Increasing the minimum wage is only a half answer to poverty

8th Jan 2014

As well as increasing the minimum wage, parties need to reduce childcare and housing costs, improve the quality of part-time jobs and create better progression routes for low-paid workers.

Parties also need to reduce childcare and housing costs, improve the quality of part-time jobs and create better progression routes for low-paid workers.

It’s clear from the papers this week that the Conservatives are seriously considering an above-inflation rise in the National Minimum Wage, with the Lib Dems and Labour both arguing that they thought of it first.

A column in The Times by Rachel Sylvester yesterday suggested that MPs Oliver Letwin, Matt Hancock and Robert Halfon – plus think tanks the Policy Exchange and Bright Blue – are keen, with George Osborne also persuaded of its political and economic merits. Today’s Telegraph and FT cast doubt on the Chancellor’s position, however, suggesting it is ‘far from a done deal’.

Increasing low wages fits the party’s core narrative of making work pay, and chimes with an emerging argument that it’s unsustainable to continue subsidising employers through in-work benefits (see Matt Hancock’s speech to the Resolution Foundation last year as well as the DWP quote in yesterday’s Times column).

It seems obvious that raising the minimum wage (like increasing take-up of the living wage) would reduce in-work poverty by increasing overall household incomes. But it is worth pausing to assess exactly how much we should expect such policies to achieve; and what else is needed to tackle very high levels of in-work poverty.

New figures from the New Policy Institute for JRF show that 44 per cent of adults in working poverty aren’t low paid themselves and don’t live with anyone who is. In nearly half of working households in poverty, all of the adults earn more than around £7.40 (the UK Living Wage is currently £7.65 per hour). Forty-five per cent live in households where one person is low paid. Only 12 per cent live in a family where everyone is low paid.

It is the amount of work that seems to matter to households in working poverty. In nearly half of these households, one person works and one doesn’t. Another quarter only have part-time workers.

For the other 56 per cent of adults in working poverty, at least one person in the household is paid less than £7.40 per hour, so improving pay could have a significant impact. However, even among this group, over a third are in families where everyone works part time and almost a quarter are in one-earner households.

If we improved pay at the bottom end of the labour market, we could expect it to have a direct impact on just over half of households in working poverty (as long as these increases were not immediately deducted through the tax and benefit system).

There might also be indirect benefits, including increased perceptions that work pays, and perhaps some employers being stimulated to make better use of their workers’ skills now they are having to pay them more.

However, at least four other steps are needed to create a convincing approach to in-work poverty:

As we face up to a 16-month lead-in to the next election, the parties will compete for the best package to help working families stuck in poverty. With 6.7 million people in such households, the party that comes up with the best offer might just end up the winner.