Low wages and living costs squeeze households, but tax allowance cuts are not the answer

The latest labour market statistics show that inflation is still rising around twice as fast as average weekly earnings and so household budgets remain tightly squeezed. Even if wages start to pick up the real pay gap that has opened up looks set to take years to close.

According to the ONS wages have hit minus 2.2% on average since the first quarter of 2010, the last quarter before the Tory-Lib Dem coalition came to power. In comparison, wage growth averaged 2.9% in the 1970s and 1980s, 1.5% in the 1990s, and 1.2% in the 2000s. This follows a report by the Institute for Fiscal Studies (IFS) which said that while the fall in household incomes had now probably come to a halt, living standards were still “dramatically” down on what they were before the global financial crisis hit in 2008.

Another report shows how the wage squeeze is impacting on saving. One in three Scots has saved nothing at all in the last three months.  Those who do have savings are less likely to dip into them than anywhere else in the UK but when they do, they are likely to raid the household piggy bank for a far larger sum than in most other areas.

For many on low pay even generous wage rises would leave their households in need of additional support via tax credits and benefits to keep them anywhere close to above the poverty line. New TUC research shows just how important this support is for working families with children. The study features a range of fictional households to show how taxes and in-work benefit entitlements change as pay goes up.

Measures that increase earnings (higher wages and/or tax cuts) provide a greater overall income boost for adults without kids than they do for low earning families with children. Wages are of course still important, but not enough to meet the needs of low income working families. This shows that reducing tax allowances is an expensive way to help those on low earnings. It doesn't replace the ongoing tax credit cuts.

This research shows that with more than half of benefit cuts hitting working people, any real programme to enable those on low pay to share in the recovery needs to recognise the role of in-work credits along with stronger pay growth, and focus on reversing tax credit cuts rather than on delivering further poorly targeted personal allowance giveaways.

At the other end of the pay scale a new High Pay Centre analysis shows the hidden cost of big pay differentials within organisations. Workplaces with big pay gaps between the highest and lowest wage earners suffer more industrial disputes, more sickness and higher staff turnover than employers with more equitable pay differentials.  On average:

• Bosses earning 10 times more than the lowest-paid staff in their organisation experience industrial action at least once a year. Those with lower pay differentials do not.
• Workplaces where top earners get 8 times the pay of junior staff report at least one case a year of work-related illness. Workplaces with pay differentials of 5 or less do not report any.
• Organisations with average pay ratios of 7:1 experience higher staff turnover.

High Pay Centre director Deborah Hargreaves said: “High executive pay is not only frequently unmerited but has a huge hidden impact on the rest of the organisation and society as a whole. Whether it’s through staff turnover, sickness, low morale or industrial action, big pay gaps undermine employees’ loyalty to the company and their managers. Employers suffer lost productivity, have to pay more sick pay and legal and recruitment costs as staff left feeling the financial and emotional strain are driven even further into the ground.”

Low wages and living costs are still squeezing household spending and savings despite the limited economic recovery. But tax allowance cuts are not the answer for low income families. Meanwhile, high and unequal pay is not only unfair, but damages organisations as well.