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New Economy Working Papers

Pay up? Living costs and the living wage in Manchester John Holden / Luke Raikes July 2012 NEWP 009

New Economy Working Papers

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2012 Holden and Raikes. All rights reserved. This text may be quoted without explicit permission, provided that full acknowledgement is given. The authors would like to thank all those who strengthened this piece of work with their feedback and assistance, both informally and formally through the peer review process. We borrowed heavily from the work of Donald Hirsch and the Living Wage Foundation in calculating a Manchester Living Wage and would like to thank them in particular. Of course, the opinions expressed, and any errors or omissions, remain our own. The Working Papers are produced by New Economy Working Papers. The views expressed in this paper are those of the authors alone and do not necessarily reflect the views or the policy of their employers, members of the New Economy Working Papers Editorial Board or New Economy.

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This paper analyses changes to earnings and the cost of living in Manchester, finding that since 2009 a combination of stagnant wages, high inflation, and reduced hours worked has resulted in a dramatic reduction in real pay for the lowest paid. The case for Manchester adopting a living wage policy to support the lowest paid to meet basic living costs is explored. Using local living cost data for typical household types a living wage rate of 7.22 per hour is calculated for Manchester. The likely impact of a living wage is analysed by assessing the theoretical and evidenced costs and benefits, drawing in particular on evidence from cities that have already adopted living wage policies. The paper argues that low and falling real wages at the bottom end of the pay scale represent a significant challenge for Manchester. Based on the experience in the US and London, promoting a Manchester living wage is likely to have a positive impact on wages for some of the lowest paid, with negligible negative economic impacts. However, it is not on its own a sufficient response. Policy makers in Manchester should also consider adopting wider policies that target low incomes (not just low hourly pay) in conjunction with policies directed at reducing the cost of living in Manchester and addressing the underlying skills and employment issues which the city faces.

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Table of Contents
Executive summary 1: Introduction 2. Pay and income in Manchester 3. Why a living wage? 4. Calculating the Manchester living wage 5. Costs and benefits: the potential impact of a Manchester living wage 6. Conclusions 05 08 10 20 30 38 46

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Executive Summary
Real wages and incomes of the lowest paid in Manchester have fallen dramatically since 2009, alongside substantial increases in the cost of essential goods and services. In real terms, hourly wages for the bottom 10% of earners in Manchester fell by 50p (7.5 percent) in two years. Real annual wages fell even more dramatically for the bottom 10%: part-time workers have faced a 619 (19.8 percent) wage cut and full-time workers pay fell by 904 (6.1 percent). There are an increasing number of households in Manchester that, even if they are able to secure full-time employment at the minimum wage, will earn less than they need to achieve a reasonable quality of life, even taking into account the benefits and tax credits to which they are entitled.
By adopting a methodology developed to calculate a living wage for the UK outside London, we develop hourly wage requirements for nine household types in Manchester based on their income requirement to meet an acceptable standard of living. We find that hourly wage requirements, assuming the individual is in full-time work, range from below the national minimum wage (childless couples, lone parents with one or two children, and couples with one child) to more than one and a half times the national minimum wage (singles and couples with three or four children). A weighted Manchester living wage is calculated to be 7.22 per hour, over 1 higher than the national minimum wage but broadly in line with the national rate outside London calculated by the Living Wage Foundation. The potential impact of a living wage on Manchester is explored by analysing the theoretical effects and the empirical evidence from cities that have implemented a living wage policy. It is concluded that Manchester adopting a living wage policy to address low pay is, due to both the scale and acuteness of the challenge, unlikely on its own to improve incomes. A broader response is suggested that seeks to both raise the income (not just hourly pay) of the lowest paid while simultaneously reducing the living costs faced by these individuals, which could incorporate, but is not limited to, paying workers a living wage.

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The recommendations below are provided to support these twin objectives. Manchesters strategic approach to improving life chances should place greater weight on increasing the real incomes of those in low paid work. Actions to raise the number of hours worked by the lowest paid should be developed, potentially funded through a community budget approach. Skills interventions should be delivered to support low paid workers to progress in work, alongside support to employers to utilise these skills. In light of the current conditions experienced by low paid employees, employers in Manchester should explore the feasibility of paying staff a living wage, or aspiring to do so when they are able to absorb the cost without it inflicting potential negative consequences. Although the current fiscal and economic climate may mean this is challenging, some public and private employers have managed to do so already: the judgement is for employers to make. As overall living costs in Manchester are similar to those in other regions outside London, a specific Manchester living wage calculated annually is not required. Local living cost data should be regularly published to support the public and private sector in paying living wages based on business and social objectives. However the Living Wage Foundations figure for the living wage outside of London should be taken as applying to Manchester, as there is insufficient variation to justify a separate rate.

Manchester should focus on lowering the cost of living for the lowest paid by: - developing approaches to increase the supply, and reduce the cost, of affordable housing; - working with transport operators to ensure that the lowest paid have affordable access to key employment sites; and - exploring ways to make childcare more affordable. Support should be provided to residents who are in debt through advice and support services and improving access to fair credit.

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Real wages and incomes of the lowest paid in Manchester have fallen dramatically since 2009, alongside substantial increases in the cost of essential goods and services. In real terms, hourly wages for the bottom 10% of earners in Manchester fell by 50p (7.5 percent) in two years.
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Pay is perhaps the most emotive issue in the debate surrounding the UKs attempt to move towards sustainable economic growth. Bankers bonuses, public sector pay freezes and benefit payment caps have all stirred controversy and debate, and captured the public interest, in a way that quantitative easing and R&D tax credit reform sadly have not. It is not difficult to understand why this is the case: households across the UK are feeling the pinch as high inflation combined with pay freezes and redundancies erode real incomes. For many this will mean having to forgo a foreign holiday or delaying buying a new car; a hardship but a survivable one. For some, however, the impact will be much more severe, with family incomes no longer stretching to meet basic needs. Rising living costs disproportionately affect those at the bottom end of the earning scale. One way by which Manchester1 could respond to these challenges is by calculating a Manchester living wage based on the true costs faced by the lowest paid to meet basic needs such as shelter, clothing and nutrition and encouraging employers to pay this rate. Successfully implemented living wage policies can reduce in-work poverty and directly improve the quality of life of beneficiaries. They can also have positive spill-over effects such as reduced income inequality and increased community cohesion (see, for instance, Vittanen and Schmuecker, 2001). This could support Greater Manchesters objective to make the city a fairer... and more inclusive place to live (AGMA, 2009).

In the UK the living wage movement has been successful in pushing the issue of low paid work up the political agenda David Cameron said in May 2011 that the living wage is an idea whose time has come (Stewart and Loweth, 2011) and increasing wages for some of the UKs lowest paid workers. However, detractors have pointed to the bluntness of a living wage approach, the possible negative impact on economic competitiveness, and legal and practical difficulties with implementing the policy. This paper explores these debates in a Manchester context. It is structured as follows: chapter 2 analyses how pay has changed in recent years in Manchester, focusing in particular on the lowest paid; chapter 3 provides a short background to the living wage movement and examines the approach of cities where a living wage has already been adopted; chapter 4 estimates the living costs for different household types in Manchester and calculates a Manchester living wage for 2012/13; chapter 5 reviews the theoretical and evidenced benefits and costs of Manchester adopting a living wage approach; and chapter 6 offers conclusions on the necessity, viability and impact of a Manchester living wage and makes policy recommendations for Manchester.

In this paper Manchester is used to refer to the 10 local authority districts of Bolton, Bury, Manchester, Oldham, Rochdale, Salford, Stockport, Tameside, Trafford and Wigan.

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Pay and income in Manchester

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
Wilkins Micawber, David Copperfield. When Charles Dickens wrote David Copperfield in 1850 he presumably did not intend to establish the discipline of happiness economics. He certainly could not have foreseen the rise of Tax Credits, child benefit payments, and other redistributive policies that mean today an income of twenty pounds with expenditure of twenty pound ought and six, may or may not result in misery depending on the net position. However, he did succinctly highlight the thin line between earning just-enough-to-get-by and earning not-quite-enough and the huge impact that this can have on peoples lives. Poverty does not just affect the out-of-work but, increasingly, those in work too.

This section looks at trends in income and wages over the past decade in Manchester focusing on how changes have affected those at the bottom of the income scale.

