After a decade without any real income growth, inflation is now biting into people’s spending, and the number in serious hardship is rising. Even among people in full time work, levels of foodbank use and homelessness are growing. People are leaving low paid work in vital areas like health and social care to take better paid work in supermarkets, and Trades Unions are increasingly fighting to raise their members’ earnings simply to keep pace.
What do we want to achieve?
So debates around poverty and income levels are growing. While most people agree that there is some minimum level of income which everyone should have access to, there are great disagreements about what constitutes real poverty, and how to set the safety net below which nobody should be allowed to fall. The fiercest current debate is about whether to update welfare benefits in line with inflation or with average earnings.
People disagree about the safety net because they are arguing about different objectives. How should we balance the needs of the economy – inflation and unemployment – against ensuring a minimum standard of living or of income. So there are three ways of looking at the problem.
Enough to live on: the government’s “National Living Wage”
The National Minimum Wage (confusingly renamed “National Living Wage” by the current government), is set by government, on the recommendation of the Low Pay Commission. Their aim is to raise low pay without harming employment or economic activity. Government has asked them to ensure that it reaches two thirds of median earnings by 2024. However, its current level of £9.50 an hour is only 56% of the target.
When the National Minimum Wage was introduced by the Blair government, the aim was to prevent exploitation of workers. It was also hoped that it would eliminate very low paid, unproductive work, since employers would only hire people who could produce enough to earn the new wage, and they would invest in training and equipment to make this happen.
At the time, there was much opposition. Some commentators claimed that the Minimum Wage would lead to large scale unemployment and business failure. Neither happened. Neither did the hoped-for expansion of training.
All employers are bound by law to pay at least the minimum. However, in 2019 the Low Pay Commission reported that one in five workers entitled to the minimum wage were not receiving it. This was especially common in retail, hospitality, cleaning and care.
Minimum acceptable standard of living: the real “Living Wage”
The real “Living Wage” is designed on a different principle. It aims to ensure that a household can afford a basic set of goods and services deemed to form “an acceptable standard of living”. In September 2022 it was £10.90 an hour (64% of national median gross earnings) outside London, and £11.95 in London where housing and travel costs are significantly higher. Over 11,000 employers have now agreed to pay the Living Wage.
Every year, the Living Wage Foundation sets the level of the Living Wage on the basis of research to define a “Minimum Income Standard”. A set of focus groups go through all aspects of a household budget, considering what goods and services would be needed, of what quality, how long they would last, and where they could be bought. Experts check the nutritional adequacy of the food baskets, calculate domestic fuel requirements, and advise on motoring costs. These budget lists are then priced at various stores and suppliers.
The resulting lists are very detailed. For example, they have decided that a microwave oven is a necessity, because it is cheap to buy and run, but a dishwasher is not. Every household should have a sofa, and pensioners should have a door security chain. Allowance is made for replacing items at appropriate stages.
The level of the Living Wage is then calculated to allow for all these factors, taking into account the impact of tax and benefit rules. Living Wage employers then update their pay rates.
Guaranteed secure income: Universal Basic Income
Universal Basic Income (UBI) is a much more radical proposal, only implemented to date in pilot form in a few countries. It aims to provide every individual (not household), with an unconditional guaranteed regular, but very basic, income for life. The level would be a political choice, requiring a major overhaul of tax and benefit policies at national level. Those on higher incomes would receive the UBI, but have most, or all, of it taxed back. It would not be enough to live on comfortably, but guarantee nobody would ever fall into destitution.
Advocates argue that UBI would give all citizens a degree of dignity and security. It would reduce inequality by raising the incomes of the poorest. It would encourage good work, because people would not be forced to accept poor working conditions. It would enable more people to take on socially desirable unpaid work, including caring work and other voluntary activities. Finally, and importantly, it would reduce the large administrative costs of welfare benefit system, removing means testing and sanctions regimes.
Opponents argue that the costs would be unmanageable; that there are more effective ways of achieving these objectives through reform to current welfare systems; that there would be a rise in people choosing to remain idle, and that there would be political resistance based on fears of “freeloading”.
The Scottish government commissioned a feasibility study which produced recommendations for a pilot in Scotland. However, because many elements are matters for the UK, rather than the Scottish, government, there has been no agreement on progressing this. The Welsh government has implemented a related scheme, a basic income for care leavers.
Two recent studies have proposed ways of funding UBI. Both depend heavily on abolishing the current Income Tax personal allowance (which is worth £47 a week to all taxpayers, but nothing to the economically inactive, or those earning below the threshold. Their proposals would also abolish some current welfare benefits, including Universal Credit, while keeping benefits for housing and disability. The New Economics Foundation proposed a UBI worth £48 a week for each adult, while the Compass think-tank would also raise top tax rates to pay for a more generous UBI of £60 per adult.
Where next?
The debate will continue, and inflation is putting pressure on political parties to adopt more radical approaches to minimum income. But the public in general still have difficulty grasping the economics of these issues, and journalists are not always good at explaining them.
It is disappointing that, despite increasing enforcement activity by HM Revenue and Customs, so many people are still denied the government’s National Living Wage. On the other hand, it is encouraging that many employers have voluntarily adopted the “real” Living Wage, and a move by the Low Pay Commission to adopt their methodology would be very welcome.
Sadly, despite its apparent attractions, popular support in polling, and the active interest of the Scottish Government, it seems that Universal Basic Income is still a radical step too far for the mainstream political parties.
Meanwhile, the cost of living goes on rising, and by whatever measure is chosen, the incomes of the poorest are not keeping pace.
