Big companies can afford a living wage

Many of the UK’s largest employers could afford to pay their staff a ‘living wage’ without taking a significant hit to their profits or passing on the costs to customers. This is the conclusion of a new report from the think tanks IPPR and the Resolution Foundation. For FTSE companies in banking, construction and computing, the extra costs of paying all staff at least a living wage would be so small – adding around 1% or less to the total wage bill – that companies could easily absorb them as part of their annual pay deals.

A living wage is one that, when combined with benefits and tax credits, provides a basic but decent standard of living for low earners and their families. Unlike the minimum wage, it is explicitly calculated against the cost of living and rises with inflation. Despite David Cameron declaring that the living wage is ‘an idea whose time has come’, more than 6 million people across the UK earn less than the living wage, around one in four of all workers. In Yorkshire and Humberside, around 700,000 employees earn less than a living wage.

The living wage is most closely associated with London, where coalitions of unions, faith groups, schools and universities have campaigned for a living wage over the last decade. A London Living Wage has been calculated annually since 2005 and now stands at £8.30 an hour, while the national minimum wage is just £6.08.The community-led organising that has driven many of the London-based campaigns has been a vital ingredient, helping to empower low earners and local communities as well as securing material gains.

More recently, the Living Wage Foundation has been established to accredit living wage employers across the UK, taking the struggle for a living wage beyond the capital. The Foundation has calculated a single living wage rate for employers outside London of £7.20 an hour. This follows successful living wage campaigns in a number of towns and cities outside London, most notably in Scotland, where over 15,000 public sector workers have gained entitlement to a living wage since 2008.

The new findings from IPPR and the Resolution Foundation give campaigners across the UK extra ammunition, suggesting that the extra costs for many major companies will be minimal. However, costs for some of the major low-wage employers – like those in retail, hotels and catering – will be higher even outside London. In these sectors, over half of employees are paid less than the living wage and a living wage could add around 5% to total wage bills for FTSE firms.

But this does not rule out a living wage in these companies, who could chose to deal with higher wage costs by accepting slightly lower profits, passing some of the extra costs to customers through higher prices, or reorganising their business to improve productivity. Negotiating a living wage can be the starting point for companies to rethink their wider strategy and make changes that not only raise wages but also help move them into more profitable markets or adopt more advanced working practices. This means that some companies will need time to implement a living wage and find their own particular way to absorb the extra cost.

The extra costs associated with a living wage also need to be balanced against the benefits. Studies have found that the major benefit perceived by companies is the reputational boost. Some companies also find that staff turnover and absence is reduced, while motivation and morale is improved, although the importance of these factors varies across sectors.

A key feature of living wage campaigns is that they require companies to take greater responsibility for the living standards of low earners, including employees like cleaners and security staff who are not directly employed by the big firms but spend their working day serving the company.  This shifts the some of the burden of responsibility away from the state, potentially creating a significant boost to the public finances by reducing tax credits payments and raising income tax contributions. This is a key argument for living wages in an era of fiscal austerity.

This does not mean that a living wage allows low earners to support their families without the help of the state. For most living wage workers, in-work benefits and tax credits will remain an essential source of income. Because the living wage represents the wage an ‘average’ family needs to ensure a decent standard of living, it remains insufficient for larger families or families with high living costs (perhaps because of a disability or very expensive local childcare) even after tax credits have been taken into account. A living wage is no panacea to the enduring challenge of low pay and in-work poverty, but it can make a vital contribution to improving the lot of low income families, while also supporting the development of stronger communities.

Kayte Lawton is a Senior Research Fellow at IPPR