Setting the Living Wage: a Q&A

It’s Living Wage Week and the Mayor of London and the Living Wage Foundation have announced new Living Wage rates for 2015. But while there is lots of discussion about the benefits of paying the Living Wage, less attention is paid to how it is calculated and what it represents. In particular, there are inconsistencies between how the London Living Wage rate and the Living Wage rate for the rest of the UK are calculated.

What is the Living Wage?

It’s an unofficial hourly rate of pay based on what people need to afford a basic standard of living. The Greater London Authority calculates a London rate, and academics at Loughborough University calculate a rate for the rest of the UK based on an assessment of family’s minimum needs.

I remember – the Chancellor announced this at the 2015 Summer Budget, right?

No! He announced something called the “National Living Wage”, which is essentially a higher minimum wage for people aged 25 and over. It’s not related to living costs, unlike the Living Wage.

Oh. So how much is the Living Wage worth?

The 2015 rates are £9.40 per hour in London and £8.25 per hour for the rest of the UK. That’s up from £9.15 in London and £7.80 in the rest of the UK last year.

Why are there two rates?

It’s partly because to begin with, there was only a London rate. The London Living Wage has been calculated by the Greater London Authority since 2005, while the out of London rate has only been calculated since 2011.

Living costs tend to be higher in London than in the rest of the UK, so from that point of view it makes sense to have two rates. However, the London and out-of-London rates aren’t calculated in the same way, so don’t interpret the difference in rates as some measure of difference in living costs.

You had better explain….

There are some key differences in how the two rates are calculated. Let’s start with the London rate. The original 2005 London Living Wage report defined a “low cost but acceptable” standard of living. The first step is to calculate what hourly earnings you need to meet this standard of living in 2015 (£7.80).

Secondly, look at it from a different angle: calculate the wage necessary to be above a London poverty line (60% of median household income in London) – that works out at £8.60.

Take an average of these two figures, add on 15% so families can deal with any unforeseen circumstances, and you get the London Living Wage (£9.40). Still with me?

Just about, although taking an average and adding 15% seems a bit arbitrary. What about the out-of-London rate?

This time, we take the basic standard of living defined in the Minimum Income Standards project (funded by the Joseph Rowntree Foundation), “covering essential needs and allowing household members to participate in society.” This is based on consultation with members of the public as well as some expert input. To meet the 2015 standard, you need an hourly wage of £9.31. That’s up from £7.20 in 2011.

However, since 2011 the annual increase in the out-of-London rate has been capped at the increase in average earnings plus 2%, to make it more manageable for employers. This cap has been applied in every year since 2011 – so by 2015, the rate has risen no higher than £8.25.

So if we hadn’t added on 15% to the London rate, it would be lower than the out-of-London rate?!

Yes, although that doesn’t mean it’s cheaper to live in London. It all boils down to the question, what counts as a basic standard of living in the UK? The “low cost but acceptable” standard of living used in the London calculation is more basic than the standard of living deemed acceptable for the out-of-London calculation.

Whatever standard you use, it’s still only an hourly rate. If I only work a few hours a week I’ll still be poor.

Which shows that the Living Wage can’t solve the problem of poverty on its own. Hours worked matter: research by the New Policy Institute for the Joseph Rowntree Foundation estimated that between 2008/09 and 2010/11, two-fifths of adults in working families and in poverty were in families where the earner was paid over the living wage.  The calculations for the out-of-London rate assume all adults in the family are able to work full-time, but the London rate does factor in that some people will be working part-time.

Picture Credit: The Daily Shoot #ds674 – The idea of connection by Rowan Peter, Creative Commons Attribution 2.0 Generic (CC by 2.0)