Trends in income and wages There are two long-term trends in income distribution which have been observed in the past three decades. The first observation is that income of those at the top has pulled away from that in the middle, a trend which has continued steadily since the 1980s irrespective of business cycle or the political party of government. The second observation is that of incomes at the bottom failing to keep pace with incomes at the middle and top (Bell and Van Reenen, 2010). Although recently there has been a focus of research on the extent to which inequality across the whole distribution can have negative effects on well-being (the main work being Wilkinson and Pickett, 2011), for the purposes of this report it is the second trend which is of interest the stunted wage growth of the lowest paid and how this interacts with rises in the cost of living. The disparity in income between those at the bottom of the distribution and those in the middle increased sharply in the 1980s, coinciding with structural changes in the economy and declining trade union density, but slowed and even reversed slightly during the 1990s and 2000s. In particular pro-active government legislation introduced since 1997 has had a positive effect particularly the national minimum wage (introduced in April 1999) and Tax Credits (Brewer and Wren-Lewis, 2011). Working Families Tax Credit was introduced in October 1999 to provide incentives to work by raising the incomes of those on or around the minimum wage. Working Families Tax Credit was subsequently replaced with Child Tax Credit (designed to simplify the system of

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financial support for parents) and Working Tax Credit (designed to make work more financially attractive), both of which are due to be merged into the single Universal Credit which is being phased in from 2013. From its inception in 1999 to 2006, increases to the national minimum wage outstripped rises in both average earnings and inflation (see figure 1)2 . Since 2006 the national minimum wage has lost value against inflation, although it has kept pace with average earnings growth. The net result of this is that, as of 2011, the hourly earnings of the lowest paid

have slipped away from costs, although they have stayed in line with the growth in wages of other groups. Tax Credits in particular have had a significant impact on the income of the lowest paid particularly families with children accounting for an estimated 40 percent of the increase in average net household income over the period 200203 to 200809. It has been estimated that, without Tax Credits, those on low to middle incomes would have seen a fall in real income between 2002-03 and 2008-09 (Brewer and Wren-Lewis, 2011).

Figure 1: Adult national minimum wage, bottom 10 percent hourly pay, median pay and RPI inflation

150 National Minumum Wage Median Gross Hourly Pay 10th Percentile Gross Hourly Pay RPI 145



134 132 127





80 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: authors calculations of ONS (2012); Annual Survey of Hours and Earnings (2012); Low Pay Commission (2012)

2 There are two main measures of inflation in the UK: the Retail Prices Index (RPI) and the Consumer Prices Index (CPI). In this report we have used RPI in all calculations of inflation and for determining real increases in pay and living costs because it includes crucial items of expenditure for this purpose in particular costs associated with housing and council tax a view taken also by the Resolution Foundation in their work on the cost of living. For more information see here:

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Wages in Manchester Turning to Manchester, median gross hourly pay stood at 10.74 in 2011, in line with northern comparator cities but below the better performing cities of Bristol and, especially, London. The gross hourly wage of the bottom decile (the wage level below which 10 percent of earners fall) was 6.27 only marginally above the 2011 minimum wage of 6.08, again putting Manchester in line with other cities outside London and Bristol. Between 2002 and 2009 the hourly pay of the lowest paid 10 percent of workers in Manchester rose at a

more rapid rate than inflation; this was in line with the experience of the country as a whole. In real terms (taking inflation into account), the average hourly wage of someone in the bottom 10 percent of earners was 6.8 percent higher in 2009 compared with 2002. However since 2009 high levels of inflation, combined with stagnant wages have seen real wages fall dramatically in 2011 wages were 50p (7.5 percent) per hour lower for the poorest workers in Manchester a similar situation as in the UK as a whole where there was a 49p per hour cut in real terms. This means that, for many, the higher real wage attained between 2002 and 2009 was more than wiped out by 2011, leaving pay 1.2 percent lower in 2011 than in 2002.

Table 1: Gross hourly pay (), Manchester and selected cities, 2011

Percentiles 10 Manchester Birmingham Bristol Leeds Liverpool London Newcastle Nottingham Sheffield 6.27 6.25 6.54 6.38 6.15 7.19 6.29 6.26 6.18 25 7.69 7.60 8.59 7.82 7.50 10.12 7.98 7.94 7.59 50 10.74 10.86 12.01 10.67 10.47 15.67 10.71 10.89 10.81

Source: Annual Survey of Hours and Earnings (2012)

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Figure 2: Real wages of bottom decile full-time and part-time workers in Manchester

120 Full Time Part Time Total


110 107.3 105

100 98.8 95 96.4

90 2002 2003 2004 2005 2006 2007 2008 2009 2010


Source: authors calculations of Annual Survey of Hours and Earnings, (2012)

There are significant disparities between changes in hourly pay and annual pay however. Annual pay fell between 2009 and 2011 even before inflation is taken into account with the result that, in real terms since 2009, part-time workers annual pay has reduced by 619 (19.8 percent) and full-time workers by 904 (6.1 percent) taken together the real annual income of the all of the lowest paid 10 percent of workers in Manchester fell by an average of 1,317 (17.5 percent). This is illustrative of the complexity of working patterns for the lowest paid, with hours worked as well as hourly wages impacting on annual pay: 28.0 percent of those in employment now work part-time, up from 24.3 percent in 2002. However, while the number of people working part-time has risen, the average number of hours they work has fallen, from an average of 8.0 to 6.8 between 2002 and 2011. So, despite average part-time hourly wages of the bottom decile of earners rising by 7.3 percent in real terms between 2002 and 2011 (see figure 2) the average annual salary of this group fell by 6.1 percent.

This long-term trend in increasing numbers of people working part-time while fewer hours are worked looks to have been exaggerated by the recession. Since 2007 there has been a dramatic rise in living costs (as shown by the steep rises in RPI in figure 1) but this has not been accompanied by significant upwards pressure on wages, as might usually occur in a growing economy. In part this is a function of the recessions impact on unemployment both current employees and those seeking work have less bargaining power to push for higher pay. This has been boosted in the public sector by nationally enforced wage freezes. In addition to stagnant real wages, employers have been willing to implement, and employees to accept, reductions in full-time working and over-time, and increased part-time working (New Economy, 2012), similar to patterns seen in previous recessions (Gregg and Wadsworth, 2010). Many of those working part-time are not doing so by choice: recent figures show that the number of people working part-time because they could not find a full-time job now stands at 1.42 million nationally

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the highest level since records began in 1992 (Office for National Statistics, 2012). The result for both the UK and Manchester is that employees are working fewer hours and also being paid less for the hours they work, thereby taking home a significantly lower salary at a time when living costs are rising.

Gender and pay The past decade has seen significant changes to gender pay differentials amongst the lowest paid. Females in the bottom 10 percent of earners saw a far greater percentage increase in average hourly pay (35.3 percent) than males (19.5 percent) and, although this remained at a lower level in absolute terms, there was significant convergence between the sexes. In 2011 there was a 34p per hour difference in pay compared to an 88p difference in 2002. However as table 2 illustrates below, of all groups it was part-time male workers whose wages accelerated the most during the period.

The wage gap that persists between male and female workers is now only observed between male and female full-time workers, with both male and female part-time wages paid at 5.93 per hour. That said, women are significantly more likely to be in part-time work than men, and so are more likely to be in this lower paid group. With respect to full-time workers, there has been a narrowing of the gap between 2002 and 2011 female full-time pay went from 87.1% to 96.9% of male full-time pay; however there is still a 22p per hour gender gap. In terms of annual pay this gap is considerably worse: women are paid 85.7% as much as men, with an annual income of 12,896 compared to 15,047.

Table 2: Percentage increase in hourly pay since 2002 for bottom decile earners - Manchester

Part-time Male Female Total 44.6% 41.2% 43.2%

Full-time 22.3% 36.0% 28.8%

Total 19.5% 35.3% 31.9%

Source: authors calculations of Annual Survey of Hours and Earnings (2012)

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Figure 3: Trends in hourly pay for bottom decile of part-time male and female workers - Manchester

7.50 Male FT Male PT Female FT Female PT









3.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Annual Survey of Hours and Earnings (2012)

Annual pay in Manchester The result of those in the bottom 10 percent of earners working fewer hours is that annual salaries are significantly more stretched than hourly wages. Whereas the bottom 10 percent of earners average hourly rate of pay in 2011 was 58 percent of the median (table 1), their average annual gross salary was just 31 percent of the median (table 3). The overall trend is the same for cities across England, with the exception of London where bottom decile annual pay was just 46 percent of median.

While table 1 highlights that bottom decile hourly pay in Manchester fare reasonably well against other provincial cities, table 3 shows that the annual earnings of the bottom decile compare poorly. There are significant health warnings on the data but the annual earnings of the bottom 10 percent appear to be lower in Manchester than any other English city. If the challenge in Manchester is annual income not hourly pay, this has important implications for the effectiveness of a living wage approach.

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Table 3: Gross annual pay (), Manchester and selected other cities, 2011

Percentiles 10 Manchester Birmingham Bristol Leeds Liverpool London Newcastle Nottingham Sheffield 6,323 6,331 7,344 6,838 6,327 8,703 6,784 6,976 6,434 25 12,805 12,791 14,404 12,920 12,394 18,107 12,799 12,625 11,839 50 20,399 21,000 22,449 20,303 20,007 30,115 20,463 20,820 19,851

Source: Annual Survey of Hours and Earnings (2012)

Coefficient of variation is less than 5%.

Coefficient of variation of between 5% and 10%. The lower the coefficient of variation the more robust the figure.

Coefficient of variation of between 10% and 20%.

