Howard Reed of Landman Economics crunches the numbers on the living wage, concluding that every low-paid worker moved on to the living wage would save the government an average of £232 in lower social security spending and £445 in higher tax receipts.

As Living Wage Week kicks off, there is much discussion about the cost of low pay. Today there are over 5 million people - and nearly a third of all female employees - who are low-paid. People used to be poor because they couldn't find work - but studies show that the majority of working-age people living below the poverty line are now in working households, and that two-thirds of all children living in poverty are part of working families.

New figures released by Landman Economics today (see table below) show that tackling low pay is also key to addressing the long-term drivers of rising social security bills. The government spends more on benefits and tax credits for families in work than it does on unemployed families. Our new calculations show that the cost to the exchequer of workers paid less than a living wage is now £3.23 billion in social security spending and lower tax receipts.

The research shows that if low-paid employees were moved on to a living wage, their gross annual pay would rise by an average of £1,376. If every low-paid worker was moved on to a living wage, the government would save on average £232 in lower social security spending and £445 in higher tax receipts. For every extra pound employers pay up to the living wage, the government saves 49p on lower tax credits and benefits and higher tax revenues.

A new study of existing living wage employers suggests that, on average, 48 directly employed workers see their pay increase as a result of each new living wage agreement. This suggests that the average new living wage employer saves the exchequer about £32,000 in higher taxes and reduced welfare spending. The process for living wage accreditation requires firms to pay their contracted workers a living wage as well as direct employees, with an estimated 16 additional workers benefitting from every new living wage agreement - with yet more savings to the exchequer.

Efforts to boost wages are not just good for the government and employees - they also benefit the wider economy, as people have more money to buy the goods and services businesses are selling. Tackling low pay and stagnating wages should be central to building a new economy in which the gains from growth are more fairly shared.

Living wage calculations
Number of employees currently paid below living wage in UK4.79m*
In aggregate:
Gross increase in wage bill from paying living wage£6.59bn
Of which:?bn
Increased take home pay4.01
Increased income tax receipts0.92
Increased employee NICs0.56
Reduced means-tested benefit payments0.28
Reduced tax credit payments0.83
Total improvement in government fiscal position:?bn
Increased tax receipts and reduced benefit payments above2.58
Increased employer NICs0.65
Per employee:
Average increase in employee wages (gross)£1,376
Average increase in employee disposable income£837
Average increased tax/reduced benefits per employee£676
Of which:
Income tax£192
Employee NICs£117
Employer NICs£136
Reduced benefits and tax credits£232


*Based on the latest data available, from Whittaker M and Hurrell A (2013) Low Pay Britain, London: Resolution Foundation

The figures are based on new calculations produced by the IPPR/Landman Economics tax benefit model and are based on research originally commissioned by the TUC in summer 2013. Running on data from the 2010/11 Family Resources Survey (FRS), the model calculates tax payments and benefit and tax credit receipts for families in the survey using the current tax and benefit system (April 2013), and the reported wages of people in work in the survey (uprated to 2013 price levels). The model then identifies people paid below the current living wage (£8.55 in London and £7.45 elsewhere) and moves their wage up to the living wage rate.

There is a problem with the FRS hourly wage measure because the measure of weekly earnings and the measure of number of hours worked per week are not always based on the same week, due to the way the interview questions are asked. This results in measurement error in the hourly wage measure, meaning that the FRS overestimates the number of people below the living wage. To correct for this, the analysis 'scales down' the estimated exchequer savings from the FRS so that the estimated number of people below the living wage corresponds with the estimate of Whittaker and Hurrell (4.8 million employees below living wage).