We need higher productivity to improve people's living standards

There is no doubt that low income working families need to see measures to improve their living standards, but – asks Katie Schmuecker - has this week’s ‘budget for working people’ delivered it?

Before answering the question it’s worth considering the starting point. Low-income working families have had a tough seven years. Between 2008 and 2014 the cost of essentials goods and services increased three times faster than average earnings, and twice as fast as the minimum wage. While the recent pause in price rises has brought some respite, working families earning the minimum wage in 2015 fall a long way short of what the public regard as a decent standard of living. A couple with two young children where both parents work full time are £75 per week short, a gap that has widened considerably since 2008.

The budget brought a mix of measures for those working but struggling to make ends meet. The announcement of a ‘National Living Wage’ of £7.20 from April – effectively a new minimum wage for people aged over 25 – will result in more money in the pockets of some of the lowest earners (although it should be noted that the rate is below the actual Living Wage of £7.85 outside London and £9.15 in London). Some of these workers will also benefit from the lifting of the personal tax allowance to £11,000, although this measure will do nothing for the six million very lowest earners who already do not earn enough to pay income tax.

But these broadly positive measures are more than offset for working families with children that rely on tax credits to top up their incomes. Indeed, the family mentioned above would (before this week) receive over a quarter of their income from tax credits. The Budget measures mark a steep reduction in the generosity of in-work support, with the IFS estimating that working families in receipt of tax credits will see an average reduction of £1,000 a year to their income.

Analysis of how the potential gains from increased pay and lower income tax balance out against the tax credit loss is beginning to emerge. Early analysis by Donald Hirsch at Loughborough University finds a parent working full time on the new ‘National Living Wage’ next year will be £960 worse off overall.

The Chancellor regards this Budget as the start of a new contract, whereby businesses pay higher wages in return for lower taxes, and workers get higher pay but lower benefits. But it’s important to acknowledge that low income and low pay are two slightly different problems. As JRF has consistently said, pay is an important part of the solution to working poverty, but it is only one part of the package.

Jobs need to provide people with a pathway to move on and up, enabling individuals to lift themselves and their families out of poverty. That four out of five low-paid people fail to escape low pay over a ten-year period is a statistic that should worry us all. So it’s good to see that today’s Productivity Report from the Treasury contains a section on getting into work and progressing. Moving forwards, we need to see a focus on increasing productivity in those sectors of the economy - like retail, catering and care - where working poverty is most prevalent and implementing the new higher wage rate will be most challenging. It’s also vital to consider the role of good management and workforce organisation in improving productivity.

Only once starter jobs provide stepping stones to better jobs will work act more reliably as a route to improving the living standards of low-income working families.