Wages by sector and occupation A key factor driving differentials in hourly rates of pay are the sectors and occupations in which people work. Unfortunately earnings data by these variables are only available at the North West level; however it is illustrative to look at these to understand where the impact of raising low levels of pay is likely to be felt. At the North West level the average bottom decile hourly pay across all occupations is 6.18. Rates of pay are below this average in elementary occupations

(5.89), Sales and customer services (5.93), and caring, leisure and other services (6.03). Only managers, directors and senior officials (7.80), associate professional and technical (8.01) and professional occupations (11.41) pay hourly rates to the bottom 10 percent of earners above that of the bottom 25 percent for all occupations (7.52). Hence, the breadth of occupations that a living wage would need to cover is likely to be extremely wide including skilled, semi-skilled and unskilled occupations.

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Figure 4: Bottom decile hourly pay by occupation North West, 2011

Professional Associate professional and technical Managers, directors and senior officials Administrative and secretarial Skilled trades Process, plant and machine operatives All occupations Caring, leisure and other service Sales and customer service Elementary 0 2 4 8.01 7.80 7.00 6.51 6.30 6.18 6.03 5.93 5.89 6 8 10



Source: Annual Survey of Hours and Earnings (2012)

This breath of coverage is replicated in data for hourly rates of pay by sector. Several sectors pay bottom decile hourly rates of pay below the minimum wage, with most notably the bottom 10% of earners in accommodation and food service activities getting an average of just 5.00 per hour. A clear public-private split is not evident. Public sector workers in administration earn amongst the highest rates of the

bottom 10 percent (8.71), however employees in the (predominantly public) education and human health and social work sectors earn just above the average for the bottom 10 percent of earners. Clearly, any attempt to boost the earnings of the lowest paid would need to impact widely on both the public and private sectors.

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Figure 5: Bottom decile hourly pay by sector, North West, 2011

Electricity, Gas, Steam and Air Conditioning Supply Public Administration and Defence; Compulsory Social Security Financial and Insurance Activities Information and Communication Transportation and Storage Professional, Scientific and Technical Activities Construction Real Estate Activities Water Supply; Sewerage, Waste Management and Remediation Activities Manufacturing Education Human Health and Social Work Activities All Sectors Wholesale and Retail Trade; Repair of Motor Vehicles and Motorcycles Administrative and Support Service Activities Other Service Activities Arts, Entertainment and Recreation Accommodation and Food Service Activities 0 2

9.64 8.71 7.89 7.47 7.31 7.15 7.14 7.04 7.00 7.00 6.78 6.47 6.18 5.97 5.95 5.93 5.93 5.00 4 6 8 10 12

Source: Annual Survey of Hours and Earnings (2012)

Outlook The Office for Budget Responsibility does not expect earnings to rise faster than prices by a significant margin before 2014 and the wage share in the UK is likely to continue to fall until 2016 (Office for Budget Responsibility, 2011). Recent policy announcements by Government in particular the indexation of all benefits and Tax Credits to the Consumer Price Index instead of the almost always higher Retail Price Index and the below inflation rise in the national minimum wage will add further to the financial pressure on the lowest paid (Brewer, Brown and Joyce, 2011). This is notwithstanding the increase to the personal tax allowance, which will benefit, in the main, full-time workers within the bottom 10 percent of earners but not part-time workers. Based on this, and accounting for changes to the Tax Credit regime, it has been estimated that typical disposable household income for low and middle

earners is set to fall 8 percent by 2015 and that even modelling for the unlikely scenario of high growth and wages increasing it would take until 2020 for low to middle income households to reach the position they were in 2007-08. The far more likely scenario is that low and middle income households are left in essentially the same position as in 2001 (Resolution Foundation, 2012). The outlook is therefore a challenging one for the lowest paid in society. While those above them in the income distribution will also see a decline in living standards and those below will be struck with falling benefit payments in real terms, increased employment seeking conditionality, and greater competition for the jobs that are available this chapter has highlighted the specific pressures which are being brought to bear on the working poor. The next chapter analyses the case for adopting a living wage policy to mitigate the worst of these effects.

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Why a living wage?

Manchesters approach to improving life chances, as set out in the Greater Manchester Strategy (AGMA, 2009), is principally focused on getting more residents into work. With over 273,000 residents on out-of-work benefits (one in six of the working age population), the reasons for this approach are self evident. However, as set out in the previous chapter, increasingly the life chances of those in work are negatively affected by stagnating real wages and rising living costs. Research by the Department for Work and Pensions (DWP) shows that 60 percent of poor adults live in working households and that 13 percent of families where at least one person works are below the official poverty line (DWP, 2011).

Table 4 presents data from DWPs Households Below Average Income survey, which highlights why dealing with low pay of the in-work is essential in tackling poverty. Workless households (with the exception of those where one household member has retired) are significantly more likely to be in the bottom 20% of income distribution (quintile) almost three-quarters of households with one or more unemployed member, and over half of those with inactive members, have less disposable income than 80 percent of the population. However, households with one or more members in work also fall into the lowest income quintile, with almost half (47 percent) of the total number of families in the bottom quintile having at least one member with a job. Clearly, an approach to poverty alleviation that focuses solely on getting people into work will miss a significant part of the working poor not least the 11 percent of the bottom quintile where all members of the household are in full- or part- time work and the 11 percent that are self employed. For many of those at the bottom of the income scale, being in work is a necessary condition for avoiding poverty but it is not sufficient.

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Table 4: Economic status and bottom income quintile, 2009/10

Economic status of adults in the family One or more full-time self-employed Single/couple all in full-time work Couple, one full-time, one part-time work Couple, one full-time work, one not working No full-time, one or more in part-time work Workless, one or more aged 60 or over Workless, one or more unemployed Workless, other inactive

Percent in bottom income quintile (after housing costs) 23 5 6 21 28 16 73 56

Percent of total bottom quintile population 11 7 4 12 13 14 13 27

Source: Department for Work and Pensions, Households Below Average Income, (May 2011)

The remainder of this chapter provides an introduction to living wage approaches by exploring the history of the living wage movement and the experiences of cities that have introduced living wages.

What is a living wage? Perhaps the most widely recognised definition of a living wage is that produced by the Family Budget Unit at the University of York. This defines a living wage as a wage that achieves an adequate level of warmth and shelter, a healthy palatable diet, social integration and avoidance of chronic stress for earners and their dependents (GLA Economics, 2011). This is also the definition used for the London living wage. It is related to, but not the same as, a poverty threshold wage. Indeed the stipulation that it should lead to the avoidance of chronic stress means that a living wage is likely to be some way above the poverty threshold.

While there are obvious parallels with the national minimum wage, there are key differences that set them apart. First, the Low Pay Commission, when recommending each year the rate at which the minimum wage should be set, has to take into account the effect of the minimum wage on the economy of the UK and its competitiveness. This means that the rate does not necessarily reflect what is required to live a reasonable quality of life. A living wage approach in contrast estimates what is required to live and works backwards from that. This leads to a third, related issue, which is that the minimum wage does not necessarily keep pace with rising living costs, as has been seen in the UK since 2009, which by definition a living wage would. The mode of implementation and coverage of a living wage also differs to the national minimum wage. While the UK government could, in theory, calculate the national minimum wage based on a living wage approach, in practice it has resisted calls to do so.

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The most recent below inflation rise in the minimum wage suggests that this will be the case for the foreseeable future. Minimum wage legislation is not a devolved function in the UK (the devolved administrations are bound by the rate set at Westminster) and therefore any locally calculated living wage would need to be voluntarily implemented by local employers. Living wage ordinances in the UK (and indeed the US) have therefore been adopted on a non-statutory basis, mainly led by public sector organisations. As a result of this, the national minimum wage has much greater coverage across the economy. It includes all workers in all sectors and, in the UK, its statutory nature means that compliance is very high. However, a strength of a non-statutory living wage is that it does not need to be uniform across the UK and can vary from place to place to reflect differences in the cost of living. In this paper it is assumed that, if Manchester were to adopt a living wage policy, this would be an independently set rate, which would be phased in by local public sector agencies that have the autonomy to do so, and to which contractors for publicly-funded contracts would be expected to comply. It is also assumed that local private sector employers would be encouraged to pay the living wage. Early History The concept of a living wage approach to tackle the problem of in work poverty is not a new one. Jane Wills (2009) has extensively tracked the history of the living wage movement, identifying living wage campaigns in Britains industrial regions as early as the 1870s. In 1894 Liberal MP (and textile factory owner) Mark Oldroyd put forward the most comprehensive argument for a living wage of the period. He declared that a living wage must be sufficient to maintain the worker in the higher state of industrial efficiency, with decent surroundings and sufficient leisure [providing] reasonable time for recreation and rest

[and] reasonable home comforts. This would be paid for by increased efficiency; greater consumption, which would help fuel demand; and in some cases by falling profits and/or rising prices (Wills, 2009). He also stressed the ethical imperative of giving workers wages that were sufficient to provide for themselves and their families. The same basic arguments are still put forward in favour of living wage policies today. Campaigning for a living wage (and other reforms to improve the quality of life of the lowest paid) gathered pace in the early twentieth century, culminating in a living wage bill being put to the House of Commons in 1931 by Independent Labour Party MP James Maxton. However, the bill was roundly defeated and, post-war, the rise of the welfare state dampened calls for a national living wage. Thus, 1931 remained the high water mark of the living wage movement in Britain until a campaign re-emerged in London in 2001. Re-emergence of the living wage The contemporary rise in the living wage can be traced to the city of Baltimore in the United States, which passed a bill in 1994 requiring firms with contracts with the city to pay workers a living wage of $6.10 per hour. Over 120 cities in the United States now have living wage policies, although the number of workers covered is still relatively limited (in general US living wage policies do not cover city employees, only firms under contract to the city). In their exploratory study for a living wage in Wales, Marsh et al (2010) cite research carried out in the United States by Neumark and Adams (2003) on the key features of living wages in a cross-section of cities. These are summarised in table 5. Generally the living wage rate in these cities is set in relation to the poverty line based on the income needed (as defined by a budget survey) by a standard household (usually a family of three or four) to achieve an adequate standard of living.

