8 Jul 2015

National living wage: will it be enough to live on?

George Osborne produces a budget surprise with his announcement that a compulsory national living wage will be introduced. But it will be lower than the voluntary living wage that already exists.

The chancellor said “Britain deserves a pay rise” and that a compulsory national living wage of £7.20 an hour will be introduced for the over-25s in April 2016, rising to £9 by 2020.

He said six million people will see their pay increase as a result, with those currently on the minimum wage £5,000 better off by 2020.

The £7.20 rate compares favourably with the national minimum wage of £6.50 an hour, but it is lower than the voluntary living wage – set independently for the Living Wage Foundation and based on the cost of living – that is paid by many companies in the UK at the moment.

The rate is £7.85 an hour (£9.15 in London), but 5.2 million workers in the UK are paid less than this.

‘Living wage in name only’

Dr Mary Bousted, general secretary of the Association of Teachers and Lecturers, said: “The new national living wage is a living wage in name only. Low paid workers will welcome a rise, but will not be fooled by the fact Osborne’s hourly rate by 2020 does not compare well with today’s independently set living wage.”

The accountants KPMG have calculated that raising the minimum wage to the same level as the voluntary living wage (a bigger move than Mr Osborne is planning) would lift six million people out of poverty and boost the public finances by £1.5bn.

Under the chancellor’s scheme, the Low Pay Commission, which recommends yearly increases to the minimum wage, will also be responsible for rises in the national living wage.

Rhys Moore, director of the Living Wage Foundation, said he was “delighted” by Mr Osborne’s announcement. But he added: “Is this really a living wage? The living wage is calculated according to the cost of living, whereas the Low Pay Commission calculates a rate according to what the market can bear.

“Without a change of remit for the Low Pay Commission, this is effectively a higher national minimum wage and not a living wage.”

Mr Moore said another concern was that tax changes in the budget could mean the national living wage would need to be higher “to make sure people have enough”.

‘Not enough for a family’

Labour’s interim leader Harriet Harman said: “What (Tory) MPs clearly haven’t worked out is even with the higher national living wage, it will not be enough for a family to live on because of the cuts in tax credits.”

The Resolution Foundation think tank said it welcomed the introduction of a compulsory national living wage, which would mean “a significant pay rise for around 2.7m low-paid workers, many of whose wages are still below the level they were at in 2008”

But it said the current living wage would have to rise “to a significantly higher level in the absence of in-work support”, adding: “Even without taking account of today’s cuts to in-work support, RF estimates that the current national living wage would rise to £10 by 2020.”

The chancellor said the Low Pay Commission will recommend future rises that “achieve the government’s objective of reaching 60 per cent of median earnings by 2020” – the generally accepted benchmark for defining low pay.

This means the compulsory national living wage will be more generous than the minimum wage, but lower than the voluntary living wage. Whether it will be enough to live on depends on individual circumstances: how many people in a household work, whether they have children, their housing costs etc.

Mr Osborne said employers will be compensated for the rise in their wage bills by cuts in corporation tax. Most business organisations reacted warily, but Terry Scuoler, chief executive of the Engineering Employers’ Federation, said he supported “the principle of establishing a new national living wage”.

‘Big gamble’

The CBI said a rise to £7.20 an hour was a 7 per cent increase. Director General John Cridland said the government was taking a “big gamble” and that “legislating for a living wage does not reflect businesses’ ability to pay”.

John Allen, national chairman of the Federation of Small Businesses, said: “Even though offset by a welcome increase in the employment allowance, some will find the new national living wage challenging.”

Mark Beatson, chief economist of the Chartered Institute for Personnel and Development, warned that without increased productivity, there was a danger of “significant job losses”.