Coffee House

A living wage misses the point of poverty

29 October 2012

We all want there to be some new quick fix for tackling poverty and a ‘living wage’ is the latest fad in this area of simplistic marketing slogans. The reality is far more complex.

It is great that KPMG and many other companies are doing well enough that they can afford to pay their employees well. But some companies are barely surviving. In industries such as electronics manufacturing there are huge success stories, but there are also plenty of tiny family run factories that have struggled to survive offshoring –for companies like this paying their staff more simply isn’t an option.

The living wage idea is a reasonable one –it’s good to encourage companies to think about the well-being of their staff and if they can afford to do so to pay them more–but this does somewhat miss the point that this only benefits employees of these companies. What about those working for the companies that can’t afford to increase wages?


According to today’s report from KPMG there are now close to five million people living across Britain who earn less than the living wage. The big problem with this figure is that it fails to take into account vastly different regional disparities in the cost of living. It does have a separate rate for London, but not for Bradford or Bournemouth. Leaving aside for a moment the question of whether the rate is appropriate, what should be obvious is that the most effective way of reducing this number, is to dramatically ease the cost of living.

recent report by the Institute of Economic Affairs showed how:

‘House prices have doubled in real terms since the mid-1990s alone, from an already very high level. No other developed country except Australia has experienced a price explosion of such a magnitude. Not even Spain, with its notorious house price bubble, has quite paralleled the British experience. In nominal terms, house prices in the UK have increased by a factor of nearly forty over the last forty years.’

We have one of the worst housing affordability problems in the world. Our energy prices are shooting up with the government’s own estimates suggesting that the impact of climate changes policies will be to add around 26 per cent to domestic electricity prices and 10 per cent to domestic gas prices by 2015, and goodness knows how much more we pay for food in the UK because of the distorting effect of the Common Agricultural Policy.

Helping reducing the number of people living in poverty is one of the most noble things a government can do. This is a complex challenge that requires a complex solution. But the government could do worse than start by gathering accurate regional information by area on the cost of living and developing a strategy for reducing it.

Ruth Porter is communications director at the Institute of Economic Affairs.

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  • Mr Brogue

    What we have today is the state, by means of a range of benefits, subsidising private enterprise. What incentive is there for companies to pay their staff well when employees can claim benefits to supplement their below subsistence wage? Capitalism has already failed. Interventionism is prevailing. Let those companies who cannot afford to pay their staff reasonably fail and die.

  • Tax this mofo

    When you pile tax upon tax upon tax for 30 years, you will find that you need more money to live.

    We used to be a low tax country. Our petrol prices were the cheapest in Europe. Both Labour and Tory governments are too blame. Every budget brings from either government being a new tax or a new tax rise. Our politicians and economists seem incapable of finding solutions other than taxes. There is too much social engineering, all of which is based upon taxes.

    We have taxed ourselves stupid, and bankrupt.

  • Kevin

    The second half of this article is an important point, but the first smacks of the common “You can’t buck capitalism” shrug of the shoulders. This approach tends to imply that whatever an employer does is not morally questionable but any attempt to intervene is. It is not clear how the distinction can be supported.

    Morally, it is of course entirely possible that an employer can exploit an employee. If, for example, the latter has been out of work for a significant period, the former may make him a lower offer. If the employee has a child, the employer may again attempt to play on his fears when it comes to salary review time. In neither (hypothetical) scenario does the employer consider the actual value that the employee gives to the company. There are endless such possibilities. Denial of shares to employees is another one.

    Political intervention in this area is certainly complex and frought with potential pitfalls, but the fact that an employee chooses to vote for a policy that he believes could help level the playing field between him and his employer does not put him on a different moral plane.

    • Kevin

      Erratum: “fraught”.

    • Brad

      one of the most sensible commentaries I’ve seen…pity that sensible doesn’t seem to gather much attention

  • andagain

    “According to today’s report from KPMG there are now close to five million people living across Britain who earn less than the living wage. ”

    Apparently the living wage is remarkably ill-named, if so many people manage perfectly well to live with less than it. I don’t trust policies that apparently can only be sold misleadingly.

  • Baron

    Ruth Porter, thank you, you’re a star.

  • Baron

    To Ruth Porter, or whoever runs the censorship department.

    Why do you remove postings that aren’t rude, incite to violence, attack the anointed groups, ha?