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There is significant difference across the 21 cities in the scope and coverage of the living wage policies. Almost all (19) cover contractors, with some also covering sub-contractors, but just five cover city employees (of which one is limited to home health staff). Businesses in receipt of financial assistance from the city are covered by a smaller number of living wage ordinances. Estimates where they are available of the coverage of these living wage policies (expressed as a percentage of the total bottom quartile of earners) range from 0.25 percent

(San Jose) to 2.05 percent (Baltimore). However, this is thought to be at the lower bound of impact, as evaluation methodologies used generally do not take into account spill-over effects or workers employed in businesses in receipt of financial assistance. The living wage rate itself ranges from a low of 120 percent of the minimum state or federal wage to a high of 173 percent, which reflects differing levels of generosity, different methods of calculation, and variable costs of living in each of the cities.

24 | Pay up? Living costs and the living wage in Manchester

Table 5: Coverage of select living wages in the United States

Coverage of living wage3 City Contractors Subcontractors City Employees Businesses in receipt of financial assistance Hourly wage State /federal Commercial (2000 or minimum development nearest date) wage (2000) projects

Baltimore Boston Buffalo Chicago

Construction and service contracts >$5,000 >$100,000 >$50,000 & >10 employees All >$25,000 >$50,000 & >10 employees All

$7.90 (1999) $8.53 $6.22 (with health benefits) $7.22 without) $7.60 (1998) $7.00 (with health benefits) $8.50 (without) (1998) $8.20 >$50,000 All >$100,000 $8.53 $7.55 (1998) $9.38 $7.50 >$100,000 >$5,000 >$25,000 $7.69 $6.80 $8.35 $8.35 $8.19 (with health benefits) $8.50 (without) $8.00 (1999) Those with tax breaks $8.84 $9.27 (1998) Home health staff All >$100,000

$5.15 $6.00 $5.15 $5.15




Denver Detroit Durham Hartford Jersey City Los Angeles Milwaukee Minneapolis Oakland Omaha

>$2,000 All All >$50,000 All >$100,000 >$5,000

>$2,000 All

$5.15 $5.15 $5.15 $6.15 $5.15 $5.75 $5.15 $5.15 $5.75 $5.15

>$25,000 >$75,000 Custodial, security & parking contracts Those with tax breaks Those with tax breaks >$25,000 & airport leaseholders >$20,000 All All

>$100,000 >$75,000

Portland St Louis San Antonio

$6.50 $5.15 $5.15

San Francisco San Jose Tucson

$9.00 $9.92 $8.00 (with health benefits) $9.00 (without)

$5.75 $5.75 $5.15

Source: Adapted from Neumark and Adams (2003), cited in Marsh et al (2010). Figures refer to the value of contract over which the living wage policy kicks in, so that ">$5,000 " means that contractors have to pay a living wage to their employees if they get a contract for more than $5,000 from the public authority. Pay up? Living costs and the living wage in Manchester | 25

The living wage in London and the rest of the UK In the UK the most high profile living wage is that which has been adopted in London. The campaign for a London living wage began in earnest in April 2001 based on the argument that low pay impacts on health outcomes, education, and family and community life. Spearheaded by London Citizens a broad alliance of community groups, including trade unions and religious organisations it has since been picked up by the Mayor of London (initially Ken Livingstone but Boris Johnson has continued to give political and financial backing). The Greater London Authority (GLA) is funded to calculate the London living wage on an annual basis taking into account changes to living costs and tax and benefit entitlements. As the most advanced UK example it is worth looking in detail at the London case. To calculate the London living wage two figures are calculated. First, a bottom up process estimates a Low Cost but Acceptable budget for different household types and calculates the wage needed to meet these costs (the Basic Living Costs approach). Second, the hourly wage requirement to reach 60 percent of the median income is calculated (the Income Distribution approach). The average of these two figures (which were 6.85 and 7.65 respectively in 2011) is taken to give the poverty threshold wage. To protect against unforeseen events, 15 percent is added to the poverty threshold wage. In 2011 this meant the London living wage was 8.30 per hour. The London figure takes into account means-tested benefits (tax credits, housing benefits and council tax benefits), but without these the living wage would be 10.40. Approximately 10 percent of Londoners working fulltime earn below the living wage, of which three-fifths earn below the poverty threshold wage. Part-time workers are disproportionately likely to earn below these thresholds, with 40 percent earning less than the living wage, of whom three-quarters earn below the poverty threshold (GLA Economics, 2011).

Research by Jane Wills (2011) an academic at Queen Marys University and campaigner for the London living wage suggests that since 2005 the London living wage has increased the pay of 10,340 Londoners (around three-fifths of whom work fulltime) which has resulted in an additional 100m having being paid to the lowest paid Londoners up to 2011. Employers committed to paying the London living wage now include as diverse organisations as Barclays and HSBC, Lush, the Tate and Eversheds. The GLA Group incorporating Transport for London, the London Development Agency, London Fire and Emergency Planning Authority and the Metropolitan Police Authority has been phasing in the London living wage which, as of May 2011, has resulted in over 3,000 employees (direct, contracted and temporary) receiving the uplift. The GLA Group includes living wage stipulations in its Responsible Procurement Policy, although whether or not a stipulation is viable is considered on a case-by-case basis for each contract on the relevance and proportionality of London living wage provisions to the subject of the contract, its size and duration (GLA, 2009). This has led to living wage stipulations on a number of support services, including cleaning, catering and porterage contracts whilst keeping within the parameters of the EU legislation. The GLA (2009) cites the London living wage as having clear economic and social benefits for employees who benefit directly; government which makes direct savings on in-work benefit payments; and London which benefits from the positive impacts on relatively poor individuals and families. Feedback from contractors who have implemented London living wage provisions has identified benefits that include:

26 | Pay up? Living costs and the living wage in Manchester

easier recruitment and retention, reducing recruitment costs; higher quality staff; better attendance; better productivity, motivation and loyalty; and better quality of service. However, the published evidence is still relatively anecdotal. Importantly, one would expect a company giving feedback to the body responsible for renewing or not their funding to be willing to please by giving the right answer. The evidence to date on the London living wage has not been able to accurately calculate the potential negative impacts of a living wage, such as displacement of low paid, low skill workers, which mean that the net effect on the lowest paid may not be wholly positive. The potential impact of these effects is explored in more detail in chapter 5. However, despite the lack of robust quantification, the perceived success of the London living wage and the powerful principle behind the living wage approach has led to active campaigns emerging in other parts of the UK, including Glasgow, Wales (where it has been the subject of an intensive feasibility study by Welsh Assembly), Oxford, Leeds, and Brighton (Hirsch and Moore, 2011). Since 2008 Manchester City Council has paid its workers the Manchester Minimum Wage (currently set at 6.84) and in 2011 Oldham Council adopted a living wage of 7.00 for its employees.

Calculating a living wage at an individual city level fits with the logic of a functional economic area. It is at this geographical level that most employers recruit the majority of their workforce and the level at which consistent pay deals could be negotiated. It is also the level at which most employees travel to work, so it can accurately reflect the costs of the local geography. A wage set at a lower spatial level (say an individual district) would not reflect the reality for many workers who have to commute to the area of work from higher (or indeed lower) cost areas. A wage set at a higher geographical level (say the North West) covers such a diverse geography that it may lead to low paid workers living in Manchester receiving a living wage that has factored in the lower living costs in other parts of the region, which employees in Manchester cannot reasonably be expected to achieve. The approach of calculating living wages for individual city regions is not without its critics however. Citizens UK the organisation that established the Living Wage Foundation and leads much of the UKs living wage campaign have devised a methodology for calculating the living wage outside London. They suggest that the development in the US of living wages in individual cities without a common framework for the calculation of hourly rates has negatively impacted on the effectiveness of living wage campaigns, which have been undermined as a result of this fragmentation (Luce, 2005, cited in Hirsch and Moore, 2011). Moreover, in a UK context, it is clear that London has far higher living costs than the rest of the country and so a separate living wage is eminently sensible. However, it is less clear cut outside London where costs are much more consistent. Figure 6 shows that, while prices in London are around 8 percent higher on average than the UK average, it is clearly the outlier and the remainder of the regions of the UK are all within 3 percent of the national price level.

