Low Income Thresholds

Published in Bottomline Autumn 2005

There is no commonly accepted definition of low income, however, tables 1 and 2 (page opens in new window) show two different ways in which low pay is commonly calculated by organisations including Low Pay Units and trade unions. This edition of BottomLine focuses on campaigns for a living wage and to set this into context this article provides two different models of low income thresholds and discusses some of the issues surrounding low income.

Until recently there were three low income thresholds but The Council of Europe Decency Threshold is now no longer in use. Under the European Social Charter member states were required to ensure 'fair remuneration' for workers and this was defined according to a decency threshold set at 68% of average earnings. In 2003 this was changed to 60% of net earnings which is referred to as the ‘ECSR Adequate Remuneration Threshold’. The problem with the new threshold is that it is difficult to calculate due to the lack of available data on net earnings. The ECSR Adequate Remuneration Threshold has, therefore, not been used in this article.

Notes:

The statistics are based on the Annual Survey of Hours and Earnings (ASHE) 2004, which replaced the New Earnings Survey last year. This is the main source of information on earnings. From this survey:

• UK median male weekly earnings (excluding overtime) = £405.40, UK median male hourly earnings (excluding overtime) = £10.67.
• NW median male weekly earnings (excluding overtime) = £384.40, median male hourly earnings (excluding overtime) = £10.11.

The second low pay threshold, a half-median male earnings is the rate the government promised as the National Minimum Wage in 1999. At present the National Minimum Wage is £0.29 lower than this threshold across the UK and only £0.01 lower than this threshold based on earnings in the North West. The higher threshold of £7.11 for the UK and £6.74 for the North West is closer to hourly pay rates recommended by living wage campaigners.

Who is more likely to be part of a low-income household?

The most up to date statistics provided by the DWP on households below average income is based on data from 2003 to 2004. The data shows that particular sections of our society were more likely to be living in a low income household than others during the period 2003 to 2004:

• Workless families
• Families with children, particularly lone parent families
• Individuals living in a family headed by a member of an ethnic minority community
• Individuals living in a family containing one or more disabled person
• Individuals living in social housing
• Individuals who are ‘financially excluded’, i.e. they do not have a bank account and do not have access to savings.
• Individuals living in inner London
• Children
• Individuals with no qualifications
• Pensioners, especially single female pensioners living alone

Not all of the groups who are more likely to be living in a household with low income are in work. Some pensioners and those who are totally reliant on benefits will not experience a rise in income with the introduction of a living wage. A living wage would, however, increase the household income of a large proportion of individuals who are more likely to live in low income households. Approximately 40% of households with an income less than two thirds of median male earnings are in work. Those with caring responsibilities such as parents and individuals with a disabled person in the household often experience difficulty combining work and home life and are thus more likely to be in low paying part-time jobs. Also, individuals with no qualifications are more likely to be in undervalued, low paying employment.

Policies, which aim to address issues of poverty in the UK, also need to address the 60% of low income households in which members are workless. A pensions system that does not penalise women for caring and which recognises different working patterns is necessary as is an increase in the carer’s allowance to at least the same level as the basic state pension. Such policies will affect approximately a fifth of the population who are living in households below contemporary low income thresholds. Of this fifth, half are categorised as having a persistent low income which means that for at least three out of four years they have been in a household with a low income. These people have little mobility between different income groups and policies which address low income are necessary to change their economic situation.

Table 3 (page opens in a new window)

Our view on low pay

The national minimum wage has had a dramatic impact on the rates of pay in many previously low-paying jobs in Greater Manchester, according to the annual survey of Jobcentre pay rates undertaken by the Greater Manchester Low Pay Unit.

Before the minimum wage was introduced more than four in ten of all the jobs on offer in Jobcentres in Greater Manchester were paying less than the 1998 equivalent of the minimum wage. In the period just before and after the minimum wage was introduced between 1998 and 1999, there was a dramatic drop to 1.8% of jobs paying less than £3.60 which was the 1999 rate of the minimum wage. Since 1999 there has only been a small proportion of jobs paying below the national minimum wage and in 2003 this fell to 0.3%. Greater Manchester Low Pay Unit argues that this shows that employers can afford to pay at least the minimum wage and the government should make a commitment to annually uprate the minimum wage.

Despite this good news about the minimum wage, the Unit expresses concern about the continuing high level of part-time jobs producing only a low level of weekly income. Even many full-time jobs were producing less than a living wage. Over a quarter of the jobs on offer in Greater Manchester paid less than a couple with two young children would receive on Income Support, and 82.1% of the jobs in Greater Manchester Jobcentres paid at a level where the same family would be able to claim Working Families Tax Credit to top up their wages.

The Greater Manchester Low Pay Unit welcomes the government's commitment to improving pay for thousands of workers. However, there are still far too many people who cannot earn enough to support their families without having to claim means-tested benefits or tax credits. The government must turn its attention not only to the quantity of jobs available but also their quality. The Greater Manchester Low Pay Unit will continue to press the government to do more to create jobs which pay a living wage.

Working Tax Credit has contributed to the government’s aim of lifting children out of poverty. It has also given families more flexibility in combining work and family life through supplementing part-time wages. However, a living wage would ensure that government does not support low paying employers and would give families greater control over their earnings whilst lifting them out of means tested benefits. Campaigning for a living wage has begun in the UK. A rate of £6.70 was set in London in 2005, £0.41 lower than the low pay threshold, which has been used by Low Pay Units.