The problem of low pay

Tesco Self-ServiceLow pay is a huge problem in the UK. Of the 11 million people currently living in poverty, 6 million have jobs. Some of this is due to under-employment – people who work, but can’t get full-time hours – but not all. For example, three quarters of children in working poor families have a parent who works full-time (see the Earnings section on page 97 of this report). It is entirely possible to have a full-time job and still not be earning enough to live on.

The minimum wage for people 21 and over is currently £6.31 an hour (between 18 and 21 it’s only £5.03 – I’m not sure why, as I don’t think things magically cost less before you turn 21…). That means that, after tax and National Insurance, a full-time week of 37.5 hours pays £197.21. You get a little bit back through tax credits – £8.27 per week if you’re single; so that would make a grand total of £205.48 a week, or £890 a month. I live in Oxford and rent a room from a live-in landlord at a cost of £550 per month (bills included). If I was on the minimum wage this would be more than 60% of my total income (as it is, it’s about 30%). This is slightly less of a problem if you live in a cheaper area of the country. But, if you add everything up, even the bare minimum living costs of somewhere like Manchester still leave only about £30 per week left over from (full-time) minimum wage. Enough for maybe one night out – if you don’t mind leaving absolutely nothing in the bank for emergencies (I can post these calculations in the comments if anyone’s interested).

At the most direct level, policy has two main tools to address working poverty: tax credits and the minimum wage. Government spending on tax credits went from less than £20 billion to more than £27 billion between 2003/4 and 2009/10 (page 78, section 13). Tax credits help a lot of people pay their bills, but they are problematic; mainly because they involve taxpayers essentially footing some portion of what the wage bills of private companies should be (if they were paying a living wage). The same is true of Labour’s recent proposal to give tax breaks to companies who pay a living wage.

Rather than tax credits, the first thing that comes to many people’s minds as a solution to low pay is to raise the minimum wage. This is understandable. After all, what’s the point of a national minimum wage if it doesn’t provide enough to live on? A recent report from KPMG (hardly a left-wing organisation) suggests that to meet basic living costs, a Londoner needs to earn at least £8.55 an hour, and a non-Londoner at least £7.45. One obvious option would therefore be to raise the national minimum wage to meet this level.

Unfortunately, this would have clear economic downsides in terms of un- and under-employment. This is because raising the minimum wage increases the cost to companies or hiring a worker. Even if companies can absorb this cost and still remain profitable (which many, of course, would easily be able to do), it would still tip the scales in their profit calculations towards other solutions like outsourcing, automation, or just squeezing more productivity out of a smaller number of workers.

Let’s take Tesco as a concrete example. They have already moved towards automating the checkout process with self-checkout machines. These still require some human oversight (mostly because they seem to break all the time), but they require many fewer workers than conventional checkout counters. If the minimum wage were to go up substantially (especially up to Minimum Income for Healthy Living standards), the pressure on a company like Tesco to go even further down the automation route would increase. We should also note that Tesco is a large, profitable company for whom automation is a viable option. A large enough increase in the minimum wage could drive some small companies (which likely employ a large proportion of those on the minimum wage) out of business.

These are all arguments you would hear if a large increase in the minimum wage were proposed; from economists, business leaders, and probably Conservative politicians. And by no means would they be wrong – if we raised the minimum wage enough to make a difference to people’s lives, it would be startling if we didn’t see an uptick in un- and under-employment. But this misses the broader point. By keeping the minimum wage low and helping out the low paid with tax credits, we are essentially deceiving ourselves about the true state of employment in this country. If we take the not unreasonable position that the only job worth having is one that pays enough to live on, then in its current state our economy can only support a certain number of these ‘real’ jobs. We have to be honest with ourselves about what this number is and decide what we’re prepared to do to address it.  We can continue to keep the minimum wage down at unliveable levels, and we can keep topping up with tax credits, but these are sticking plasters over a gaping wound.

