Gavin Kelly of the Resolution Foundation on the importance of the real Living Wage in light of the Government's National Living Wage increase

Gavin Kelly, Chair of the Resolution Foundation and Chair of the Living Wage Commission reflects on the Government's recent increase to the National Living Wage.

On the 1st of April the statutory minimum wage for those aged 21 and over rose to £11.44 reaching its target of two-thirds of median earnings. This increase shines a light on the pressures that workers, families and employers have all faced during the cost of living crisis we have been living through. 

If we look back across the turbulent last three years since April 2021 the annualised inflation rate has been a remarkable 6.7%, while on the same basis average pay has risen by 5.6%. This has presented acute challenges for families struggling to get by, as well as employers having to navigate surging costs. Against this difficult backdrop, the UK’s real Living Wage has increased by an annualised rate of 8.1%.

The job of the Living Wage is to determine the wage rate necessary to ensure that households earn enough to reach a minimum acceptable living standard as defined by the wider public. For the past 8 years the Resolution Foundation have calculated the real Living Wage, overseen by the independent Living Wage Commission (LWC), made up of leaders from private, public and third sectors, who scrutinise the calculation and take decisions over the methodology that underpins it. 

The idea of a real Living Wage - currently £13.15 in London and £12 for the rest of the UK - may be intuitively simple but underneath the surface is a complicated set of calculations that take place each year. 

The Living Wage methodology is rooted in the cost of a basket of goods needed for a basic but decent standard of living as determined by members of the public. This includes essentials like food, housing, childcare and transport but also those things we might all need to pay for like a school uniform or a birthday present for a child. The research behind it is carried out by the Centre for Research in Social Policy (CRSP) at Loughborough University who construct these baskets for different family types. 

Each year the Living Wage calculation needs to be updated to reflect changes in prices, alterations to our tax and benefit system, shifts in the proportion of different types of households, and differences between key costs in London and the rest of the UK. Out of this calculation process emerges the two wage rates. 

It is crucial that the Living Wage is based on a stable and transparent methodology that workers and employers can rely on. But it is also important that it is capable of evolving to reflect shifts in social and economic norms. 

Changes in our assumptions have happened a few times during the life of the LWC. Some years ago, for example, it was considered reasonable to assume that every family on the Living Wage lived in social housing. That is clearly wide of the mark in today’s Britain where more than 60% of families with kids who rent on low earnings now live in the private rented sector. Hence, we reflected this reality in our methodology. Another important shift concerned the rise of the auto enrolment workplace pension system. As it became the clear norm for employees to contribute to these schemes we decided to take account of this in our calculation. 

Over the last few years the Living Wage Commission has decided to review the approach taken to working hours. Traditionally, the Living Wage calculation has assumed that all adults in the calculation work full time. Over-time this assumption has become more detached from reality for some families. Amongst families where the main earner is in the bottom quarter of the earnings distribution, seven in ten single parents, and six in ten second earners with children, now work part-time. As a result, we have decided to move to a situation where single parents and second earners are assumed to work part-time. As with previous methodology changes, this will be phased in overtime to manage volatility.

The wider point is that the Living Wage needs to reflect the world of the mid 2020s not the 2010s never mind the late 20th Century. While always ensuring stability, we will continue to track shifting social norms to ensure our approach mirrors today’s realities. 

The Living Wage campaign is a remarkable success story – what started over twenty years ago as a local campaign among cleaners in East London has fundamentally changed the landscape of low pay in the UK. 

Its direct impact is impressive: with over 14,000 organisations signed up, 1 in 8 employees in the UK now work for an accredited Living Wage employer. But it has also had a major indirect effect too. The real Living Wage benchmark has become a core part of our civic infrastructure, shaping pay discussions far beyond accredited Living Wage employers. Its success has also put sustained upward pressure on minimum wage policy, leading in 2015 to the announcement of the ‘National Living Wage’. It is no overstatement to say that the campaign has changed the national conversation about fair pay.

The Living Wage Foundation has now broadened its agenda with new employer benchmarks for Living Hours to tackle the rise of insecure work, and Living Pensions to support employees to build up pension savings that will provide for a decent retirement. In time, these initiatives may have the same affect: pulling up statutory floors, and giving employers who want to do ‘more than the minimum’ a credible standard to reach. At a time of political change and economic turmoil these benchmarks provide an important anchor for both working people and their employers.