The need to tackle low incomes is becoming increasingly clear to politicians of all stripes. One popular proposal to address this is to lift people from the National Minimum Wage to the Living Wage. The difficult question is how to pay for this rise. There are broadly two different approaches to this question from different ends of the political debate. One side sees government, footing the bill, the other business.

Think tanks like the Adam Smith Institute see a solution in cutting taxes on minimum wage earners so that the amount they have left at the end of the day is similar to a living wage. One problem with this is that people receiving Universal Credit will see less of any tax decrease, as it’s calculated using post tax income, meaning it would penalise families with children. These blanket tax cuts would also cut taxes for people right at the top of the income spectrum.

The other approach is to raise the National Minimum Wage so that it becomes a Living Wage. There have been various attempts at looking at the effects of employers paying the Living Wage with some moreoptimistic than others. The evidence suggests that it could lead to a fall in employment especially in industries with high proportions of low pay. One way to reduce this effect could be by lifting the minimum wage by above inflation on the condition that the economy continues to recover.

Importantly both approaches could create a more equal economy if done well and a less equal economy if implemented poorly.  An approach which cuts taxes for all would see well off couples and those without children gain far more than single parents on low incomes. At the other end a too high minimum wage could make the situation worse for many on low incomes by decreasing the number of jobs available.

It’s clear that workers earning a Living Wage is good for business as employees are happier, have lower rates of absenteeism and staff turnover. At the same time there are clear benefits for Government as it would reduce money spent on tax credits and more received in taxes. A solution may be for both to bear  some of the weight in lifting low incomes for example by the minimum wage rising above inflation and the lower and upper bounds of National Insurance also rising above inflation to reduce the pressure on business with a high proportion of low earners.  If implemented properly, a Living Wage could be a large step toward greater equality.

Tim Stacey, Policy and Campaigns Officer