National Minimum Wage – Why is it not a Living Wage?

National Minimum Wage – Why is it not a Living Wage?

Feb 10, 2013 | Knowledge Base, Payroll

Why is the National Minimum Wage not a living wage?

There is often confusion over the National Minimum Wage and whether it is indeed set at a minimum limit which affords individuals to be lifted out of relative poverty. Certainly, this can be a contentious issue and one that hits the headlines from time to time. So what is the National Minimum Wage? How is it calculated and how does it compare to the living wage?

The National Minimum Wage

The national minimum wage (NMW) has been set in the UK by law since 1999. The NMW stipulates the minimum hourly wage rate for individuals dependent on age and employment circumstance. At the time of writing (May 2014) the adult hourly rate is set at £6.31.

The long-term aim of the minimum wage is to remove the problem of poverty pay, which exists when the earnings from paid work do not result in a living wage and fail to push people out of poverty.

So what are the effects of the National Minimum Wage?

The balance between supply of labour and demand for product is a tightly knitted equilibrium, one that economists bear in mind when calculating the NMW on an annual basis. In other words, if the NMW is set too high, a company’s profitability is likely to fall and this may in turn reduce the firms demand for labour to produce the product. The knock on effect could see a company reduce its workforce or substitute workers for cheaper alternatives or invest in automation – thus creating unemployment in the marketplace.

It is a fine balancing act and one that the Low Pay Commission (LPC), an independent body appointed in July 1997 are required to analyse and recommend the rates to government on an annual basis.

What is the difference between the living wage and the national minimum wage?

The first thing to realise is that the living wage is an informal benchmark, not a legally enforceable minimum level of pay, like the national minimum wage.

The living wage is currently calculated by the Centre for Research in Social Policy at Loughborough University, and the basic idea is that these are the minimum pay rates needed to let workers lead a decent life.

At the time of writing the living wage is set at £8.55 an hour in London and £7.45 an hour in the rest of the UK. As you can see by comparison, the national minimum wage is significantly lower at £6.19 for those aged over 21.

In October 2012, the accountancy firm KPMG (which supports the living wage idea) reported that 20% of all workers in the UK, nearly five million people, are paid below the living wage.

Some supporters of better pay for the low-paid argue that employers who pay their staff too little are effectively benefiting from taxpayers! The theory being, that taxpayers are subsidising a company’s low paid staff because these individuals are more likely to claim state-benefits such as tax credits.

The outcome of the National Minimum Wage

The big disappointment with the NMW appears to be the fact that it has had little success in reducing poverty. The NMW does not affect those who are unemployed, therefore these individuals remain untouched.

Another point to note is that many of the workers who benefited from its introduction were part-time workers, and in particular, female part-time workers bringing a second income into the household. These were not poor households. In fact, the Institute of Fiscal Studies estimated that only 4% of households in the bottom half of the UK’s income distribution gained from the NMW compared with 7% in the richer half! So not only did the NMW do little to reduce poverty, it also did little to make the distribution of income in the UK fairer.

Indeed the argument for a minimum living wage continues and as unemployment rises and business tighten their budgets it is unlikely to be discussed or debated at any point in the near future.

Will the October 2014 minimum wage rise to £6.50/hour affect your business’s employment prospects? Does your organisation’s ethical outlook try to replicate the Living wage? Or do you try to improve your employee’s benefits with improved SMP entitlement or holiday allowance? We would love to hear your comments?

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