3 November 2016

When it comes to the living wage, the sums just don’t add up


Living Wage Week is here again, along with the announcement, on Monday, of the new level at which the wonderful wage has been set.

Sure enough, we’ve been told that it will be going up in London by 35p an hour to £9.75, and in the rest of the country by 20p to £8.45 an hour. But we’re being told other rather odd things.

We’ve also been told that a family, such as the one I grew up in (two adults, four kids), is in poverty unless its household income is £50,000 a year. This is most peculiar. A definition of poverty that puts you in the top 20 per cent in terms of household income – that’s twice median household income – is not a greatly useful definition of said poverty.

The basic idea behind the calculation of the living wage is fine, as Adam Smith would have pointed out. Being unable to afford a linen shirt does not make you inherently poor. But if you live in a society which says that not being able to afford one makes you poor then, in that society, you are poor.

So focus groups were asked what should you be able to do in order not to be considered poor. They put their heads together to consider this, and produced an income level: the Living Wage.

That figure was then weighted by household size – and it’s here that things became problematic. A family of two adults and four children (like that Worstall clan of a generation ago) requires £1,040 a week in order to not be deemed poor. But £52,000 a year is not a useful definition of poverty in a country where median household income is £25,000. Not even if we measure by equivalised households.

Equivalisation means that two can live not quite as cheaply as one.  If a couple counts as “1” family, and a child as “0.2”,  our six-person family equivalises to 1.8 standard families. The proper definition of relative poverty is less than 60 per cent of median household income. So, 1.8 x 25,000 x 0.6 gives us the poverty line for the Worstalls: £27,000. Yet the Living Wage Commission, backed up by the Resolution Foundation, is telling us that really it should be near twice this. It is also telling us that a couple with no children only require £6 an hour.

But there’s another problem: the actual announced living wage is an average across all different family types. That is, it’s not even a living wage for any particular family arrangement at all.

It’s difficult to conceive of the logic by which an employer should pay people more because Mr and Mrs like getting it together. So quite why the minimum just wage should depend upon family size is entirely unknown.

Perhaps we should take this for what it really is: an example of the kindness of the British. Wouldn’t it be nice if everyone could live nicely, regardless of how much it might cost, or even its possibility?

For that is actually what is being said here. That linen shirt question to the focus groups is “What is needed for a decent life?” It’s only later that the campaigners switch to “What is necessary to meet needs?” But aspirations to a decent life, and needs to be funded at the expense of others, are rather different things.

Tim Worstall is Senior Fellow at the Adam Smith Institute.