About Robert de Vries

I'm an Early Career Research Fellow in the Sociology department at the University of Oxford. I'm mainly interested in how people are affected by concerns about their social status; how it colours the way they think, feel, and behave. I try and contribute here regularly, but my addiction to writing excessively long posts keeps getting in the way.
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8 Responses to The problem of low pay

  1. EdS says:

    “That means that, after tax and National Insurance…”

    That’s actually the problem right there.

    Before Income Tax, National Insurance and Employers NI they are being paid pretty much a living wage, it’s only the taxes that are forcing them below the poverty line.

  2. koenigal86 says:

    If you don’t have kids, you have to be 25 to get tax credits remember. Under 25s on full-time minimum wage just get minimum wage (and possibly some under 35 Shared Room Rate Housing Benefit in London?) and that’s it.

  3. koenigal86 says:

    And as pointed out above, why on earth are they taxing people on full-time NMW at all? Especially if many are receiving tax credits? That is, having money taken with one hand, then given back with the other with a complex bureaucracy. And then HMRC often waits a year before decreeing a recipient suddenly owes them money…

  4. koenigal86 says:

    My rent and bills are included in my £90/wk rent as a lodger, and travel in Birmingham is c £55/mth on the bus. So when I was on a few pence over full-time NMW I did OK – if paying 50% of your pay on rent for a room is OK (which it isn’t). Running a car or renting a flat rather than a room wouldn’t have been feasible.

    Could still go out more than low-paid relatives in the sticks whose money went on rent, petrol (one commutes an hour – c 30 miles – to work), car costs etc.

    Of course, this year I’ve been in and out of temp work, and am mostly on over 25 JSA + under 35 shared room rate HB (a combined income equivalent to just over 20 hours on NMW), so now 70% of my income goes on rent and I’d kill for a full-time job at NMW or over with reliable hours…

  5. koenigal86 says:

    Oh yes, I would be interested in those calculations in Manchester actually, I thought parts of it were cheaper than Birmingham. I have about that left a week after rent when not working (some of which then services debts from uni), so it’s surprising. Do the calculations include car costs or bills etc?

  6. Robert de Vries says:

    Koenigal – thanks for you comments. You’re right of course that in many ways people who can get full-time work at all, even on minimum wage, are the lucky ones. But your experience in Birmingham says a lot. If even in a relatively cheap part of the country a full-time job still means you are paying half your wage to lodge in a room (most sources on ‘affordable housing’ recommend that you shouldn’t be paying more than 30-40%), then there’s something wrong.

    My calculations for Manchester living costs were:
    Median weekly rent for a room in a shared house in Manchester=£69.92 (from the Valuation office private rental market statistics)
    Average weekly electricity and gas bill=£25.59 (from DECC annual domestic energy bills report – might be a bit cheaper if you’re sharing)
    Average weekly water & sewerage bill=£6.21 (from Ofwat report)
    Council tax=£13.88pw (average 2012 council tax bill for Band A properties, after 25% single person discount. Again, might be a bit cheaper if you’re sharing)
    Cheapest BT internet & line rental deal (the internet is definitely an essential these days): £3.57pw
    Cheapest sim-only mobile phone contract: £1.85pw (orange sim only 8)
    TV license=£2.79pw
    Transport – Arriva Manchester weekly saver transport ticket = £13.50
    Food, clothing, & routine household goods & services=£37.40pw (I took the average weekly expenditure figures for the poorest fifth of 1-person non-retired households from the ONS Family Spending 2013 report, table 3.4E)

  7. Ben Baumberg says:

    A very delayed reply, but just to note – according to economists, there’s a situation in which the minimum wage does not reduce in lower employment levels (and in fact can increase them) – I think this is known as monopsony (good luck in understanding this on Wikipedia though…). The employment implications of minimum wages seems to one of those things that economists debate quite viciously – which is another way of saying that it’s difficult to study and hugely important.

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