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Improving living wages

Research from the University of Bath has informed policy change, directly impacting the living standards and social welfare of employees.

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Living wages

Following the financial crisis of 2008, the UK experienced a decade of stagnation in real wages. According to the Bank of England, this was the worst such period since 1860.

The decade has been rather unusual, with large falls in real wages, yet only limited job losses. This was quite the opposite to previous UK recessions, and the general pattern across the OECD. Professor Paul Gregg and colleagues from the University of Bath, have explored this in detail, looking in particular at the two periods, 2009-14 and 2017, in which wages fell, and the brief recovery in between. They published a series of studies on their findings.

A prominent area of focus for Gregg, has been wage stagnation among those in the lower portion of the wage distribution. He found younger generations to be particularly hard hit, with their wages in 2018 the same in real terms, as for their counterparts 15 years previously. They often had reduced chances of career progression, job moves and promotions, meaning they spent longer in lower paid occupations. In turn, this led to weaker growth in earnings.

Research funded by the Low Pay Commission

During 2013, Gregg undertook research funded by the Low Pay Commission, into the effects of minimum wage laws in the UK. The study examined what happened when wages were raised to the new minimum, and whether this had any adverse effects on jobs surviving, hours, bonuses and non-wage aspects of the contract.

He found that the minimum wage somewhat reduced hours worked, weakening its overall effect on weekly income. However, it had little effect on levels of non-basic pay, the use of temporary contracts or the provision of pensions by employers. Nor did it produce an increase in flexible employment arrangements, such as zero hours contracts. The minimum wage had only slight negative effects on a person’s likelihood of remaining in the same job a year later; this was no worse for young people than for older workers.

This research led to academic publications and reports by the Resolution Foundation, disseminated widely in the media and policy-making circles. This has connected to broader debates about generational fairness: whether young people will continue to see lower wages as they age, or will catch-up as wage growth recovers.

Impacting the National and Voluntary Living Wages

Gregg’s research on the effects of minimum wage laws, demonstrating their positive benefits and the lack of any significant negative effects, has had a major impact on the development of the National Living Wage (NLW) and the Voluntary Living Wage (VLW).

The NLW is calculated by the Government based on a proportion of the median level of earnings, whereas the VLW is calculated independently of Government and is based on the amount people actually need to get by.

In November 2017, Gregg presented the research to the Bank of England Monetary Policy Roundtable. He went on to share his findings with the Trades Union Congress (TUC) in January 2018 and the Cabinet Office in February 2018. He gave a keynote presentation to the HM Treasury Labour Markets Conference (September 2018) and a joint Resolution Foundation/Bank of England seminar (October 2018), as well as to other more public-orientated events and academic conferences.

Gregg’s research and expertise on the UK labour market, in terms of both wages and employment, also led to his membership of the two influential bodies, looking at how to ensure higher wages for lower paid workers.

The National Living Wage

In 2014, the Resolution Foundation requested a review of minimum wages. This review was chaired by Sir George Bain (former Chair of the Low Pay Commission), and was strongly influenced by Gregg’s research into wage stagnation in the lower portion of the wage distribution. The resulting report was influential in shaping Government policy. When announcing the 2015 Budget, George Osbourne cited the review as key evidence to introduce the national living wage for those over the age of 25.

'I am today introducing a new national living wage. The Low Pay Commission will recommend future rises that achieve the Government’s objective of reaching 60% of median earnings by 2020. That is the minimum level of pay recommended in the report to the Resolution Foundation by Sir George Bain, the man the last Labour Government appointed as the first chair of the Low Pay Commission.' – George Osbourne, Chancellor of the Exchequer, 2015

This bold policy shift was significant, given the prior reluctance of Conservative politicians to regulate the labour market. Moreover, the proposed 60% of median hourly earnings is high by international standards - only France and New Zealand, among advanced economies, are in this territory.

When concerns were raised over the potential effects of higher minimum wages on employment and hours worked, research by Gregg with colleague Dr Kerry Papps (2014) was cited in the Treasury document for the new National Living Wage, to allay such fears. These research findings were consistent with earlier research by the Centre for Economic Performance.

As a result of the policy changes announced in the 2015, the Office for Budget Responsibility estimated in 2017 that 6 million workers would be affected, depending on where they are in the wage distribution. They projected that the effect on weekly earnings, after factoring effects on hours worked and employment, would be £6 per week averaged across all groups. This would represent just under £2 Billion a year reaching low waged workers.

According to a report by the Low Pay Commission looking at the period to April 2019, these numbers have been exceeded. This was due in part to rapid employment growth and slower wage growth in general, meaning NLW increases have bigger effects.

The Voluntary Living Wage

In 2017, the Living Wage Commission, was established by the Living Wage Foundation, to set the rates for a higher Voluntary Living Wage. The aim was to harmonise the process of setting rates for the national VLW and the London Living Wage; and to demonstrate to existing and potential VLW employers the guiding principles for future rate changes. Gregg became a member following his research in the area.

The research behind the Commission’s setting of the 2017 VLW was published, and rates continue to be revised annually. It also plays a key role, in providing some principles and forward guidance, to help support this growth. A growing number of employers have sought accreditation by the Living Wage Foundation, signing up as a Living Wage Employer. Others shadow the wage rates set by the Foundation without accreditation.

The impact of the VLW has been widespread. In 2020 there are 6500 accredited Living Wage employers, including 40% of FTSE 100 companies. This equates to 180,000 workers being directly covered, with an additional 2500 employers joining the scheme since 2017. Many of these firms also require their contractors to meet the VLW.

In addition, since 2017, and with the encouragement of the LWF, a number of ambitious plans have been drawn to create Living Wage Places, towns and cities, where all employers pay the VLW. Dundee, Glenrothes and Cardiff have formed employer/local council- led coalitions to achieve this ambition. This shows the larger socio-political impact that the LW debates and research evidence are having.

'[Gregg] played an invaluable role in forging the reputation of the LWC and in ensuring it plays a robust, independent and credible role in setting the Living Wage rates…. [He] quickly commanded the respect of the employer chief executives on the Commission as well as the General Secretary of the TUC and Deputy Mayor of London.' – Gavin Kelly, Chair of Resolution Foundation

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