Why Manchester? Living wage requirements vary across the UK based on different localised costs. Variations in local cost are driven principally by housing costs, but also include other major expenses such as transport (where rural areas in particular experience higher costs because of a greater need to use private transport) and childcare.

Pay up? Living costs and the living wage in Manchester | 27

Figure 6: Price level relative to national price level (UK=100), 2010

110 108 106 104 102.3 102 100 98 96 94 92 90 Wales East Midlands Northern Ireland West Midlands Yorkshire and the Humber East North West South West South East North East London Soctland 107.9










Source: Office for National Statistics, UK Relative Regional Consumer Price levels for Goods and Services for 2010

The calculations in the next chapter present our analysis of what a reasonable level would be for a living wage in Manchester, which is then followed by an objective assessment of the likely impact of Manchester adopting a living wage approach.

28 | Pay up? Living costs and the living wage in Manchester


The contemporary rise in the living wage can be traced to the city of Baltimore in the United States, which passed a bill in 1994 requiring firms with contracts with the city to pay workers a living wage of $6.10 per hour. Over 120 cities in the United States now have living wage policies.
Pay up? Living costs and the living wage in Manchester | 29

Calculating the Manchester living wage

This chapter calculates a rate for the Manchester living wage. In coming to this we broadly follow the methodology developed by Donald Hirsh for calculating living wages outside London (Hirsch, 2011), amending this where required to fit data that are available at a Manchester level.
The approach we have taken is a bottom up basic living costs approach, rather than a top down income distribution approach or (as in London) a combination of the two. We have adopted this approach for two reasons. First, average income data for different standard types of households, which is the obvious UK dataset to use to undertake an income distribution approach (and is the dataset used in the London calculation), is only available at the level of the North West. Second, the bottom up approach results in a living wage that reflects local costs rather than local pay, which is important as these may not necessarily be closely linked, particularly in a time of rapidly rising living costs. However, benchmarking using the income distribution approach does provide a useful sense check for a living wage against local labour market conditions and is explored briefly at the end of the chapter.

children. By using cost of living measures to price an acceptable standard of living for a series of typical households we can develop a wage that would deliver this standard of living for an average household. We build up an income requirement based on costs that accrue for these groups in the following areas: housing, including Council Tax; transport; childcare; and all other costs. For the first three groups it is possible to get acceptable quality data at a Manchester level. For all other costs we use data produced by the Joseph Rowntree Foundation (JRF) as part of their minimum income standard work, reweighted to North West prices. The following sub-sections explore local trends in these data and set out the rationale for the figures we have included in the living wage calculation.

Housing costs, including Council Tax Increases in both house prices and rental costs have been a core driver of rising costs for most households over the past decade. At the bottom level of the housing market, stymied supply (alongside increases in the availability of buy to let mortgages and the attraction of housing as an investment opportunity) have served to both reduce the supply of affordable housing available to purchase, and increase the demand for social and private rented properties. Owner occupation is now unaffordable for many of the lowest paid, with bottom quartile earnings to bottom quartile house prices of around 1:5 in 2011, up from less than 1:3 in 2002. For this reason we assume that someone earning a living wage will live in rented accommodation and use rental costs as the basis for our calculation.

Developing an income requirement A first order question for a living wage is what kind of household it should support. A wage that provides a reasonable standard of living for a single person may not be enough to support a larger family. To ensure that the Manchester living wage provides a wage that meets the needs of a significant majority of working households we develop an income requirement for nine different types of household: childless singles and couples; lone parents with one, two and three children; and couples with one, two, three and four

Pay up? Living costs and the living wage in Manchester | 31

While detailed private sector rent trend data are not available at a local level, the market nationally has seen rents driven up both by sharp increases in tenant demand, and an enduring shortage of supply, particularly since the recession (Royal Institution of Chartered Surveyors, 2011). In Manchester, the average cost per month of renting in the year to December 2011 was 527, with a lower quartile average monthly rent assumed to be affordable to low-earners of 420. Monthly rates by type of residency for the lowest quartile are: Room 251; Studio 323; 1 bedroom 390; 2 bedrooms 435; 3 bedrooms 500; and 4 or more bedrooms 695. In order to generate Manchester average housing costs we assume that singles require a bottom quartile one bedroom house and couples require a bottom quartile two bedroom house. We assume, as London do, that the cheapest housing will be social housing and that those who are able to access social housing will do so. We assume that lone parents and couples with one or two children will require a house with two bedrooms and that lone parents and couples with three or four children will require a house with three bedrooms. We have sourced private rents data from the Valuation Office Agency, which provide data for bottom quartile rents to a local level. To get housing association rents, for which only regional data is available from the 2010 Housing Finance Survey, we calculated the percentage difference in price between total North West local authority rents and Greater Manchester Housing Association rents, then applied this

percentage across the figures for different housing types available regionally. For council tax we take an average of Band D rates from across Manchester.

Transport Costs Transport costs are also a core component of the expenditure of low earners in Manchester. Although transport prices rose between 2002 and 2010 in terms of fuel prices, bus, metro and rail, only rail and fuel rose by more than wages. In real terms, hourly wages for the bottom decile rose by 3.4 percent while both real bus fares and real Metrolink fares fell by 0.5 percent and 11.4 percent respectively in the latter case due largely to a three year freeze, lifted in January 2012. Rail fares rose by 2.4 percent in real terms, while diesel and petrol rose by 24.5 percent and 25.7 percent respectively. These transport costs are however merely benchmarks, and the pricing of different routes will clearly have different dynamics and exert different pressures on households, depending on where they live and work and which transport options are open to them. For the living wage calculation we have used the price of a weekly Manchester wide System One Adult Bus Saver for each adult in the household (19.00). We have done so on the basis that to achieve a living wage it is reasonable to expect employees to have to travel to work across the city by public transport. As around 70 percent of passenger commuting in Manchester is by bus we have excluded the option of tram and train, which would significantly increase costs. We have assumed that any children in the household do not need to travel by public transport to school.

32 | Pay up? Living costs and the living wage in Manchester

Figure 7: Peak transport costs in Manchester compared with bottom decile hourly wages* (nominal)

170 Bus Metro Rail Unleaded Diesel Wages


159.6 158.0




130.0 128.2 126.3

120 112.5




80 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Highways Forecasting and Analytical Services, Transport for Greater Manchester (2011); Annual Survey of Hours and Earnings (2012) *Fares are the peak averages/benchmarks taken by TfGM

Pay up? Living costs and the living wage in Manchester | 33

Childcare For those with children, childcare makes up a significant proportion of household costs. Figures produced by Daycare Trust show continued above inflation increases in the price of childcare in the UK, with the hourly rate for a child aged under two increasing by 5.8 percent in 2012 (Daycare Trust, 2012). The London living wage work uses local authority childcare figures aggregated at a London level by the Daycare Trust. The non-London living wage work adopted this approach using figures for all non-London regions. Rather than use aggregated regional data, we have taken the cost of childcare in the City of Manchester for the same measures the hourly cost of a child minder and the average cost of an after school club. We have assumed that the parent(s) of the child work for employers that do not operate childcare voucher salary sacrifice schemes, which would allow them to offset some or all of their childcare costs against their pre-tax income.

Developing a set of agreed goods and services and the amount that should be spent on each is a hugely time consuming and complex process. Rather than build these up from first principles, we use as our base national figures produced by the Joseph Rowntree Foundation (JRF) for their annual minimum income standard appraisal (Hirsch, 2011). These figures are based on what members of the public think people need to achieve a socially acceptable standard of living. JRF describe the minimum standard as including, but more than just, food, clothes and shelter. It is about having what you need in order to have the opportunities and choices necessary to participate in society, which clearly strongly complements a living wage approach. In order to bring these figures up-to-date and make them locally relevant we have up-rated them by inflation and adjusted for North West prices. The headline costs that make up the minimum income standard are set out in table 6.4 There are two notable exclusions that are not factored into these calculations. First there is substantial variation in energy costs faced by households: low income families often live in poorly insulated houses (the most expensive to heat) without access to the cheapest energy tariffs (often only available online). Second, and increasingly an issue for the low-paid, is the cost of servicing (often high-interest) debt, which can compound income difficulties for those already struggling. While these are not quantified here, they should not escape the concern of policy makers.

All other costs A key part in determining what a living wage should be is deciding what goods and services should be included in the calculation of living costs. Clearly there are some unavoidable and indisputable costs faced by all households (for instance food, water and heating) but there is some expenditure that, whilst optional, is for many people central to achieving a reasonable quality of life (for instance a TV license or an outing to the cinema). Moreover, even for goods and services that are unavoidable, a single reasonable price is not always easily available.

