By Dr Laura Davison, Head of Research at the Economic Development Office, City of London Corporation
Last week (31/10/16) saw the publication by the Living Wage Foundation of the latest London Living Wage (LLW) figures - a recommended voluntary pay rate of £9.75 an hour in London, rising from £9.45 last year. With the annual release of ONS data on pay the previous week (the Annual Survey of Hours and Earnings - ASHE, 26/10/16), it’s a good time to look at what this new data tells us about the relationship between pay and the cost of living in London. It’s also possible to look at how the relationship between pay and the cost of living stack up relative to the rest of the UK, where the new voluntary living wage figure is £8.45 an hour - and where the main differences in cost arise.
In addition, this year has seen a fundamental change in the way the London Living Wage is calculated, harmonising the approach with the UK methodology, looking solely at the cost of living and removing the element linked to wider incomes and the poverty threshold. This harmonised approach focuses on the income a household would to meet the cost of a so-called ‘basket of goods’ - a collection of goods and services deemed by social consensus to offer a decent standard of living that allows full participation in society. This includes elements such as rent, bills, childcare, groceries, household goods, clothes, transport, and leisure. The work that has gone into designing and recalculating this new London approach highlights some of the differences in the costs - and styles - of living in London relative to other parts of the UK.
The calculations assume that all adults in a household are in full-time employment. It is worth noting, however, that the living wage level does not guarantee that all recipients in full-time work will be able to afford the basket of goods and services calculated. This is because different household compositions will incur different costs and have differing income streams - for example, depending on the number of adults and children, children’s ages, and any entitlement to measures such as tax credits or housing benefit.
The calculations therefore look at the total income needed across seventeen different types of households (using the Minimum Income Standard budgets), calculate the pay needed to attain that income, and then weight the results according to their prevalence in the population. These weights reflect the differences in household composition between London and the rest of the UK – most strikingly the differences in single person households (weighted: 43% in London, 33% across the rest of the UK), and couples without children (weighted: 25% in London, 34% across the rest of the UK). This likely reflects the pattern of internal migration seen for London, with large influxes of people in their late teens and early twenties, and net outward migration from about thirty onwards, as shown in the chart below, plotted with data from the ONS. While slightly fewer London households contain children, the weights allow for a greater proportion of families with three or more children (weighted across categories: 6% in London, 5% across the rest of the UK).
Looking firstly at pay and living wages, in the first chart, I’ve pulled together data from ASHE looking at full and part time pay in London and the UK, mapped across percentiles to show the range of wages people earn. To this, I’ve added the three different living wages currently in play, calculated on the basis of a 37.5 hour working week (which the Living Wage definitions use).
- The London Living Wage and UK Living Wage are both voluntary levels of pay, calculated by the Resolution Foundation and overseen by the Living Wage Commission, taking a ‘basket of goods’ approach. For more information on methodology click here.
- The National Living Wage - which effectively replaces the National Minimum Wage for those aged 25 and over - was introduced in April this year and is a legal Government requirement, annually reviewed by the Low Pay Commission. This takes a different approach, and looks at the economic climate and likely impact on jobs. For more information on methodology click here.
A couple of aspects jump out.
- For gross full time weekly pay, the median level (the point where half the population falls above and half below) is £671 in London, versus £539 across the UK - a difference of £132 per week (24% higher).
- For those on the lowest pay, the gap is considerably smaller - a weekly difference of £50, or 16%, with the lowest 10% of full time earners in London receiving less than £358 per week.
- As pay gets higher, the difference exacerbates - the top 10% of earners in London take home more than £1437/wk, 36% (£380) higher than across the UK as a whole.
- For part-time workers, gross weekly pay is much lower - and the differences between London and the rest of the UK much less marked. The median weekly pay of £185 for London workers is only £8 higher than the rest of the UK, and it’s only for part time earners on the highest rates that there’s really much difference.
- The difference between the three living wage levels can be clearly seen (note this is a fixed rate rather than percentiles). Those on the London Living Wage would be taking home nearly £50 per week more than the UK living wage - and £96 more than the compulsory national living wage.
So, why is the London rate higher – and how does this relate to the costs of actually living in London?
Both the Resolution Foundation and the Trust for London have looked at the elements which make London significantly more expensive as a place to live – with the latter finding that household budgets were between 18% and 47% higher in London. Whilst the costs of consumables such as groceries and clothes were broadly equivalent, three elements are significantly different – housing (factored in as rental prices), transport, and childcare.
In addition, the reports highlight not only differences in costs, but associated differences in lifestyles. In London, for example, single people are more likely to live in shared accommodation (54% of single Londoners in the 2011 Census), and the minimum standard for families is viewed to be a flat rather than a house. In terms of travel, the London calculations view a car as unnecessary for transport, and factor in public transport costs instead (with travelcards split between inner and outer London). There are also more subtle lifestyle differences in costs - with Londoners tending to eat out more, partly reflecting the difficulties in entertaining at home in small or shared accommodation.
In the second chart here, I’ve focused on housing costs, as this element accounts for the majority of the cost differential between London and the rest of the UK. Here I’ve looked at the costs of different types of private rented housing using data from the Valuation Office Agency. Whilst the living wage factors in the assumption that families with children live in the social rented sector, DCLG data reports 263 thousand households currently on the waiting list for social housing in London, so here I’ve focused on private rents.
The chart below shows monthly rents by housing type across London – with the London Living Wage mapped across overall and at a 50% level (showing what a single earning LLW household spending all and half their gross wages on housing could afford respectively).
Again, several trends jump out:
- The London average is significantly more than the UK average - the median rent is over double that for England, and at the cheapest end (lower quartile), 2.3 times as much. For this lower quartile, the difference is £655 per month - £151 per week, so rather more than the London and UK Living Wage differential of £50/week.
- The ASHE figures showed a weekly difference in average wage of £132 / week between London and the UK overall. But the average housing cost difference equates to £185 / week. So the higher salaries in London do not - for most people - compensate for the higher cost of rent.
- The cost of renting does vary significantly across housing type - but spending half of the London Living Wage gross pay rate for a full-time worker would only put them within reach of shared rooms or the cheapest studios.
- This would obviously pose significant problems for families if dependent on the private rented sector. The living wage calculations assume they have access to social housing – but even here, the latest English Housing Survey report shows London’s social rented sector weekly costs as 36% higher than across the rest of England (£120 vs £88 per week).
- Full time workers on the median London salary would receive around £2900 / month before tax. The median London rent of £1452 would take up half of this. For the lowest quartile of pay (£2071 /month) and rents (£1150 / month), this would be 56%.
- There are, of course, significant differences in London boroughs (not shown on this chart). Kensington and Chelsea sees the highest median rent (£2492 / month), and Havering the lowest (£1000 / month).
So, looking across the data here on earnings and rental prices, while full-time salaries in London are significantly higher than across the UK, rented accommodation is a very significant cost and proportion of wages - and the higher salaries earned in London do not fully cover this differential. Those on the London Living Wage with families are assumed to be in the social rented sector; if not, only the smallest and cheapest types of private rented accommodation would be realistically affordable. Housing pressures and costs continue, then, to be one of the most significant challenges for London and Londoners.