  • Jebediah

    For as long as we define poverty as a proportion of average income or as nebulous as “living wage” it is an unsolvable problem, because it is definitionally unsolvable. By these measure if we all earned £1million a year, the person earning £500,000 would be in poverty.
    This is not helpful in finding a solution to genuine, I can’t feed/house my family, poverty.

  • Timbo

    How ironic that the IEA are moaning about having “one of the worst housing affordability problems in the world” when it was neoliberal marketisation policies that left our housing in this mess. The theory is always that markets reduce prices, increase choice and extend access. That’s a laugh on housing isn’t it! More like the worst case of market failure ever!

    • andagain

      It is the government that bans people from building houses on their own land, not the evil “market”.

      If you want to attack people for hypocritically demanding deregulation of the employment market while demanding planning regulations that choke off the supply of new houses, be my guest.

      But it is not the market that stops people from building houses in those parts of the country that people want to move to. It is people who CLAIM to believe in market forces that do that.

    • A. S.

      Developers don’t control land prices, materials’ prices, the minimum wage, health & safety legislation, employment legislation, green legislation or the availability of mortgages.

    • eeore

      It’s odd that you describe Caroline Flint as a neoliberal.

      • telekuka

        she shaves her legs. She is a telemachus’ clone

        • eeore

          I have never seen her legs. But then I have never seen her in the same room as Michael Jackson.

  • Robert0461

    Given the current scandalous dearth of job vacancies, surely taking up this suggestion would effectively trap those who live in poorer areas by making it impossible for them to move out into areas where the cost of living is higher.

  • eeore

    The living wage has the same problem as the minimum wage, it does nothing for the poor but instead acts as a way for marketeers to set prices – and in doing so drives competition out of the economy.

  • Troika21

    This article hits the nail on the head – the problem is not ‘low wages’ but ‘high-cost-of-living’, and it is having a serious impact on our economy.

    I was reading a business start-up book recently (can’t remember which though, by one of the self-made ‘Dragons’ I think), in it he talked about his life and other self-made entrepreneurs; and the most noticeable thing was that almost all of them had struck out early, usually by renting somewhere cheap; in his case a £30 per week bedsit (this was early 80’s), and encouraged others to do the same.

    I nearly spat my tea! Nothing near me his less than £100 pw, and that’s just rent – throw in cost-of-living and council tax it it will hit £500-600 a month! No wonder the nation is living on credit and has no savings.

    This country desperately needs more houses to recover its entrepreneurial vim.

    • Baron

      Troika21, sir, your invaluable contribution has spurred Baron to have another thought (in addition to the brilliant NACOWASA idea above).

      We should create a National Council for Halving Cost – NACOHACO, it should be charged with setting up prices throughout the economy on everything from housing rent, cars to pins and needles. The same countries as Baron mentioned earlier had such an agency, too, and it was also helpful in ensuring booming economies, unlimited choice, and an electorate so full of happiness in kept voting for those in charge with near unanimous approval.

  • anon

    The information I read seemed to concentrate on bar work and catering as the prime offenders. These are quite often areas of part time , second job employment. Whilst I’m no proponent of slave labour rates, I’d like to know whether the data examined whether the respondents earned all their remuneration from the one source or if it was a top up. It would make a difference!

  • Judy

    A living wage rule is a great way of exporting more jobs to China. I wonder how much it’s going to cost to produce in Turkey those Ford vans which were produced till now in the UK, and how much per hour the Turkish workers are paid compared with their UK equivalents? The Spec could do us all a favour by showing how much it costs to produce a product here compared with countries our jobs are being exported to, and how much more it costs to produce the same product in France, whose Hollande is the model for the Miliband government, if it gets elected.

    • itdoesntaddup

      I note that Ford was closing uncompetitive production based in the EU. Genk in Belgium will also be closed, and so will Mondeo Man.

  • Baron

    for those in favour of the minimum wage, here’s a thought.

    We should create a Nationwide Council for Wages and Salaries (NACOWASA), it should be charged with setting up the pay for everyone from tea ladies to hedge fund directors, in doing so, it should take into account both individual needs, aspirations as well as the goals we as the society want to pursue.

    This approach worked well for the Red Menace governed countries of the East, China (up to about 20 years ago), still works well for North Korea. It should work wonders for us, too.