4 Detailed descriptions of the specific goods and service included under each heading, are available here: [accessed 20th April 2012]

34 | Pay up? Living costs and the living wage in Manchester

Table 6: Minimum income requirement by group, North West, 2012

Household type Number of children

Single 0

Couple 0

Lone parent


1 2 3 1 2 3 4 (age 0-1) (age 2-4 (age 2-4, (age 0-1) (age 2-4 (age 2-4, (age 0-1, and primary and primary 2-4, primary) and high primary) and high primary school) school) and high school) 54.02 3.94 0.00 18.39 8.08 2.23 19.18 2.30 75.45 3.94 0.00 27.74 8.49 2.49 20.63 2.03 98.42 3.94 0.00 43.47 9.01 2.40 20.71 2.17 78.99 6.87 0.00 23.44 8.08 2.47 20.19 5.26 111.91 6.87 0.00 32.79 5.96 2.49 21.59 7.87 120.66 6.87 0.00 48.52 9.01 2.76 22.02 9.60 140.17 6.87 0.00 54.51 9.01 2.76 23.23 3.39

Food Alcohol Tobacco Clothing Water rates Household insurances Fuel Other housing costs

46.31 4.96 0.00 8.56 5.16 2.00 10.51 2.48

79.57 15.70 0.00 17.21 6.08 1.84 11.62 4.79

Household goods










Household services Personal goods and services Social & cultural participation Living costs (excluding Housing, Council Tax, Childcare & Travel) Adjusted for RPI and North West prices














































Pay up? Living costs and the living wage in Manchester | 35

Calculating the living wage Bringing together these costs gives an annual target net income (see table 7). For each household type we have then calculated an annual wage requirement to the nearest 500 factoring in deductions (tax and national insurance) and the main benefits the household may be entitled to (namely, Child Tax Credit, Working Tax Credit, the Childcare element of Working Tax Credit, Child Benefit, Housing Benefit and Council Tax benefit) based on the 2012/13 tax year. We assume that households have no other income. To get a wage requirement we have assumed all members of the household work full time (37.5 hours per week) for 52 weeks a year. This gives a living wage for each of the different households. In order to produce a single living wage for Manchester we have then weighted each households wage requirement based on 2001 Census figures (latest data) for the number of each present in Manchester. This results in a living wage of 7.22 for Manchester for 2012/13, significantly above the national minimum wage rate (from 1 October) of 6.19

but broadly in line with the non-London rate of 7.20 calculated by the Living Wage Foundation. It is worth noting, however, that when the Living Wage Foundation publishes its 2012 rate in November this year it will be based on an updated basket of goods, which, because of changes to the tax and benefits system which introduce far steeper taper rates on tax credits and are less generous in reimbursing parents for childcare costs, could result in a living wage higher than it appears here. However, the rise in the applied living wage is capped at 2 percentage points above earnings growth (Hirsh, 2011b), as such the rate calculated above is likely to undershoot the revised non-London rate when it is released, but not by as much as the policy changes would imply. In 2011 around 20 percent of workers in Manchester more than 200,000 people earned less than this hourly rate. Approximately 90 percent of full-time workers met the Manchester living wage, but around half of part-time workers did not. Without taking into account benefit payments the Manchester living wage would need to rise to 9.58.

36 | Pay up? Living costs and the living wage in Manchester

Table 7: Manchester living wage calculations, 2012/13

Single Housing Council Tax Requirements Transport Childcare All other costs Total: weekly target net income 90.00 13.80 19.00 0.00 151.27 274.07

Couple 100.38 18.49 38.00 0.00 244.97 401.84

Lone Parent +1 66.01 16.01 19.00 134.55 212.21 447.77

Lone Parent +2 72.60 16.01 19.00 172.55 283.15 563.31

Lone Parent +3 80.14 16.01 19.00 172.55 373.91 661.60

Couple +1 66.01 21.52 38.00 134.55 282.58 542.66

Couple +2 72.60 21.52 38.00 172.55 365.25 669.92

Couple +3 80.14 21.52 38.00 172.55 452.74 764.95

Couple +4 80.14 21.52 38.00 238.87 496.86 875.38

Annual target net income 14,252









Annual gross income requirement, of which: Tax and NI Child tax credit Working tax credit (WTC) Income Childcare element of WTC Child benefit Housing benefit Council Tax benefit

17,500 -3,068 0 0

23,400 -2,424 0 0

5,500 0 3,122 4,502

7,000 0 5,733 4,285

14,500 -2,108 8,334 1,311

26,000 -3,596 3,131 0

33,000 -5,836 5,733 0

39,000 -7,756 6,005 0

39,000 -7,756 10,936 0

0 0 0 0

0 0 0 0

4,739 1,056 3,432 832

6,074 1,752 3,775 832

6,074 2,449 3,179 528

1,487 1,056 0 0

49 1,752 0 0

0 2,449 0 0

5 3,146 0 0

Hourly wage requirement 8.95 Calculation Manchester weight Living wage contribution 0.34 3.03

5.98 0.33 1.99

2.81 0.06 0.16

3.58 0.03 0.11

7.42 0.01 0.11

6.65 0.09 0.61

8.44 0.09 0.78

9.97 0.04 0.37

9.97 0.01 0.07

2012/13 Manchester living wage


Pay up? Living costs and the living wage in Manchester | 37

5 Costs and benefits: the potential impact of a Manchester living wage

So far our analysis has shown that not only have real wages for the poorest in Manchester fallen since 2009, but that they have experienced long-term and substantial increases in the cost of essential goods and services. Nationally the effect of similar pressures has been well documented. The UK is in the midst of a cost of living crisis exacerbated by, but predating, the recession and this has been confirmed to also apply to Manchester. The calculations in the previous chapter show that there are households that, despite working fulltime at the minimum wage, are earning less than they need to achieve a reasonable quality of life, despite the benefits and Tax Credits to which they are entitled.

Few would argue with the sentiment that action needs to be taken to alleviate these pressures. However the question this chapter will address is whether paying employees a single calculated living wage which gives weight to different groups according only to their prevalence not their priority is the appropriate way to do so. In making this assessment we consider the costs of the implementation of a living wage, its likely efficacy in improving the circumstance of those groups who are most in need, and other policy options which might also be pursued.

Interrogating the living wage calculation Before looking in detail at the benefits and costs of a living wage approach, it is useful to pause to examine some of the issues that emerge from the calculation of the living wage itself. Table 7 in chapter 4 set out the detailed calculations undertaken to produce a single living wage for Manchester from which four key issues arise. First, the weighting to develop a living wage for an average household means that some household types benefit more than others. Based on our calculations, childless couples, lone parents with one and two children, and couples with one child would all meet their annual income requirements if they worked full time at the living wage. However, childless singles, and couples with two, three or four children would all earn significantly less than their income requirement. At the extremes, a couple with three children both working full-time and earning a living wage of 7.22 would earn 2.75 an hour short of their requirement, whereas a lone parent with one child would earn 4.41 more than they need.

Pay up? Living costs and the living wage in Manchester | 39

Second, we assume that all adult members of a household that can work do so full-time and that they work for 52 weeks a year. Such households are not usually the subject of policy focus as they are, in general, unlikely to be in poverty or experience significant hardship. Table 4 shows that just one in twenty single or couple households in full-time work are in the bottom 25 percent by income after housing costs, accounting for only 7 percent of the total bottom 25 percent lowest earners. In contrast, 21 percent of couples with only one member working are in the bottom 25 percent of earners. Linked to both the above points, analysis of the impact of living wages in seven major US cities has found that nearly 75 percent of employees affected by the living wage were not initially in poverty and more than 40 had total incomes of at least twice the poverty line (Toikka, Yelowitz and Neveu, 2005). Thirdly, the living wage provides an hourly wage requirement; however, the critical issue facing the lowest paid is not low hourly pay per se but low income. Differentials in income are driven by a combination of low hourly pay and a low number of hours worked. In recent years the trend (outlined in chapter 2) has been rising part-time pay but falling hours worked, which has resulted in this group slipping away from average annual incomes. Unless action is undertaken to ensure that those on low incomes are able to work more hours, a boost to their hourly wage is unlikely to be sufficient to move them out of poverty. Finally, the Manchester living wage is not materially different to the living wage calculated using a similar methodology for all regions outside London. This is seemingly a strong endorsement of the validity of the non-London rate and it may be counterproductive for Manchester to promote a different rate to employers, particularly those that operate national pay scales. With these caveats in mind, the paper now turns to an analysis of the potential costs and benefits of introducing a living wage in Manchester.

