First thoughts on the ‘National Living Wage’ | CPAG

First thoughts on the ‘National Living Wage’

Published on: 
08 July 2015
Written by: 

Moussa Haddad
Former senior policy and research officer

A substantial increase in the National Minimum Wage for over-25s (or National Living Wage, as Osborne’s re-badging has it) can only be a good thing for low-paid workers. It should be celebrated. That much, at least, is clear.

Clear enough, too, is that, while giving away (employers’) money with one hand, the Chancellor took plenty from low earners, and parents in particular, with the other. The four year freeze in working age benefits is a big reduction, and will compound real-terms cuts in the previous Parliament. (The rationale – keeping parity with earnings growth – is spurious, since unemployment benefit at the start of the financial crisis was half what it would have been had it grown with earnings since 1980.) It amounts to £4 billion worth of cuts a year by 2020. Income-replacement benefits will be significantly lower by then than forty years previously – in a far wealthier society. 

Perhaps most pernicious of all is that the freeze includes the local housing allowance on which housing benefit entitlement is based. Action on social sector rents will help families, but short of measures to dampen the housing market – and the signs remain that the government will continue to do the opposite – the increasing proportion in the private rental sector will see a widening shortfall between housing costs and housing support. That will have to be met from dwindling other sources of income. Add in a tightening benefit cap, and, for those who are unable to work in particular, things will get far harder.

Other reductions target children in particular. Children in large families, already at higher risk of poverty, will be hurt badly by restrictions in child tax credit (CTC) awards to two children. Cuts to tax credit awards – such as the removal of the family element of CTC, the reduction in income thresholds, and the increase in the tax credits taper rate – will directly take substantial sums of money out of the pockets of parents. Meanwhile, more than half those savings – £2.5 billion a year – go straight into increasing the personal tax allowance – no help to the 43% of adults who don’t pay tax – and raising the higher rate and inheritance tax thresholds, benefiting the richest 9% and 6% respectively.

To return to the increased minimum wage, it is worth noting that it differs from a true living wage in a couple of important respects. First, the living wage is calculated with respect to the cost of achieving a basic minimum living standard. Pegging the minimum wage to median income is valuable in other respects, but that does not make it a living wage. Second, the living wage assumes full take-up of tax credits and other benefits. Cuts to tax credits will therefore increase the wage level needed to meet those minimum costs. It has been estimated that in-work support reduces the London Living Wage by £2.50 an hour.

More fundamentally, welcome as higher wages undoubtedly are, they are not and can never be a full substitute for state support. Different households face different costs. The largest geographical variation in the UK is in housing costs – the biggest single driver in the higher London Living Wage rate (£9.15 compared with £7.85 outside London in 2014). Costs of disability are (to some extent) accounted for through benefits like the personal independence payment. At CPAG, we have long pointed out the extra costs faced by families with children, one which we now quantify annually – the cost from 0-18 being £153,679 in 2014.

No single wage level can ever account for such wide variance. And, children being a social good rather than a private luxury, society has long understood the case for investing in family benefits, smoothing incomes over the life cycle by providing support when parents’ costs are highest and earning potential reduced. The evidence we have shows that most gains from tax credits go to workers not to employers – but, even were the case for the government’s ‘welfare merry-go-round’ proven, that would not negate the other important roles they play. Indeed, many of those benefiting from an increased minimum wage will be second earners in relatively wealthy households who weren’t eligible for tax credits in the first place.

We and others will be crunching the numbers over the next few days, but it seems clear that, for many – and for parents especially – the cuts to benefits will outweigh increases to wages.  Just as in the last Parliament, social security cuts weren’t about deficit reduction, but about redistributing from the poor to the rich, so the Chancellor has chosen his priorities today. Welcome, and overdue, as a wage increase for low earners is, it cannot disguise the fact that, for this government, children have fallen to the bottom of the list.