Why closing the gap for the lowest paid matters

Katherine Chapman, Director of the Living Wage Foundation, discusses the importance of the real Living Wage and explains how it has helped London-based coffee shops Rossyln Coffee, along with many other real Living Wage employers, to grow their business.

James Hennebry, co-founder of Rosslyn Coffee, has keenly felt the rising cost of doing business. The price of coffee beans has skyrocketed. London rents on premises have risen, and his business, like many others, has had to contend with the post-pandemic changes in working patterns.

Yet despite all these pressures, Rosslyn Coffee is thriving, with plans to open three new shops this year. Award-winning coffee is poured by a motivated and loyal workforce. Rosslyn Coffee pays the real Living Wage, which recently rose to £12.00 per hour UK-wide and £13.15 per hour in London. James and his co-founder Matt Russell have had to think hard about changes in their cost base, but their commitment to pay every staff member a wage in line with the rising cost-of-living has not faltered. 

Rosslyn’s commitment means thousands of pounds back in the pockets of its staff each year, enough to pay the rent, save for a holiday and live a life free from constant stress and financial pressure. It is also a timely reminder that, for all the value in other employee benefits such as flexible working and health plans for higher salaried workers, a decent wage remains the cornerstone of a good job and a thriving workforce, particularly for lower earners. 

This is borne out in the statistics. Undoubtedly this has been a tough period for some, with the Resolution Foundation describing it as a lost decade of pay growth. But for lower earners the picture isn't so bleak, in fact there has been unexpected growth. Hourly pay at the bottom grew faster than the average. Overall hourly wage inequality between and within regions and nations narrowed. 

A big pull factor in this trend has been the rising number of firms prioritising their lowest-paid staff and voluntarily choosing to go beyond the legal minimum. In the last 12 months, three thousand new employers accredited with the Living Wage Foundation, agreeing to pay the real Living Wage rate to their staff and contracted workers. Over half of FTSE firms are now real Living Wage employers and 460,000 workers saw a pay bump last October. That’s more than double what it was four years ago.  

The push factor, meanwhile, has been the National Living Wage rate set by the UK Government, which has risen at a record rate over recent years and from the start of this month went up to £11.44 for over 21s. Despite being set against median earnings rather than the real cost of living, it has significantly increased the rate of wage growth for the lowest paid. The Low Pay Commission has now met its 2024 pay growth target with the the largest-ever cash increase and this year will also lower the age threshold for the National Living Wage from 23 to 21.

Closing the gap for the lowest paid has had broader benefits, helping firms tackle wider workforce inequalities including the ethnicity and gender pay gaps. A recent study by the Low Pay Commission found that within a firm where the Living Wage Foundation’s real Living Wage rate were used, entry-level workers earned about 7 per cent more than those in establishments not subject to the higher rates. The introduction of the Living Wage increased average wage bills by 1.5 per cent but reduced the ethnicity pay gap within the organisation by around half, from 7 per cent to 3.5 per cent. 

Increasingly, forward-thinking firms are expanding their lens of focus from the hourly rate to look at the security of hours and pensions. If the S in ESG means anything, it should be for an inclusive and sustainable vision for working life. But there is a hard-nosed argument, too. Firms with an eye on their brand credibility and appeal to their customer base can also turn this to their competitive advantage and attract staff in a relatively tight labour market.

Rosslyn Coffee, like around 80% of the 14,000 Living Wage employers, is an SME, but larger firms also see the business benefits of taking such an approach. Take IKEA. The firm saw impressive sales growth in 2023 and has chosen to invest over £35 million in the financial wellbeing of workers, with a combination of real Living Wage pay increases and year-end bonuses. 

Although there is cause for cautious optimism, we can't rest easy. Earlier this year the Living Wage Foundation reported a small rise in the number of jobs paid below the real Living Wage, up from 3.5 million last year to 3.7 million in 2024. Although the overall picture is a vast improvement on some of the historic highs of past years, this is a reminder of the work still remaining to ensure all workers can meet their everyday needs.