    • HFC

      Dave Lindsay has asked me to congratulate you, Baron, on your incisive thinking and commitment to the cause your contribution exhibits. A red star for you!

      • Baron

        Spasibo (Спасибо) to comrade Commissar Lindsay, it would be particularly pleasing if the Red Star were to be accompanied with a bag or two of potatoes, just in case his idea of the society of equals fails.

      • Baron

        HFC, sir, Baron’s note of thanks got censured. Why? Here it is again.

        Spasibo (Спасибо) to comrade Commissar Lindsay, it would be even more pleasing if the Red Star of Lenin were accompanied with a bag or two of potatoes, just in case his idea of the society of proscribed equals fails.

  • Charlie the Chump

    And what about Employes NationaI Insurance Contributions? Adding to the cost of employment, reducing the likelihood of expanding, increasing the likelihood of shedding staff.
    This has not been though through because it’s another socialist wheeze.

  • Richard

    “start by gathering accurate regional information by area on the cost of living”

    No! Remember the Cowperthwaite rule – if we collect statistics, people will want the government to do something about it. Which in this case will mean lobbying for higher minimum wages.
    Your analysis is right – housing, electricity and food are all to expensive, because of government interference (planning rules, climate change and the EU). And incomes are too low because taxes are too high. Let’s get rid of those, and only if there’s still a remaining poverty problem do we need to look into regional statistics.

  • David Lindsay

    We need a statutory ban on anything paying any of its employees more than 10 times what it paid any of its other employees, with the whole public sector functioning as a single entity for this purpose, and with its median wage fixed at the median wage in the private sector, to which manual jobs would no longer be outsourced. MPs and Ministers would be included in that, and there would be a statutory ban on anything, anywhere in the economy, paying anyone more than the Prime Minister.

    In much that vein, there is also the matter of holding Iain Duncan Smith to the logical conclusion of his position, namely a unified system of taxation, benefits, pensions, minimum wage legislation and student funding, to ensure that no one’s tax-free income ever fell below half national median earnings. Some of us have been blogging away for years that there should be a single form of Social Security payment, called simply Social Security, and guaranteeing that minimum income universally.

    Ed Balls, over to you.

    • HFC

      Ah, the national socialist Utopia!

    • HJ777

      An idiotic suggestion.

      If companies are banned from freely paying some of their employees more than 10 times what the lowest paid get, then they will simply split the company up and outsource either the lower or the higher paid work. It’s an easy, but bureaucratic, way of getting around such a ban.

      • HFC


        You just don’t get it do you?

        David Lindsay, the deepest of deep thinkers, would quickly place a ‘statutory ban on anything’ that interferes with his prescription for National Socialism.

        For my part, I’d place a statutory ban on shallow, ill-conceived and impractical utterances by David ‘Deep Thought’ Lindsay.

        • HJ777

          Yes, sorry about that.

          You’re right of course – we should be able to ban things we don’t like. I don’t like people who go around wanting to control other people’s behaviour by banning things – so I too advocate banning David Lindsay.

    • Mike Thomas

      You are Wesley Mouch and I claim my Galt gold dollar…..

    • moulin de plassac

      Brilliant. This would allow the government to introduce a five year plan under which the wages of everyone are raised until they are above average; Just like education standards have been.

  • LB

    It all misses the point.

    The state is bankrupt.

    It is only by running a fraudulent set of books, that it gives the impression it might be solvent. No state pension, civil serivce pension … and the rest appear on the books.

    So we have commentators like Ruth Porter behaving like Nero. Fiddling whilst Rome burnt.

    e.g We have to worry about an extra 5p, or 10p on the abstract idea of a living wage. it’s really important. Debts? Too big to solve. If we look at them, we would have to admit the game is up. Far more comfortable sticking our heads up our backsides on that one.

    Deny Deny Deny being the order of the day. If we admit to the debts, we have to admit to defrauding people.

    • A. S.

      This is unfair to Ruth Porter.

      She, like many, would dearly love the state to tackle it’s (ours) debt problem, by spending within its means.

  • LB

    Lets see.

    8.30 an hour living wage.

    Lets see who is the big criminal when it comes to making that person poor.

    Is it the company who pays them money, in exchange for their skills and labour? Nope, they are paying the money out.

    For that London worker on a 37.5 hour week.

