In this article, I will be exploring Rishi Sunak’s recent budget announcement. In particular, I will be focusing on the new National Living Wage and the Tory’s continuing push to “end low pay in work”. There has been (as there should be) a great deal of scrutiny targeting the budget so I’ll also be offering perspective on the criticisms and responses of the new policies.
The Living Wage is the minimum wage that applies to people aged 23 and over. The new minimum wage of £9.50 is an increase of 6.6% from the current £8.91. This policy decision has spawned a debate in the media about the effectiveness of the budget in tackling low-pay issues.
Why is this so controversial? Why are people against this policy? More wages for those at the bottom of the pay scale is a good thing, right?
Well, people aren’t exactly opposed to this increase. Many of the critics still welcome the new Living Wage, the issue for them is that it isn’t enough.
People and the media can be very quick to criticize any attempts made by a government to “alleviate poverty” or “help the poor”. Why is this?
Backlash often happens as a result of the way the government chooses to market their new policies. Promises of “helping you through” and “saving struggling families” litter Rishi Sunak’s budget announcement and surrounding discussions, inviting criticisms of the validity of this government’s crusade to “end low pay”.
Perhaps the most concise headline I could grab, that best summarizes the complaints and suspicions of Sunak’s new Living Wage is the Guardian’s below.
Why am I highlighting all of these headlines?
As economists or just as economics enthusiasts, we need to filter out noise, opinion and rhetoric to see things as objectively as we can. So, I’m going to try and break down these headlines and see how real the critiques of the new Living Wage are.
The consensus in these articles is that the increase of the Living wage may not actually keep pace with the increasing cost of living. Inflation is expected to reach 4% or more, either early next year or later on this year, leading many to believe that the increase in the Living Wage will be “swallowed up” by inflation.
Discussions of wages and inflation go hand in hand, what we’re really interested in here is the real wages earnt by those earning the Living Wage. What I mean by real, isn’t the actual, monetary amount of the wages, but rather the inflation-adjusted value of the wages. The real wage is an extremely important concept for everyone in the economy to understand, and it is what really matters for the people who are the target of these low-pay policy decisions.
Real wages are calculated by dividing the increase in the GBP value of wages by the increase in the Consumer Price Index (CPI) which is a basket of goods used to measure inflation. We can construct our own index to judge whether the claim that the “benefits of increasing the minimum wage […] could be eroded by inflation” is a real concern.
We do this by assigning both inflation (CPI) and the Living Wage a base rate (100), and compounding the annual changes to the Living Wage and CPI since (for example) 2019:
Now, we just divide the final Living Wage index by the final CPI (115.68 by 109.70) to get 1.0545, or a 5.45% increase in the real value of the Living Wage between 2019 and 2022.
We can also do this just for 2021 – 22 to see that the new Living Wage will be a 2.5% increase in real terms (using latest inflation estimates). In other words, even if inflation grew more than expected, Rishi Sunak’s 2022 Living Wage would likely still be an increase in real terms. If inflation grew way more than expected, Sunak can always announce a second increase of 2022 for October.
Whilst it is possible that the increase in the wage could be rendered insignificant by inflation, it’s not probable that inflation will be so much greater than expectations that it will wipe out the benefits of the new Living Wage. Claims like “Living wage increase will be cancelled out by soaring costs of living” are subjective statements.
So, the new Living Wage is fine?
For some, yes, for others, the government needs to do more than just update the wage to account for inflation. They want the government to make big changes to the minimum wage to catch up to what is referred to as “the Real Cost of Living”.
The Real Cost of Living is a concept that is promoted by the Living Wage Foundation. They organize around 8,500 employers to pay an alternative minimum wage which the foundation calculates using Loughborough university’s “Minimum Income Standard”. The MIS “looks in detail at what households need in order to have a minimum acceptable standard of living” and is seen by many as a much more meaningful definition of the Living Wage than the government’s.
In response to the budget announcement, Graham Griffiths, the Director of the Living Wage Foundation said “The rise in the National Living Wage is a positive step for so many workers” but that “there is still a substantial gap between the government’s 2022 rate and the rising cost of living”.
If you’d like to know more about the Real Cost of Living and voluntary minimum wage organization, the Foundation is hosting a webinar on the topic on November 15th: Link here (no affiliation).
Hopefully in this article you’ve had a closer look at this detail of the budget and seen that media opinions, even when in a consensus, are just opinions. Although it is often economists and experts who provide some of these opinions, it is possible for media outlets to source an expert for whatever story they’d like to peddle. Economists (academics in general) very rarely reach a consensus on any topic and reality in economics is often much less simple than headlines can manage.
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