Intended and unintended consequences The most obvious beneficiaries of a living wage policy should be low paid workers who work for employers that implement the living wage policy. Workers who are paid low hourly wages are more likely to be parttime, young and women (Bennett and Lister, 2010) and therefore a living wage would clearly impact upon these groups. There are then multiple individual benefits that could derive from this, over and above the direct financial impact, with higher wages being associated with more stable family life, improved health and well-being, and so on. For instance, Bhatia and Katz (2002) and Cole et al (2005) found evidence in US cities that living wage ordinances would result in health improvements for workers for instance. Higher paid workers are also more likely to be offered training at work and progress in their roles leading to further positive externalities (Cheung and McKay, 2010). Taken together these impacts could theoretically lead to a positive spiral of increased motivation and increased productivity, leading to increased investment in staff training, further wage gains and so on. More employers paying living wages could also encourage unemployed workers to take up work, as the pay differential with benefits widens. However, Marsh et al (2010) use standard economic theory to identify two effects that suggest that living wages may have some negative consequences for the lowest paid. As the lowest paid are usually also the lowest skilled, the first effect of the introduction of a living wage will be an increase in the cost of using low skilled workers. Employers may then substitute away from these workers towards other inputs (for instance, higher skilled workers or mechanisation). Second, even if the firm substitutes low pay, low skilled labour for other inputs, the cost of production will rise and, if employers cannot absorb this, then the price of the good or service they produce will too need to rise. This will result in the quantity demanded of the product falling, with the extent to which this is the case being dependent on the demand elasticity of the final product. Ultimately, both effects will reduce

40 | Pay up? Living costs and the living wage in Manchester

the demand for low skilled labour. Neumark and Adams (2005), compare cities with living wage policies with a control group of those that had living wage campaigns that failed and find some evidence of this, although the extent to which this transferable is limited due to the small sample sizes used in their methodology and the significant differences that exist between the US and UK living wage approaches. Marsh et al also highlight that a living wage policy, without legislative backing, will only impact on a proportion of firms in an area (chiefly those in the public sector or with public sector contracts), resulting in covered and uncovered sectors. When this is the case, increased wages in the covered sector may displace low skilled workers into the uncovered sector as higher skilled workers get attracted to higher rates of pay in the covered sector which will depress wages in the uncovered sector making the low skilled that the living wage was targeted at worse off. A living wage policy may then have negative impacts on the economically inactive as, rather than higher wages encourage work, they may lead to reduced job opportunities or the squeezing out of workless groups. The current evidence on the impact of living wages is not sufficiently developed in the UK to assess the extent to which these theoretical impacts arise in practice. A reasonably large number of living wage ordinances have been operational in the US since the mid-1990s so the evidence there is stronger but it is still patchy. In one of the more complete studies, Buss and Romeo (2006) analyse rates of growth of employment and unemployment in a sample of US cities with living wages before and after they introduced their living wage ordinances. It finds that at the macro level the introduction of living wages has resulted in negative labour market impacts for some

cities, but these represent the exception rather than the rule (Buss and Romeo, 2006). Recent research using regression modelling techniques that account for structural differences between living wage and non-living wage cities in California finds that living wage laws there have had no significant impact on employment or business growth, nor is there evidence that living wages make cities uncompetitive by signalling an anti-business sentiment (Lester, 2011). In the UK the evidence that does exist relates the national minimum wage. When first introduced there were fears that the minimum wage would significantly erode the UKs competitiveness and result in reduced employment. The extensive body of work that now exists examining the impact of the national minimum wage suggests that the effect on employment levels has been marginal or nil and that the policy has raised earnings for the lowest paid improvements to productivity and training have also been identified (Metcalf, 2008). Scare stories about the devastating impact of living wage policies on economic competitiveness may be just that. However, while the macro picture is positive, at an individual level the results are less clear. We have managed to identify only one study that looks empirically at the compositional effects on firm level employment of living wage ordinances, that by Fairris and Bujanda (2008). This finds, based on data from around 300 firms in Los Angeles, that workers hired after the living wage was introduced were generally older, more educated, and had previously been earning higher wages in other employment. They suggest that this labour-labour substitution offset up to 40 percent of the increase in wages resulting from the living wage (Fairris and Bujanda, 2008).

Pay up? Living costs and the living wage in Manchester | 41

Impact on the public sector In addition to any benefits accrued by individuals, both local and national Government would benefit from more employers paying a living wage, as the amount they have to pay towards in-work benefits (for example tax credits, housing benefit and so on) reduces and they are able to make savings from services that deal with the consequences of individuals getting into financial difficulties. However, while this has obvious attractions to Government, it in fact dampens the effectiveness of a living wage approach. Research in the US has found that the phase out rates of benefit programmes (designed, as with Tax Credits in the UK, to reduce as salaries increase), reduce the ability of living wage laws to reduce poverty as increases in salary become ineffective at raising comprehensive disposable incomes (Toikka, Yelowitz and Neveu, 2005). In the UK Working Tax credit and Child Tax Credit are both due to be phased into the Universal Credit from 2013. This will still result in central government receiving the benefit (i.e. reduced in work transfer payments) of increased pay, however the Universal Credit will in many ways blunt the living wage approach, as higher wages paid by employers will be soaked up by declining benefit entitlements. That said, for many of the lowest paid, moving away from being dependent on benefit payouts may be an important motivating factor, and it will also shield them from any future cut to in-work benefit payments (which were signalled by the Chancellor in the 2012 Budget). Moreover, research has found that the source of an individuals earnings is extremely important, with earned income correlating with prosperity irrespective of income levels (Berthoud and Bardasi, 2004). Finally, there are of course the direct wage costs to those public sector organisations which implement the living wage. A Manchester living wage policy led

by the public sector would require local agencies to source funding at a time when their expenditure is extremely constrained, and while provision is being curtailed in other areas. Absorbing these costs will be challenging, however Manchester City Council have since 2008 shown leadership in tackling low pay and more recently Oldham Council have adopted a living wage. Authorities may wish to look at the approaches these councils have taken as well as the living wage policies in Glasgow, Islington and Lewisham and come to a view as to their own spending priorities. The assumption that the public sector should lead the way is perhaps misplaced however, as shown by the London living wage where many private sector employers have shown a willingness to increase wages and have reported benefits from doing so.

Impact on firms that adopt a living wage For private sector firms to widely adopt the living wage on a non-statutory basis then there have to be clear business benefits. The GLA commissioned an investigation of the experiences of organisations that have adopted the London living wage (in terms of both benefits and costs) to quantify the business impacts. Based on the views of eight living wage employers surveyed (the small sample size places a considerable caveat on these findings), the most significant impact was on reputational benefits, which seven thought had a significant or slight impact. The other main impacts noted were improvements in recruitment and retention of staff, improved worker morale and motivation, and, to a lesser degree, improved productivity (London Economics, 2009). Evidence from the US backs up these findings with, for instance, Fairris (2005) reporting reduced low paid worker attrition rates and a drop in absenteeism in Los Angeles living wage firms, and Howes (2004) finding increased rates of staff retention in homecare providers in San Francisco.

42 | Pay up? Living costs and the living wage in Manchester

The GLA research also sought to understand the main barriers and difficulties firms face when deciding whether to implement the London living wage. The main barriers identified were difficulties arising from renegotiation of employee and contractor contracts, issues relating to the maintenance of pay equivalence (which in some cases led to ripple wage increases to maintain wage differentials), increased wage costs, possible impacts on profits, prices or share price, and ensuring that contractors pay the London living wage too. Little or no evidence was found on business performance: all London living wage employers surveyed reported no change in sales or turnover, and the majority saw no change in prices, output or profits. In sum, the evidence from London and the US suggests that, while not overwhelming, a business case will be evident for some employers based in particular on improvements to staff recruitment, retention, morale and motivation. For many firms, the positive reputational benefits and contribution to wider social responsibility objectives will provide the rationale for adopting a living wage.

This raises a second point, which is that a living wage would not deal with the fundamental cause of low pay for many individuals: the mismatch between the skills possessed by Manchesters workforce and the evolving structure of the citys economy. Research has consistently highlighted low levels of skills (using qualifications as a proxy) and a lack of work experience as key drivers of low pay (see for instance Kemp et al, 2004 and Longhi and Platt, 2008). While it could be argued that paying higher wages encourages employers to invest in the skills of their workforce, it is unlikely to have an effect on the scale needed, and should not detract from the long-term efforts to raise the skills levels of Manchesters poorest residents, in order to improve their own life chances and support the wider economy in an extremely competitive world. Low wages are of course also a function of pay progression, and low paid entry level jobs do not always lead to better paid ones (Kemp et al 2004). Rectifying this issue will in part require working with employers to both increase training and develop employment progression routes. It will also mean providing high quality careers advice and guidance to low paid workers on how they can achieve wage progression both by working up the careers ladder in an organisation and, increasingly, through developing a career cluster by gaining work experience in different organisations on the way to a target job (New Economy, forthcoming). An additional challenge will be persuading the low paid themselves to recognise value in training if they do not see it as necessary for their role or believe that opportunities for progression are limited (Keep and James, 2010).

The long road to higher pay Not all firms will be convinced by these arguments however after all, if the positive impacts of increasing earnings of the lowest paid are so evident, one would expect firms to be already paying higher wages. Manchester in particular has a challenge in this regard as many firms in the conurbation are operating, often successfully, in a low skill equilibrium. These firms operate business models that are dependent on employing low paid workers to undertake low skilled work (Holden, 2010). Engaging with these employers on a platform solely focused on increasing wages is likely to be unsuccessful and a much wider business support approach is required to support them to move to higher levels of productivity.

