Tuesday, 14 July 2015

Need for clarity on the living wage and family benefits

Note:  This article gives the views of the author, and not the position of the Social Policy Research Unit, nor of the University of York.

Jonathan Bradshaw writes:

When Eleanor Rathbone[1]campaigned for a family endowment in the 1920s her main argument was that a working class wage was not enough to keep a man and his wife and children above the poverty level. They needed a family allowance to close the gap. The Beveridge[2]report accepted this argument and family allowances were introduced into UK social security by the Tory government in 1945 - according the Macnicol[3]in order to hold down wage demands in the post-war era. Family allowances, after a long and torrid history, have now become child benefit and child tax credit. Every rich country has a similar package of cash transfers that seek to recognise the extra costs of children[4].

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The child transfers in the UK were never adequate to meet the needs of low paid families with children. When budget standards began to be produced in the late 1980s[5]it became clear that the biggest shortfall between net income and a minimum budget standard was for families with children. The minimum wage from 1998 closed some of the gap. Then the increases in child benefits and the introduction of child tax credits closed more. Child poverty began to fall. But there was still a shortfall. The latest poverty statistics show that two-thirds of children in poverty are living in low paid working households.

The London Living Wage was founded on the basis of this budget standards work. After the first Minimum Income Standard (MIS)[6]was produced in 2008 it was taken up by campaigners as the basis of the first UK-wide Living Wage.  Initially, in 2009, a figure of £7.14 an hour was set to cover fully the needs of most household types, including the following with very similar wage requirements:
Single person: £7.09
Couple with two children both working: £7.14
Lone parent with one child: £6.79

The key feature of the living wage is that the level was based on the net earnings and child cash benefits that would meet the MIS. In 2009 the child transfer system was doing a good job in creating a similar living wage for different family types.

This is no longer the case. The latest MIS for 2015 requires: 
Single person: £8.75,
Couple with two children: £10.24,
Lone parent with two children:  £13.67
if a family is to meet the MIS standard. These different levels are the result of changes in commodity prices, family cash benefits, direct taxes and the specifications of what is required as a minimum since 2008. The most important cause of the divergence, even before the recent Budget, has been cuts in in-work benefits.

The Living Wage is to be revised in November 2015 based on these latest MIS estimates. It is currently £7.85 outside London.

Now in the Summer Budget the Chancellor has announced that he will raise the minimum wage for over 25s to £7.20 per hour in April 2016 and to the equivalent of 60% of median earnings or currently £9 per hour in 2020.  In some ways this is a fantastic achievement for the Living Wage Foundation and the research on budget standards showing that the present minimum wage is not enough. It is a big increase on the minimum wage which will be £6.70 per hour from October 2015. No campaigner on low wages would have predicted that a Conservative Chancellor would do this.

But of course that is not the end of the story. Badged as a national living wage it is undermined by the associated cuts in child tax credits. The so called national living wage will give single people a lot of help towards reaching a decent living standard, which the national minimum wage fails to achieve. However, most low paid families with children will be much worse off. Most of their national living wage increase will be clawed back in higher tax and national insurance liabilities, a tapering in tax credit support, cuts in the rates and thresholds of child tax credits and frozen child benefit. Child poverty rates will increase for low paid families.

What is needed here is greater clarity. First, clarity that the national living wage is not a living wage, but an enhanced minimum wage. Greater clarity about how the living wage is calculated would also help. Perhaps it is time for the living wage campaign to fix the living wage on the basis of the MIS for a single person and return to the idea of the family endowment on top of that. The living wage should be the responsibility of employers and the family endowment, the investment in children, a responsibility of all taxpayers through state transfers.

[1] Rathbone, E. (1924) The disinherited family, Arnold: London
[2] Beveridge Report (1942) Social insurance and allied services, Cmd 6404, HMSO: London
[3] Macnicol, J. (1980) The movement for family allowances 1918-1945, Heinemann: London
[4] Van Mechelen, N. and Bradshaw, J. (2013) Child benefit packages for working families, 1992-2009 Marx I. & K. Nelson (eds.) Minimum Income Protection in Flux. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan 81-107
[5] Bradshaw, J. (ed) (1993) Budget Standards for the United Kingdom, Studies in Cash & Care, Avebury: Aldershot
[6] Bradshaw, J., Middleton, S., Davis, A., Oldfield, N., Smith, N., Cusworth, L., and Williams, J. (2008) A minimum income standard for Britain: What people think, York:  Joseph Rowntree Foundation