The Living Wage in the UK: testing the limits of soft regulation?

Introduction

Despite a long history in economic and social thought, the living wage is arguably one of the most potent social movements of recent years. One of the first successful modern living wage campaigns ‘mobilised’ in 1994 in the US city of Baltimore, driven by a dynamic coalition of labour and faith groups with a keen sense of the hardships faced by local residents (Pollin, 1998). The rapid spread of living wage campaigns to many other large post-industrial cities across the US has led some to argue that the living wage movement heralds a potential reawakening of organised labour in the 21st century (Luce, 2014). The Living Wage campaign in the UK began in the early 2000s when The East London Community Organisation (TELCO) and one of the UK’s largest trade unions, UNISON, began lobbying for a living wage to ensure that nobody in full-time work ‘fell below the poverty line’. Following the early success of the campaign in pressuring local hospital trusts to adopt the Living Wage for subcontracted workers, the campaign moved on to target blue-chip multinationals in and around the Canary Wharf business district in east London (Holgate and Wills, 2007).

A living wage in its broadest sense refers to a wage level which provides a worker with sufficient income to reach a ‘modest but decent standard of living’ based on the cost of accommodation, goods and services within a particular location (Figart et al., 2002). Beyond this seemingly simple mathematical calculation, the living wage as a concept has come to represent a wider dissatisfaction with weakly regulated market models of pay setting, which have left many workers without the means to afford basic necessities. The clear anti-poverty message of the Living Wage campaign has been persuasive with individual employers. In the UK, as of March 2019, over 5000 organisations are accredited with the Living Wage Foundation, ranging from multinational companies in finance and professional services to family-owned SMEs in manufacturing and hospitality. ¹ The Living Wage in the UK has also proven to be popular across the political divide with left-wing and right-wing politicians alike championing the cause (particularly in London). However, the number of workers covered by individual living wage agreements remains low and the voluntary system of accreditation means that the obligation to pay a living wage is only morally and not legally binding (Heery et al., 2017). This has led some to suggest that: ‘in some senses, living wages have generated more heat than light’ (Lawton and Pennycook, 2013: 4).

Twenty years on from the first TELCO campaign, this is an opportune moment to take stock. Drawing on a range of published literature, including the authors’ own empirical work on living wages in the UK, this article reflects on the emergence and evolution of the Living Wage campaign and methodology, while also exploring the implementation and impact of living wages. The aim is to provide a contextualised account of the UK experience and to offer important insights about the interaction between the Living Wage and other forms of labour market regulation. In this context, the Living Wage, as shaped by both the moral demands of civil society (Aguilera et al., 2007) and the real material needs of low-wage workers, can be viewed as a critical response against the market-led practices of individual firms in the UK. The article argues that the Living Wage in the UK has been partly successful in bringing the public’s interest in decent pay back into the private domain of the corporation (Bremmer et al., 2012). However, it has failed to deliver change across wider segments of the UK labour market, largely due to its voluntarist nature coupled with its relative isolation as a wage-fixing mechanism due to the limited presence of collective bargaining in the UK private sector.

The rest of the article is structured as follows. The next section looks at the emergence of the Living Wage in the UK and its effects to date on low-wage workers and low-wage labour markets. Section 3 considers how the campaign has spread across different parts of the UK economy, before offering a critical evaluation of the system of soft regulation that has developed around the Living Wage. Section 4 examines the relationship between different organisations and actors involved in setting and enforcing the Living Wage. The final sections explore different mechanisms through which the Living Wage could be both ‘broadened and deepened’ in a UK context before offering some concluding thoughts.

The Living Wage in the UK: a voluntarist response to persistent low pay

Until the early 1990s, the dominant mainstream economics view held that increases in the wage floor, whether through a statutory minimum wage or a living wage, would necessarily exceed an employee’s marginal contribution to production and cause job losses. Over time, however, the economics perspective has become more attuned to the role of monopsony employer power, the indeterminate shaping effects of staff turnover costs and other HRM decisions, and the role of wage-led productivity effects. By 1999, when the UK introduced a statutory National Minimum Wage (NMW), opinion had shifted towards the view that a minimum wage set at a suitable level could be a viable instrument for tackling extremely low pay and exploitation.

Under the tripartite Low Pay Commission, the next two decades witnessed a steady increase in the relative value of the minimum wage, narrowing the gap with median wages (Brown, 2017). At the same time, however, the share of low-wage work in the UK remained relatively unchanged at around 20 per cent between 1999 and 2015. The share has fallen since 2016 as a result of sharp increases in the minimum wage, alongside sluggish annual growth in median earnings since the recession (D’Arcy, 2018). In broad terms, minimum wages are not generally designed to guarantee living standards but rather they set a floor under wages. This floor is highly sensitive to what ‘the market can bear’. As Wills and Linneker (2012) note, although the UK’s NMW has helped to reduce the incidence of extremely low pay, it has not been able to stem ‘the rising tide of in-work poverty’. In this context, the Living Wage may perform an important ‘market correcting’ mechanism by establishing a higher going rate near the bottom of the labour market, while also protecting living standards and providing a route out of poverty (Figart et al., 2002).