Pay up? Living costs and the living wage in Manchester | 43

Another way to higher real wages: lower living costs Based on the evidence presented so far, the net effect of a living wage policy in Manchester is likely to be minimal at the aggregate level. It would boost the quality of life for direct beneficiaries, even if these are not necessarily the target of the policy. However, a living wage approach in isolation would neglect a crucial element in boosting real wages: what can be done in Manchester to lower living costs. While a large proportion of the costs facing the lowest paid cannot be manipulated easily locally (such as food prices, clothing costs and so on), some costs can be lowered through local action. Seeking to lower costs is also important as inflation is likely to remain above the Bank of Englands target for the foreseeable future resulting in any increases in the wages of the lowest paid being quickly eroded. In this regard the living wage approach provides a powerful framework in which to assess the varying costs faced by different household types and design appropriate and targeted policy interventions. There are three key areas where local action could have a significant impact. First, house prices and rental costs have increased dramatically in recent years, affecting not just the lowest paid but middle and even higher earners. In addition, our living wage calculation assumes that there is an adequate supply of decent social housing despite this becoming increasingly scarce. Actions that seek to boost the supply of homes and hence reduce costs to buy or rent would support the low paid to meet their basic needs. Linked to this, actions to reduce the cost of running existing homes, such as better insulation (and hence lower heating costs) are also important.

Second, transport costs now account for 5 percent of the basic weekly spending requirement on average across the nine different household types. For childless couples this figure is 9.5 percent, for couples with 1 child it is 7.0 percent, and for single households it is 6.9 percent. Changes even at the margins for travel costs can have a real impact. For instance in Manchester when child fares rose by 20p (to cover the costs of free travel for older and disabled passengers), 65 percent of parents said the increase had impacted on their disposable income and 16 percent said it affected their ability to pay for essentials (Greater Manchester Transport Research Unit, 2008). Being able to travel cheaply and rapidly to work across Manchester is a core requirement for residents to be able to access good quality jobs. Currently a four-weekly unlimited use bus pass for travel on all Stagecoach Manchester routes (principally in the south of the city) costs 44.00 compared with 54.90 on Arrivas Bolton and Wigan routes and 68.00 for the System One any provider pass. As well as increasing costs for those who have to travel on multiple operators, this restricts access to employment for low paid workers in Manchester. As the tram system is extended out to more deprived areas of Manchester, it will be important to pay regard to how multiple costs on multiple modes of transport affect, and are managed by, the lowest paid. Finally, a striking finding from the work undertaken in the previous chapter is the financial difficulty faced by couples working at or around the minimum wage when they have children. While childless couples and lone parents with one or two children would theoretically be able to reach an acceptable standard of living at a rate of pay below the national minimum wage (5.98, 2.81 and 3.58 respectively), couples

44 | Pay up? Living costs and the living wage in Manchester

with one child require an hourly wage around 10% above the minimum wage to meet basic costs (6.65). This hourly wage requirement rises to 8.44 for couples with two children and 9.97 for couples with either three or four children. The key reason for this difference is the cost of childcare. While lone parents receive financial support for childcare through the childcare element of Working Tax Credit, few working couples will be eligible for significant support while still earning enough to cover basic costs. This situation is likely to worsen in future years, with forecasts produced by the Social Market Foundation (SMF) suggesting that low-income families will contribute 62% more for childcare costs (600 in real terms) in 2015/16 compared to 2006/07. The SMF recommend the introduction of a national loan scheme, similar to the student loan scheme, to help parents smooth these costs over a longer period of time (Shorthouse, Masters and Mulheirn, 2012). Other potential solutions could include a scheme similar to Londons childcare affordability programme, which is a city-wide subsidy jointly funded with national government (SQW, 2009).

The next and final chapter offers conclusions on the issues raised in this paper and offers policy recommendations for how Manchester can respond to the issue of low pay and rising living costs.

Pay up? Living costs and the living wage in Manchester | 45


Through the lens of assessing the case for a Manchester living wage, this paper has explored the rates of pay and living costs of the lowest paid in Manchester. It has found that the real wages and incomes of the lowest paid in Manchester have fallen dramatically since 2009, alongside substantial increases in the cost of essential goods and services.

The result of this cost of living crisis is that there are households that, even if they are able to secure fulltime employment at the minimum wage, will earn less than they need to achieve a reasonable quality of life, even taking into account the benefits and tax credits to which they are entitled. The living wage movement in the UK has been effective in raising awareness of low pay and increasing wages as a political campaign it has clearly united and focused attention on a vital issue. Not only that but the movement has been intelligent in its approach, and appears to have learnt the lessons of similar campaigns in the US, and avoided many pitfalls. Based on the experience in the US and London, promoting a Manchester living wage is likely to have a positive impact on wages for some of the lowest paid, with negligible negative economic impacts. However, the impact of Manchester adopting a living wage policy to address low pay is, in isolation, not likely to be sufficient or targeted enough to deal with the acute challenges faced by many at the bottom end of the earnings scale. It is also likely to fall short of raising annual incomes sufficiently, and fails to tackle on-going rises in costs facing the lowest paid. However this is a measure of the scale of the challenge and does not diminish the case for adopting a living wage approach. The evidence presented in this report suggests that an approach is needed that seeks to both raise the incomes (not just hourly pay) of the lowest paid while simultaneously reducing the living costs faced by these individuals. The following recommendations are provided to support these twin objectives.

Pay up? Living costs and the living wage in Manchester | 47

At the strategic level, Manchesters approach to improving life chances and tackling poverty and deprivation has, since the adoption of the Greater Manchester Strategy, placed its primary focus on getting more residents into work. It is still the case that the majority of residents experiencing acute poverty live in households with one or more workless members, so this needs to remain as a priority. However, recent dramatic increases in the costs faced by the lowest paid alongside negative wage pressures (both of which are expected to continue) mean that moving into work is no longer sufficient to move out of poverty. Manchesters strategic approach to improving life chances should therefore place greater weight on increasing the real incomes of the low paid. For Manchesters future prosperity it is no longer sufficient just to get more residents into work; the quality of work matters too. Ultimately poverty stems from low annual income, which is related to, but not the same as, low hourly pay. Low paid workers working fewer hours on average is a core driver of the income gap between them and higher earners. There are multiple reasons for low paid employees working restricted hours some of which will be voluntary, some involuntary, and some will stem from benefit entitlement restrictions but it will be important that support is given to part-time employees that want to increase their hours, either at their existing employer or through an additional job. This support could be funded through a community budget approach that captures the financial savings that arise from reduced Tax Credit and other benefit payments. As employers paying higher wages would result in cost savings to Government, this approach could be linked to a living wage policy. The introduction of Universal Credit from 2013 should provide the framework through which this can be delivered.

Low pay also stems from low qualification levels and a lack of relevant work experience, which feeds into poor job and pay progression for those in work. Maintaining a focus on improving the skills of low paid staff, and supporting more employers to utilise these skills, will be important for achieving increased wages, as will other interventions to support job and pay progression. However, it should be recognised that for many employees particularly those working for a low skills equilibrium firms the only way to achieve higher pay will be to move to another employer. Providing high-quality careers advice and guidance that supports residents to progress in employment (or move employer) will be vital. More employers choosing to pay a living wage is one way to ensure that work pays for more Manchester residents. The fact that the calculations in this report show that a Manchester living wage would not be materially different than the living wage outside London indicate that the national rate outside London for a living wage is sufficient for Manchester, and that there is no need to independently develop a Manchester-specific living wage. Living costs in Manchester do not justify a rate over and above that of national rate outside London calculated by the Living Wage Foundation. The non-London living wage rate for 2012 will be released in November and this research has shown that this is the rate which Manchesters employers should consider paying their low-paid staff.

48 | Pay up? Living costs and the living wage in Manchester

If public sector authorities or private sector firms do choose to adopt a living wage they should seek to implement it in such a way that it minimises the chance of displacement and targets those most at risk at experiencing in-work poverty. This could include simultaneously adopting recruitment practices that promote the employment of low skilled workers for example. If paying a full living wage rate is not possible for either public or private sector employers, this should not deter employers from increasing wages by a smaller increment, and aspiring to over the longer term pay a living wage. New Economy should support employers to make informed decisions on rates of pay, including paying living wages, by regularly producing, and making freely available on its website, information on trends for the cost of living in Manchester. There is also an important but under analysed concurrent policy that, as well as looking to improve wages, Manchester should focus on lowering the cost of living for the lowest paid. This has the advantage of being targeted at those that most require support, avoiding the bluntness of a living wage approach. The main local actions Manchester could take are as follows. - Developing approaches to increase the supply, and cost, of affordable housing, for owner occupation, private rent and social rent. Actions that reduce the running costs of the existing housing stock for instance improved insulation or electricity self generation should also be prioritised.

- Exploring ways to ensure that the lowest paid have affordable access to key employment sites across the conurbation. - Exploring alternative methods of financing childcare, such as a mortgage-like childcare loan scheme to allow residents with children to spread a major cost over a longer period of time, or through city-wide subsidy, jointly funded by national government (as in Londons childcare affordability programme). Finally, the net result for many residents of stagnant incomes and rising costs will, unfortunately, be that they slip into debt. Maintaining sufficient debt advice and support services will be important to ensure that such debt issues do not become chronic. Supporting access to fair credit for instance, by encouraging the development of local banks and credit unions will help residents avoid some of the worse problems associated with debt.

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