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UK: Shouldn't we be paying workers enough to live on?
The Guardian
Donald Hirsch

July 5, 2011
View the Original Article

Tax credits should be used as a top-up for working families, not as a lifeline, says Donald Hirsch

As the government prepares to overhaul tax credits and benefits with its universal credit, spending cuts are already trimming entitlements for low earning families. But are we being clear enough about how much we expect the state and employers to provide working families with adequate incomes?

The minimum income standard results for 2011, published this week, show up just how far the balance has tipped towards the state over the past decade.

Why has the wage needed to make ends meet risen by over 20% for many working families with children requiring childcare in just one year? Much of this increase occurs because of a seemingly minor cut in support for childcare. The problem is that parents now rely so heavily on this support that it's especially tough to make ends meet when it is reduced.

The state wants to prevent in-work poverty and make work worthwhile, but does not think it can always rely on employers to pay enough to do so. So it tops up low working incomes with tax credits, but then has to means-test them sharply to keep the cost affordable.

The problem arises when, even helped by this means-testing, families don't earn enough for a decent life. They're then trapped, because if they work harder to earn more, they get the means-tested support reduced, making them barely better off. It's like running up a down escalator: every time you earn an extra pound, you typically lose 73p by paying more tax and losing tax credits.

The universal credit will reproduce this in a new form, with the down escalator running even faster for many families.

We can't ignore this situation when thinking about a living wage. Families with children will always need some sort of supplement to their earnings for low-paid workers to make ends meet. So the living wage level will be influenced by how generous the government is to such families.

But even single people are falling short on today's wages. If they work full time on the minimum wage (presently close to £6 an hour), they don't have enough even by the government's standards, and get tax credit top-ups. This seems to tell employers that they don't need to pay enough for people to live on, because the state will pick up the difference. This feels wrong, and a wage floor above £7 would give a different message. Then state subsidies to low earners could concentrate on the extra cost of feeding a family.

• Donald Hirsch is head of income studies at the Centre for Research in Social Policy Studies at Loughborough University and has written the Joseph Rowntree Foundation report A minimum income standard for the UK in 2011