What Price a Living Wage? Understanding the impact of a living wage on firm-level wage bills

The concept of a ‘living wage’ has gained traction across the political spectrum in recent years. Following the success of the first contemporary living wage campaign in the UK, launched in east London in 2001, a series of local and regional initiatives has delivered tangible improvements in pay for thousands of low-paid workers. More widely, the publicity surrounding the concept of a living wage has contributed to an important reframing of perspectives around low pay and in-work poverty, focusing attention on the role that decent pay above the national minimum can play – alongside remedial redistribution through tax credits and in-work benefits – in raising living standards.

Yet despite a number of high-profile successes, relatively few workers have secured a higher wage as a result of a living wage campaign. In London in 2010, an estimated 652,000 workers were earning less than the London living wage, yet only around 10,000 workers won a living wage in the six years between 2005 and 2011. The number of accredited living wage employers – primarily high-profile financial and legal firms, including prominent names such as KPMG and Barclays, and public sector bodies – remains small. Aside from a handful of notable exceptions (such as the cosmetics retailer Lush) relatively few companies in retail, food service or the travel and tourism sectors, which account for the bulk of low-wage jobs, have become living wage employers.

An obvious barrier to expanding living wage coverage is a concern on the part of many employers that a living wage entails prohibitive costs. Yet the potential wage bill costs associated with a living wage, and how these may vary across sectors, are not well understood. This report provides, for the first time, estimates of the wage bill increases that UK companies listed on the London stock exchange across a range of key sectors might expect if they made the decision to pay their directly employed staff a living wage (£8.30 per hour in London and £7.20 per hour elsewhere). In doing so, it aims to enable a more informed discussion about the potential cost of a living wage across different sectors.

The results make clear that the cost of a living wage varies widely across industries. While there will of course be differences between firms within particular sectors, the estimates make clear that for listed firms in construction, software and computing, banking, and food production, average wage bill increases as a result of implementing a living wage are small (around 1.0 per cent or less). For listed firms in these sectors there is, therefore, a strong case for implementing a living wage as a matter of course.

The estimates also make clear that a living wage will be more challenging, but not impossible, for listed firms in the major low-wage sectors – general retail, food and drug retail, and bars and restaurants – where average wage bill increases are significant (between 4.7 and 6.2 per cent). However, average wage bill increases are far smaller in these sectors if an initial hourly pay rate of 90 per cent of a full living wage (£7.47 in London and £6.48 elsewhere) is introduced rather than the full rate (between 2.0 and 2.6 per cent). This suggests that for listed firms in these sectors there may be merit in exploring living wage accreditation by means of phased increases over time in order to reduce upfront costs and provide time to modify business models.