even if a flat 1% increase is made to all scps (and a 1% increase is probably what most council employers envisage), scps 4–10 will still be below the living wage.

  • By contrast with the national pay spine for local government, the lowest pay rate in the National Health Service (under the Agenda for Change pay scales) is currently £14,153, which is much more in line with the Living Wage than the lowest NJC pay point (currently £12,145).

  • Unlike other parts of the public sector, the National Joint Council for Local Government Services did not pay the £250 per annum increase to public sector employees earning less than £21,000 per annum which was announced by the Chancellor as part of the 2010 budget (the so-called “Osborne 250”).

The battle lines are likely to be drawn between the employers saying paying the Living Wage is a matter to be decided at individual council level and the trade unions seeking national pay arrangements that would force every council to pay it. The expectation is probably that the employers would not concede, but, if the trade unions were willing to play ball on other parts of the employers’ agenda (ie changes to terms and conditions), they might be tempted towards agreement of some degree of bottom-loading, given that this would bring the lowest scps closer to the Living Wage concept, which is being viewed in a relatively favourable light at the moment.

Conclusion

The Living Wage Campaign has attracted considerable interest in the last two months, and chimes in with a number of political issues of the day, including the review of benefits and the gender pay gap issue.

However, behind the favourable reaction to the idea lie numerous practical problems, not the least of which is a question of affordability across the public sector in the age of austerity. Most of the favourable publicity revolves around voluntary decisions by particular organisations to adopt the Living Wage as part of their business strategy. The reaction by government and employers in all sectors to any proposed compulsion to pay the Living Wage (either by increasing the National Minimum Wage or through some other means) is likely to be very different, and it is unlikely that there will be any legislative change to implement the Living Wage .

The more likely impact of the campaign (if the current momentum can be sustained) is likely to be a gradual increase in the lowest pay rates in relation to median earnings elsewhere. The immediate issue for local government is whether this process plays out through the national pay settlements, or simply through more and more councils agreeing to implement the living wage (or minimum pay levels closer to it) in their own pay structures on a voluntary basis.

More information is available from The Living Wage Foundation website.

Author

Steve Vale is a Consultant in Human Resources and is a regular contributor to Croner-i HR for Local Government — the online employment law and practice reference source designed specifically for HR Managers and their teams in local government.

Last reviewed 8 January 2013