Paying a Living Wage could save the UK billions

Introducing the living wage across the UK would save the Treasury just over £2 billion a year, a new study will reveal.

The analysis from the Resolution Foundation and the IPPR think tanks to be published early in the New Year is the most detailed examination yet of the potential impact of the living wage on the public finances. The living wage is a pay level calculated as the minimum hourly rate for a basic but acceptable standard of living and currently set at £7.45 outside London and £8.55 in the capital.

The new analysis suggests that its introduction nationally would add around £6.5 billion to the gross annual earnings of the country’s employees.

However, the report shows that the Treasury would collect more than half of the initial financial gains from a living wage – around £3.6 billion –  in the form of higher income tax payments and national insurance contributions, as well as lower spending on benefits and tax credits.

But the study also examines the extra costs to the public purse of paying a living wage to all public sector workers. It suggests that wage costs would increase by more than £1.3 billion – leaving an overall public saving of more than £2 billion.

The report will also look at the possible effects of a living wage on labour demand, recognising that the lower national minimum wage (currently £6.19) is set by the Low Pay Commission to avoid risking jobs and that an immediate shift to a universal living wage across all sectors may not be feasible.

As a start, the report will recommend, all Whitehall departments and London boroughs should pay their staff at least the living wage by April 2015 and explore the costs of paying sub-contracted staff the same rate.  The London weighting means that most public sector workers already earn at or above the London living wage, so introducing the living wage for all staff would cost relatively little in the capital but would set a precedent for others to consider following. Only six London boroughs currently are accredited living wage employers -Lewisham, Islington, Camden, Lambeth, Hounslow, and Southwark.

Five million people are paid less than the living wage, three million of whom are women. Yet more than 85 per cent have permanent contracts. More than 3 million households (13 per cent) contain at least one adult earning less than the living wage. Fewer than 45,000 workers have achieved a living wage as a result of recent campaigns.

The report builds on research previously published by Resolution Foundation and IPPR which showed that the cost of paying a living wage would add less than one per cent to the wage bills of firms in sectors such as construction, food production and banking.

Kayte Lawton, Senior Research Fellow at the IPPR, said:

“At a time when typical wages have flatlined but prices have continued rising, concerted action to drive up levels of pay for low earners is an essential component in the improvement of living standards. As a first step, making sure that all council staff in London are paid at least the living wage wouldn’t cost very much but would be an important symbol of political leadership. Councils in other parts of the country, like Glasgow and Newcastle, have shown that the living wage can be affordable even though the costs are higher.”

Matthew Pennycook, Senior Analyst at the Resolution Foundation, said: “There are significant overall public savings to be made from paying a living wage, on top of the beneficial effects it would have on reducing working poverty.  Public-sector employers are well-placed to expand the living wage and to set an example which the private sector can follow.”

Workers earning less than a living wage across the country:

32% in the North East (375,000 people)

31% in Yorkshire and Humber (714,000 people)

31% in Wales (344,000 people)

30% in the West Midlands (617,000 people)

28% in the East Midlands (552,000 people)

27% in Scotland (623,000 people)

27% in the South West (583,000 people)

25% in the North West (683,000 people)

24% in the East of England (593,000 people)

23% in the South East (843,000 people)

20% in London (581,000 people)

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