Method briefing: The public subsidy to low wage employers

Citizens UK

1. Research team and Advisors This research has been developed by a Citizens UK research team. The principal authors are Stefan Baskerville, George Gabriel, Jesse Hancock, Sanjiv Lingayah and Henriette Neubert. The authors gratefully acknowledge the help of a number of advisors without whom this work would not have been possible: Chris Goulden (Head of Poverty Team, Joseph Rowntree Foundation); Donald Hirsch (Director, Centre for Research in Social Policy, Loughborough University); Christopher Howarth (Senior Policy Analyst, Open Europe); Spencer Thompson (Senior Economic Analyst, IPPR); Professor Jane Wills (Professor of Human Geography, Queen Mary, University of London). Responsibility for the calculations remains with Citizens UK.

2. The Living Wage and the Public Subsidy Citizens UK is a powerful alliance of local Community Organising groups in London, Birmingham, Cardiff, Milton Keynes and Nottingham bringing together churches, mosques and synagogues; schools, colleges and universities; unions, think-tanks and housing associations; GP surgeries, charities and migrant groups to work together for the common good.

Citizens UK began the modern Living Wage campaign over 15 years ago, calling for working people to be paid enough to get by. The Living Wage is an hourly rate calculated independently and updated annually based on the amount an individual needs to earn to cover the basic costs of living in the UK – with a separate calculation for London. The current UK Living Wage is £7.85 an hour and the London Living Wage is £9.15 an hour compared to the current minimum wage of £6.50 per hour for workers aged 21 and above.

An estimated 5.24 million people in the UK are employed on less than a Living Wage (Markit, 2013: 3), categorised for the purposes of this research as in receipt of “low wages”. Many low waged workers are in receipt of benefits and tax credits, policy tools used to top up their incomes.

Recipients of benefits and tax credits are often criticised in popular, media and policy circles. The calculation of the public subsidy is a new way to think about low pay. In effect it is low paying employers who are subsidised by state payments to their employees without which they would be unable to meet their basic needs and continue working for low wages. This research documents substantial scale of these payments, at times dwarfing employers’ own tax contributions.

The work of calculating public subsidy is complex and in order to make calculation feasible certain simplifying assumptions need to be made. In order to provide a robust and constructive basis for

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public discussion wherever possible the Citizens UK research team has taken a conservative approach to calculating the level of the public subsidy (see modelling assumptions section for more details).

The purpose of this work is three-fold:

1. To calculate the extent of public subsidy connected to low wages; 2. To encourage other organisations, including employers, to develop and refine the calculations; 3. To stimulate a public and policy debate on the public subsidy to employers as a result of low

wage rates.

3. Defining and calculating the Public Subsidy Citizens UK has undertaken new work to calculate the size of the public subsidy paid to low wage employers and examine the implications of greater movement to the Living Wage. The two main calculations related to public subsidy are:

1. Total Public Subsidy (benefits and tax credits minus employee tax) to low wage employment; 2. Public savings (decrease in benefits and tax credits, plus increased employee tax and employer

NI contributions) from increases in hourly wage levels to the Living Wage;

Public subsidy to low-wage employees The calculation of the net public subsidy for low wage employees is the amount of benefits and tax credits1 paid to a worker at a particular wage level below Living Wage minus the amount paid by the employee in income tax and national insurance and the amount paid in Employer National Insurance.

The level of the public subsidy is determined by:

1. Employment income (Hourly wage rate multiplied by hours worked); 2. Household circumstances, including whether a worker is single or is part of a couple and

whether they have dependent children.2,3

1 Benefits and tax credits included in the calculation of the Public Subsidy are Child Benefit; Child Tax Credit; Housing Benefit; and Working Tax Credit. 2 This affects the size of benefits and tax credits because of the impact of the size of housing and childcare costs. 3 This report calculates the Public Subsidy associated with 10 types of working household: 1. Single full-time, 25 years of age or older, no dependents; 2. Single part-time, 25 years of age or older, no dependents; 3. Single, full-time, 21-24 years old, no dependents; 4. Single, part-time, 21-24 years old, no dependents; 5. Single full-time (21 and above) with two dependent children; 6. Single part-time (21 and above) with two dependent children; 7. Couple full time low-wage worker, part-time non-low-wage worker (both 25 years of age or older) with no dependents; 8. Couple part-time low-wage worker, full-time non-low-wage worker (both 25 years of age or older) with no dependents; 9. Couple full-time low-wage worker, part-time non-low-wage worker full-

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These data, alongside a number of modifying assumptions listed in section 5, are entered into the Benefits Calculator (http://www.entitledto.co.uk/benefits-calculator/startcalc.aspx) and for each increment of 10 pence between the Adult Minimum Wage of £6.50 per hour and UK Living Wage of £7.85 a net Public Subsidy figure can be calculated based on benefits and tax credits paid minus tax paid (national insurance and income tax).

Example

In a couple with two dependants where the part time worker (16 hours a week) earns £7.20 per hour and the full time worker (35 hours a week) earns £8.29 per hour the portion of the public subsidy to the low wage employee is £87.09 per week or £4528.52 per year.

Public subsidy to low-wage employees of specific employers In order to calculate the total public subsidy for the employees of a particular employer estimates of wage rate and hours worked are combined with sector-specific Labour Force Survey distribution data on hours worked (full time and part time) and the proportion of employees from different household types according to age range; relationship status (single couple); and whether employees have dependent children or not.