    1,610 pounds in income tax
    1,031.16 pounds in employee NI
    1,200.19 pounds in employer NI [Just like VAT]

    If you want to do the sums yourself.

    3,841.45 in taxes for working.

    Hmm, now who is making people poor?

    • TomTom

      Just like Medieval England the Serf works for the Agents of The Crown who seizes Rent

      • LB


        That’s what is behind the Pleb attitude of all MPs. It’s not just Mitchel. It’s wide spread.

        For example, you see in on the left. A tax cut is giving money to the rich and the middle class. Eh? It’s not the state’s money, its the earner’s cash that you are taking.

        There are more insidious variants on this. Eg. Debt/GDP as a ratio.

        First, they omit all the big debts off the numerator to make the ratio smaller. Then they make the denominator bigger by using GDP. Yep, all the money in the UK is theirs.

    • Timbo

      And rent £12,000

      (London average: see–London-rents-highest-1-038.html).

      So, it would be the landlord then, wouldn’t it.

      What do IDS and George Osborne do to help? Cap rents? No, cut housing benefit. Cruel, stupid, or both?

      • Kevin

        Why is this comment getting voted down?

      • MrVeryAngry

        Capping rents is very bad practical economics. And housing benefit is a subsidy to landlords. But I agree that ‘rent’ (true rent or mortgage payments to banks, it matters not) is the problem. The basic costs of living ex-housing are almost identical everywhere in the UK. Tescos charge the same for a lamb chop in Basildon of Berwick.

        So what one thing can be done to sort this house cost/rent seeking problem most quickly? Go on, have a guess (hint. It’s not subsidies, benefits of caps).

    • hexton

      Sorry to be an utter pedant, LB, but your figure for £3,847.45 tax/NI is a bit misleading. Of your total, ‘only’ the income tax and employee’s NIC of £2.647.16 is deducted from the ‘living wage’ salary of £16,185 (and that’s the maximum: less income tax if there are company pension contributions etc deducted through payroll). Payment of the £1,200.19 employer’s NIC is the employer’s liability over and above the salary:

      – the cost to the employer is £16,185 + £1,200.19 = £17,385.19, which is tax-deductible for the employer.
      – the net take-home pay of the employee is £16,185 – £2,647.16 = £13,537.34

      I’m certainly not denying that the employee has to suffer large deductions in tax/NI: just saying that these deductions not as large as can be implied by conflating the employee’s and employer’s liabilities.

      • Jim

        The cost of employers NICs are almost entirely borne by the employee, in the form of lower wages. When employing someone, you work out what the amount of money you can afford to pay, and still make a profit from the employee, and then you work out what combination of wages + employers NICs adds up to the figure you have in mind.

        For example, lets say my business could afford to employ someone at £20K, absolute maximum cost, all in. So the maximum my employee will be payed is £17,575, which is £20K including employers NICs. The slice the government takes could have gone to the employee, it would make no difference to my costs who gets it.

        • hexton

          Certainly. But the figures calcualted as a living wage – £8.20 an hour in this case – are derived solely from the employee’s side of the figures. The implication is that the additional NIC cost to the employer treated as a secondary matter, minor in the scale of things.

          From the employer’s perspective, and as you say, the charge to employer’s NIC is of course anything but minor.

          All a matter of viewpoint.

  • itdoesntaddup

    It’s obvious, isn’t it?

    Stop subsidising mortgages via artificially low interest rates and rents via housing benefit (which should really be called Landlord Benefit). Watch house prices and rents fall.

    Stop subsidising uneconomic forms of energy production and the penalising of economic methods by giving ROCs a zero buyout value, repealing the carbon floor price and EU ETS, and the Large Combustion Plant Directive. Repeal Ed Miliband’s Climate At 2008, and his Energy Act 2010. Get on with developing shale gas, awarding some of the tax revenue to local spending in the areas where developments occur. Watch energy prices fall.

    • alexsandr

      and remove the VAT from domestic fuel. It was put there to suppress demand. The market price does that now so the tax is superfluous.

    • LB

      You’ve missed off Economic Refugees.

  • TomTom

    KPMG lives off PFI Projects. It has long had its staff as implants in HM Treasury and spent decades with Sheila Masters now known as Baroness Noakes hoovering up contracts with Government Agencies under Labour then put in the House of Lords by William Hague

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