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Why a living wage beats tax cuts for Britain’s low-paid workers

At IPPR we’re proud to be an accredited living wage employer. Back in 2005, one of our members of staff got involved with the London Citizens campaign for a living wage and lobbied for IPPR to sign up, which we did with alacrity. Since then, all of our employees, interns and contractors have been paid at least the London living wage or the UK rate if they are employed at IPPR North (the new rates are £8.55 and £7.45 an hour respectively). We were one of the first voluntary sector organisations to pay the living wage.

The living wage is now spreading fast across Labour local authorities, higher education institutions and some big businesses. Indeed, if press coverage was anything to go by, the struggle for a living wage would have been won by now. Yet despite a number of high-profile successes, relatively few workers have secured a higher wage as a result of a living wage campaign.

In London in 2010, an estimated 652,000 workers were earning less than the London living wage, yet only around 10,000 workers won a living wage in the six years between 2005 and 2011. The number of accredited living wage employers – primarily high-profile financial and legal firms, including prominent names such as KPMG and Barclays, and public sector bodies – remains small. Aside from a handful of notable exceptions (such as the cosmetics retailer Lush) relatively few companies in retail, food service or the travel and tourism sectors, which account for the bulk of low-wage jobs, have become living wage employers.

My view is that if IPPR can afford to the pay the living wage, plenty of others can too. Our own research, undertaken with the Resolution Foundation, has found that for FTSE-listed firms in banking, construction, software and computing, and food production, average wage bill increases as a result of implementing a living wage are small (around 1.0 per cent or less). For listed firms in these sectors there is, therefore, a strong case for implementing a living wage as a matter of course.

Our estimates also make clear that a living wage will be more challenging, but not impossible, for listed firms in the major low-wage sectors where average wage bill increases are significant (between 4.7 and 6.2 per cent). In these firms, incremental steps are needed; indeed, being sensitive to employment effects in the different sectors is one reason why campaigning for a living wage is not the same as calling for a higher national minimum wage. (Moreover, organisations like London Citizens aim to build broad social movements that campaign for change, not legislation per se.)

In response to the calls for wider adoption of the living wage, some organisations (such as the Adam Smith Institute) and politicians have argued that the best thing to do is to lift the low-paid out of tax. They argue that a better approach would be simply to increase the personal tax allowance so that those on the minimum wage pay low or no tax, such that they effectively take home a living wage. But this is wrong and muddled.

First of all, IPPR analysis has shown that increasing the personal tax allowance to £12,500 – such that no one working full-time on the minimum wage was required to pay income tax – would cost £24 billion in lost revenue. In today’s fiscal climate, this is totally unrealistic (without further massive, unidentified cuts in public services). And it would be very poorly targeted, with two-thirds of the financial gain going to households in the top half of the income distribution. Furthermore, a tax-cutting strategy also weakens the UK’s already precarious tax base and totally ignores the underlying drivers of low pay, including the falling share of GDP going to workers (especially those at the lower end of company pay scales).

The campaign for a living wage rests on a moral claim that people should not be treated as commodities. The CEO of a firm should be able to look their cleaners in the eye and justify the amount they are paying them for their work. In the coming months the IPPR and the Resolution Foundation will be publishing further analysis and ideas on how the energy of the living wage campaign can be harnessed even more effectively to tackle the scandal of low pay.

Ed Miliband is right and brave to say that inequality can no longer be addressed through ever-greater redistribution. But the right must face their own truth: it won’t be tackled by tax cuts either.

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3 Responses to Why a living wage beats tax cuts for Britain’s low-paid workers

  1. Tim Worstall says:

    “Furthermore, a tax-cutting strategy also weakens the UK’s already precarious tax base and totally ignores the underlying drivers of low pay, including the falling share of GDP going to workers (especially those at the lower end of company pay scales).”

    That is, of course, a hugely enjoyable argument.

    For the falling wages component of the labour share of income is due to rises in employers NI. Tax rises that is. And the falling labour share of income is offset by the rise in VAT in the taxes minus subsidies part. A rise in taxes that is.

    So, the falling share of wages in GDP is because of rising taxes in GDP. And you then suggest that cutting taxes is a bad idea because wages are falling as a percentage of GDP?

    Most, most amusing.

    Do come back to us when you can count to five without taking your mittens off.

    • “For the falling wages component of the labour share of income is due to rises in employers NI.”

      Your entire argument is circular, since you did not prove this assertion.

      You should remember to take your mittens off before you start typing.

  2. sadbutmadlad says:

    So raising the tax threshold to £12K would cost £24b. That’s quite a bit considering that the total tax receipts for income tax and NI is around £255b. Would 10% really be lost just due to raising the limit a bit from £8k to £12k? Seriously? Sounds like you’ve worked out one side but not the other side of the equation. How much would be saved by not having to pay out tax credits, not having to pay civil servants to move money around. How much better would the economy be with people using the extra money on stuff in the local economy rather than taken from their hands and spent keeping diversity officers employed.