Example

In 2014 Tesco had 310,000 employees. Given Labour Force Survey data on the retail workforce and informed through consultation with workplace unions and retail experts we can estimate that of these approx 209,000 were low-wage employees of which: 2,712 were single people that work full time and had two children; 54,246 were part of couples with no children and where one worker was low-wage (£7.20 per hour) and the other was not (£8.29 per hour); and so on through ten types of household (see footnote three). Combining wage rates, hours worked and the distribution of household types with the Benefits Calculator shows that the (net) Public Subsidy paid to low-wage Tesco employees in 2014 was £364 million in total. It is useful to contextualise this figure with Tesco’s UK corporation tax contribution for the last full financial year, £519 million.

Public subsidy to low-wage employees in the economy as a whole Calculating the Public Subsidy figure for low-wage employees in the economy as a whole uses the same approach as the calculation of the Public Subsidy figure for the low-wage employees of a specific employer. It is a combination of the number of low-wage employees in the economy as a whole; estimates of low-wage rate and hours worked; combined with economy-wide Labour Force Survey distribution data on hours worked (full time and part time) and the proportion of employees from different household types according to age range; relationship status (single couple); and whether employees have dependent children or not (Office for National Statistics, 2015).

time (both 21 and above) with two dependent children; 10. Couple part-time low-wage worker, full-time non-low-wage worker (both 21 and above) with two dependent children.

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Example Independent research estimated that there were 5.24 million low-wage employees in the economy as a whole. Applying an estimated hourly wage rate of £6.70 per hour (Markit, 2013: 6) to this figure and using Labour Force Survey data on hours worked and household types in low-wage employment with the Benefits Calculator software shows that the Public Subsidy paid in total to low-wage employees for the year 2014 was over £ 10.9 billion.

4. Defining and calculating Public Savings from paying the Living Wage The Public Saving is calculated by comparing the benefits, tax credits, employee and employer tax paid at a low wage rate with that at the Living Wage rate. This can be aggregated for an employer and for the economy as a whole using Labour Force Survey distribution data on hours worked and the proportion of employees from different household types according to age range; relationship status (single/couple); and dependent children. These calculations show that although there are costs to employers from increased wages there are significant savings to taxpayers.

Example For a single full time worker with two dependent children on £6.50 per hour, the public saving calculated from the Benefit Calculator of raising their hourly wage to £7.85 is £43.39 per week or £2256.43 per year.

5. Modelling assumptions and parameters Calculating the Public Subsidy is potentially complex. In order to generate robust and workable data certain assumptions have been made. These include the following:

Couples: Partner one to be the low wage worker; and partner two has a wage fixed at the median part time hourly wage.

Benefits are split equally across couples based on household situation and income. This is a conservative and cautious assumption as the focus in this study is on low paid employees and they could reasonably be allocated more than 50 percent of household benefits and tax credits based on their income.

Children: The calculations with households with children are based on two children with a gender and age split so that their children can share one bedroom which reduces the amount of housing benefit required and reduces the level of the public subsidy.

Age: Workers are 21 or over to avoid multiple minimum wage levels.

To aid a conservative public subsidy calculation and for simplicity we have not factored in pensioner benefits in our calculations, e.g. Pension Credit and Winter Fuel Payment.

Pension contributions for the employer and employee have been excluded from Public Subsidy calculations because these are a contribution to future rather than current income. The figures for

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cost of implementation of the Living Wage include employer’s Pension contribution at four percent of gross salary.

Geography: The method used in the report applies to UK Living Wage figure of £7.85 only. This leads to a cautious and conservative Public Subsidy calculation particularly because London housing cost and associated Housing Benefit levels are considerably higher than in the rest of the United Kingdom. This differential has led to high profile calls for an increase in the London Minimum Wage above the UK figure.

Housing costs: Rental figures used in the calculations are the mean of social housing costs used by the Living Wage Foundation (Centre for Research in Social Policy, 2014) and private rental costs in Office for National Statistics data (2015). The rental figures used are significantly lower than for similar studies such as the report by Open Europe cited by David Cameron in his speech on European immigration on 28 November 2014 (http://www.bbc.co.uk/news/uk-politics-30250299) which cites private rent levels only and are further deflated 35% to compensate for owner occupied accommodation and other low cost arrangements. The result of the lower rent and deflation is to very significantly reduce the calculation of Housing Benefit and therefore level of Public Subsidy.

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6. References Centre for Research in Social Policy, 2014. Working Paper: Uprating the out of London Living Wage in 2014. Centre for Research in Social Policy.

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Crerar, P. 2015. London workers need a £1 boost to minimum wage, says Tessa Jowell. London Evening Standard. Accessed March 2015. http://www.standard.co.uk/news/london/workers-need-a-1-boost-to-minimum-wage-says-tessa-jowell-10110678.html

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Gardiner, L and, Hussein, S. 2015. As if we cared: the costs and benefits of a living wage for social care workers. Resolution Foundation.

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Office for National Statistics. 2015b. Consumer Price Inflation, Improvements to the measurement of Owner Occupiers’ Housing costs and Private Housing Rental Prices. Accessed March 2015: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-388705. Office for National Statistics.

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