Can businesses afford to pay (or afford not to pay) a living wage?

Blog posts

22 Sep 2022

Claudia Plowden Roberts, Research Officer
Astrid Allen, Research Fellow

This morning, the Living Wage Foundation announced the new 2022/23 Real Living Wage of £11.95 per hour for London (covering all boroughs in Greater London) and £10.90 for the rest of the UK. This 8 per cent and 10 per cent increase (respectively) is the biggest since the Real Living Wage was first calculated. It has been announced two months ahead of schedule as a reflection of the current cost of living crisis, which is impacting employers and employees alike.

We are facing a perfect storm this winter, where despite the government’s support package for businesses, rising inflation may hold employers back from offering pay rises, at a time when their employees most need them. The cost of living crisis and looming energy bills mean that thousands more people are facing in work poverty over the coming months, as their take home pay no longer allows them to pay their bills.

The recently published Living Wage Foundation report found that most low-income workers say they are facing the worst financial period of their lives, with over half reporting using foodbanks over the last 12 months. While earlier this year the Bank of England called for businesses to show restraint when increasing wages (to avoid adding to consumer costs and inflation), the cost of doing business will squeeze company profit margins to the point that many employers will be wondering whether they can afford to significantly increase workers’ pay. Employers will need to consider both what they are legally required to pay their staff and what minimum levels of pay are required for employees to be able to afford the essentials.

There are several terms used (or potentially, misused) to describe the living wage, including the ‘National Living Wage,’ ‘National Minimum Wage,’ and the ‘Real Living Wage,’ but all have different monetary amounts and definitions, making it confusing for employers and employees alike to understand what they should be paying and being paid.

While the Real Living Wage has no legal status, meaning that employers pay it voluntarily, the National Living Wage (which currently stands at £9.50) was established by government to provide a minimum wage that was legally binding. In April 2021, however, the National Living Wage was only available to those aged over 25 years old. This threshold was lowered a year later so that the National Living Wage was available to all aged over 23 years old, meaning that more younger people would receive a higher wage. The National Minimum Wage is available to all under 23 years old and ranges from £9.18 for 21–22-year-olds to £4.81 for under 18s.

Although the National Living Wage was calculated to reach a target of 66 per cent of median earnings by 2024, this doesn’t reflect the current cost of living. The Real Living Wage, calculated annually by the Resolution Foundation and a group of independent economists, is based on actual living costs, and differs depending on location (the rate is higher in London).

Over 11,000 employers across the country, including Oxfam, Nestle, and Age UK, have committed to paying the Real Living Wage, with many councils and parts of the UK becoming Living Wage Cities and Towns. These ‘Living Wage Places’ are made up of groups of local ‘anchor’ businesses that are accredited Living Wage employers. Many of these employers will be considering what the Real Living Wage announcement means to them and their employees. Beyond that, there are still many organisations across the country that have not committed to paying their staff the Real Living Wage and they will need to think very carefully about what this announcement means for them and their staff.

Many employers are thinking creatively about what they can do to help their staff, with four out of five large businesses planning on supporting staff through the cost of living crisis. Ensuring they provide ‘good work’ and that their strategic approach to reward is not just about pay, is critical. For example, by offering staff shopping discounts or making work more flexible, so that staff can save money on travel, childcare or other costs. The key is understanding what employees’ financial needs are and developing a package that is valuable to them. Of course, this is no substitute for fair pay. What is important to understand here is that employees want to work for an employer that treats all employees fairly and that brings benefit to the community they work in. By focusing pay rises on their low-income workers, employers may see their business benefit from increased levels of engagement from workers at all levels, as well as from customers and investors.

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.