The UK has two living wages – one for London and another for the rest of the UK. Until 2016, each living wage rate was fixed by a distinctive methodology. The London Living Wage was calculated each year by the Greater London Authority to provide a ‘low cost but acceptable budget’ based on typical housing and living costs in the capital, and included an explicit reference to the poverty line of 60 per cent of median earnings. In contrast, the UK Living Wage was calculated by a team at Loughborough University who estimated the hourly wage necessary to reach a ‘Minimum Income Standard’ based on the typical experiences of different family types, reflecting social norms as well as straightforward economic calculations (Lawton and Pennycook, 2013). The methodology was subsequently harmonised and is now undertaken by the Living Wage Commission. The methodology focuses solely on the ‘basket of goods’ approach; the poverty line reference point has been dropped. Crucially, however, acceptable living costs are established through dialogue with workers and families (see D’Arcy and Finch, 2019).

Although the revised methodology brings consistency and arguably improved credibility to the calculation, there remain anomalies and tensions in the process of setting and uprating the two living wage rates. As Anker (2011: 52) notes, ‘a silver-bullet methodology does not exist, nor will it ever exist’. A first reason is that each worker’s needs vary. For example, the calculation of a living wage has variously been based on the needs of a worker, a worker and their spouse, and a worker with up to three dependents (Bennett, 2014). It is therefore difficult to determine a minimum hourly wage rate (at any level) which would guarantee a specified standard of living for such a heterogeneous set of workers and family types. A second reason is that an hourly rate, in the absence of statutory or collectively agreed guarantees for minimum working hours over the week, month or year, cannot ensure that minimum consumption needs are met (Figart et al., 2002).

As such, a living wage in isolation cannot guarantee a route out of in-work poverty. Indeed, as a poverty fighting tool, living wages have been argued to be ineffective as many poor workers are not low-wage workers; and many low-wage workers are not poor (Macpherson, 2004). Certainly, the effects of living wages on overall household incomes are strongly shaped by household composition effects, and living wage calculations assume that workers are aware of and claim all additional benefits to which they are entitled, such as housing benefits and in-work tax credits among others (Linneker and Wills, 2016; Swaffield et al., 2018). Clearly it is not a zero-sum choice between higher wages and stronger systems of social protection; as Heery et al. (2017: 810) argue: ‘the Living Wage should be conceived of as a complement, a means of adding to the redistributive effect of statutory regulation of wages and of tax and benefit policy rather than as an alternative to these methods’.

However, evidence from the UK also suggests that those paid at or below the Living Wage are more likely to be income poor and materially deprived than employees with wage rates above the Living Wage, and that paying employees the Living Wage or higher is likely to reduce the risk of poverty (Linneker and Wills, 2016; Swaffield et al., 2018). This is particularly the case for single earners and lone parents who are likely to be most dependent on their own earned income (Swaffield et al., 2018). From a social justice perspective, studies have suggested that living wages can have strong redistributive effects to low earners while also reducing the tax burden on the state (Linneker and Wills, 2016). Increased individual earnings can relieve immediate financial pressures within the household and potentially bolster the financial independence of second earners (who are often women or young workers) (Bennett, 2014). Placing the emphasis back on the wage-setting practices of employers (and the inequalities they perpetuate) is preferable to state-funded income protection such as Universal Basic Income (UBI), ² which has been proposed as a means of decommodifying labour (Standing, 2017). Taken together, the evidence suggests that living wages are not a replacement for vital social protections. Rather, they are a crucial tool in tackling low wages as a source of gendered discrimination in the labour market and wider society (Figart et al., 2002) by establishing a new norm of fair pay for undervalued skills and jobs, which are typically undertaken by women (Bennett, 2014).

Sustaining and scaling up the campaign

The success of local living wage campaigns arguably lies in their ‘grass-roots’ nature which gives them a wider appeal beyond traditional union-led agitation for better wages (Freeman, 2005). Moreover, campaigners have found a way to turn concerns about structural problems of low pay, poverty and inequality into a ‘winnable issue’ in the form of an independently calculated hourly wage rate (Bunyan, 2016). However, campaigners are faced with the issue of how to scale up local initiatives and build bargaining power across groups of (typically) unorganised workers without compromising the dynamism of small campaigns, what Freeman (2005) describes as the ‘scale-up or cul-de-sac’ paradox. Broadly speaking, the UK campaign is arguably more closely aligned with traditional coordinated ‘European’ labour movement activity around low pay, redistributive social policies and rebuilding collective bargaining power (Grimshaw, 2004). Furthermore, the UK campaign is also relatively centralised when compared to the city-level campaigns in the US and has relied on the campaigning expertise and resources of larger civil society organisations, such as Citizens UK, to establish a consistent message and methodology for calculating living wage rates (McBride and Muirhead, 2016). For example, the early campaigns in London were quick to recognise the importance of powerful personal stories of hardship, but crucially these were backed up by research evidence to establish the wage rates needed to achieve a basic standard of living (Grimshaw, 2004).

