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].

Read more .....

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.

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[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

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].

Read more .....

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

The non-uprating of child benefits - impact on poverty gaps

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 and Lindsay Judge write in an article for the North East Child Poverty Commission Blog:

Objectives

This note attempts to illustrate the impact that uprating benefits in line with prices since 2010 would have had on the poverty gap of a low wage family in 2014/15.

Method

It is based on the tax/benefit model developed and maintained by Professor Steve Wilcox and mainly used for the annual UK Housing Review. The model simulates the net disposable income of different family types using different earnings levels, given the existing tax and benefit rules. In this note we have taken one family type – a couple with two children, with one earner, working a range of hours on the minimum wage (from October 2014 £6.50 per hour), the living wage (outside London) as at October 2014 (£7.85 per hour) and £10 per hour. The net disposable income after direct taxes, net rent and net council tax are deducted,  is compared with the after housing costs poverty threshold for a couple plus two children in 2012/13 £364 per week. We do not yet know what the poverty threshold is for 2013/14 or 2014/15. It is unlikely to be very different given what has been happening to benefits and earnings over that period.

A number of assumptions are included in the model:

• Rent= £120 per week.
• Council Tax=£28.95 per week. Council Tax Benefit is assumed to be calculated on the basis of the old national scheme3.
• The 30 hours bonus for Working Tax Credit and Housing Benefit is included after 30 hours.

Base line results

Figure 1 shows the results for the minimum wage case working between 24 and 45 hours per week. The red horizontal line is the poverty threshold. The items below the zero line are deduction from earnings including income tax and national insurance contributions, rent net of housing benefit and council tax net of council tax benefit. Then above the zero line are earnings net of these deductions, child benefit, child tax credit and working tax credit. The poverty gap is the gap between the top of the bars and the poverty threshold. Even working 40 hours per week this family is £25 short of the poverty threshold.

Figure 1: Minimum wage case

The Living Wage and the £10 per hour cases are presented in Figures 2 and 3. It can be seen that in neither case does the net income reach the poverty threshold. The increase in earnings is offset by losses of means-tested benefits and tax credits and extra income tax and national insurance contributions. At 40 hours per week the poverty gaps are £23.23 for the Living Wage case and £19.64 for the £10 per hour case.

The numbers for these and all the figures are given in the appendix.

Figure 2: Living wage case

Figure 3: £10 per hour case

Simulating inflation uprating

CPAG4 has made estimates of what child benefit and child tax credit would have been if they had been uprated since 2010 in line with the RPI and the CPI and in the case of child tax credit if the Chancellor had not reneged on his promise in 2010 to uprate child tax credit by more than inflation. These estimates have been used to adjust child benefit upwards by 13% and child tax credits upwards by 8.5%. Working tax credit has also been uprated by 9.5%5 in Figure 4. The net income is still below the poverty threshold but the poverty gap has now fallen to £7.80 for 40 hours.

Figure 4: Minimum wage case with inflation uprating of child benefit and tax credits

However this does not take account of the non-uprating of housing benefits and council tax benefit scales. In Figure 5 these are uprated by 5.6%. The poverty gap at 40 hours has now fallen to £3.28.

Figure 5: Minimum wage case with inflation uprating of all benefits and tax credits

Conclusion

Families with children with one earner in full-time employment on low earnings cannot reach the poverty threshold. Even if they earn £10 an hour, their net income is short of the poverty threshold because of the very high marginal tax rates in our highly means-tested tax and benefit system. This is why over two-thirds of poor children have a parent in employment. Increasing wage rates without tackling the UK’s high marginal deduction rates is not an effective solution to child poverty.

In-work benefits are much more effective but their effectiveness has been undermined by the Coalition Government decision to freeze child benefit for three years from 2011 and uprate it and tax credits and other working-age benefits by 1% from 2013. The poverty gap for a 40 hour a week minimum wage family increased from £3.28 per week to £25.32 per week. Thus those who were working poor have become poorer.

APPENDIX: Data tables

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NOTES

[1] Professor of Social Policy University of York and Durham University

[2] Senior policy and research Officer, Child Poverty Action Group

[3] Which is likely to make it more generous than what households actually receive from local schemes.

[4] CPAG (2014) POLICY NOTE 2: UPRATING AND THE VALUE OF CHILDREN’S BENEFITS December 2014 http://www.cpag.org.uk/sites/default/files/CPAG-Uprating-childrens-benefits-policy-note-Dec-14.pdf

[5] If a family was claiming WTC without the 30 hour element the tax credit has lost 9.4% of its value over the course of the parliament because the basic element was frozen for 3 years and then uprated by 1%, and the couple/LP element uprated by CPI for first 2 years and then 1% thereafter. If the family was also in receipt of the 30 element they have lost slightly more - 9.6% - of WTC’s value (because that element was also frozen for three years).