At the same time, the campaign has been given impetus and energy by the same dynamic coalitions of labour, faith and community groups found in US cities that were able to mobilise around issues of inequality and insecurity at work (Heery et al., 2017). For example, the TELCO campaign drew attention to migrant workers trapped in low-paying part-time roles who were unaware of their rights at work or their entitlements to benefits, while also highlighting the wage gaps between co-workers as a result of complex systems of subcontracting (Holgate and Wills, 2007). Direct action such as disrupting shareholder meetings, combined with the negative publicity of being seen to pay ‘poverty wages’, quickly led to increases at HSBC and Barclays bank from £5.00 to £6.00 per hour (a 20 per cent increase) along with increased pension contributions and paid sick leave (Bunyan, 2016). A number of multinational firms with offices in London, such as CitiGroup, KPMG and Deutsche Bank, followed suit, and in 2005 the then Mayor of London, Ken Livingstone, and the Greater London Authority (GLA) established the Living Wage Unit to calculate the London Living Wage. Arguably more important than the spread of the Living Wage among blue-chip multinationals (where the numbers of workers affected were minimal), was the decision of the GLA to adopt Living Wage clauses for its external contracts such as cleaning, catering and waste removal, thus consolidating the position of London as a ‘proving ground’ for the implementation of the Living Wage.

Wills and Linneker (2012) estimate that around 11,000 workers received a pay increase as a result of employers adopting the London Living Wage between 2005 and 2011. The Living Wage has spread relatively rapidly across the UK, delivering a wage gain of more than 10 per cent over the national minimum wage for affected workers (Heery et al., 2017). Challenging neoclassical economic thinking, these wage gains appear to have been achieved at little or no cost to employment levels or working hours (Wills and Linneker, 2012). Data from across the UK suggest that the cost of implementing a living wage policy is on average no more than around 5 per cent even for larger firms in ‘low-paying’ sectors with very high proportions of low-paid workers (e.g. hospitality, catering, and retail) (Pennycook, 2012). Moreover, survey evidence suggests that many consumers would be willing to pay more for goods and services if they knew that staff were paid a living wage which would help offset higher wage costs (Coulson and Bonner, 2015). One reason for the absence of job loss effects is associated with the indirect effects of higher wages on the nature of employment within low paying firms. Case-study evidence shows that the introduction of the London Living Wage led to a decrease in staff turnover of 25 per cent within some firms, which helped to offset the increased wage costs (Wills and Linneker, 2012). At the same time, there are methodological limitations to testing the employment effects of a living wage and ‘proving’ the business case. Many firms that sign up to the Living Wage Foundation accreditation scheme already pay above the Living Wage and this makes it difficult to isolate the specific business effects of becoming an official Living Wage employer (Heery et al., 2017).

At an aggregate level, the achievement of significant wage gains with few of the adverse effects in terms of job losses almost certainly reflects the relatively low absolute numbers of workers covered by the Living Wage and the problem of the limited scale of initiatives, which solely rely on social sanctions or loss of legitimacy, within individual firms. For example, nearly three-quarters of the 5000 accredited Living Wage employers are small and medium-sized enterprises with fewer than 50 employees (Heery et al., 2018), and an estimated 120,000 workers across the UK are estimated to have directly benefited from wage increases as a result of their employer voluntarily adopting the UK or London Living Wage since 2011, when the Living Wage Foundation accreditation scheme was first established (Heery et al., 2017). To put this figure into perspective, there are an estimated 5.75 million jobs (22 per cent of the total) across the UK that pay less than the Living Wage (IHS Markit, 2018). Thus, so far at least, it appears that the Living Wage in and of itself has not been able fundamentally to dislodge the statutory National Minimum Wage as ‘the going rate’ for many workers, reflected in the increasing share of workers being paid at or just above the statutory rate (D’Arcy, 2018).

The expansion of the Living Wage in many parts of the UK private sector has largely been driven by the Living Wage Foundation accreditation scheme, which, although highly innovative in a UK context, largely relies on moral suasion and/or bottom-up collective action rather than sanctions for enforcement. Accredited employers are expected to abide by the annual uplift and promote the Living Wage with suppliers and contracted service providers. In return, employers can display the accreditation logo in their premises and on their website. This also potentially enhances staff recruitment and retention strategies and bolsters the reputation of firms as ethically or socially aware. Furthermore, the use of the logo also confers legitimacy on the Living Wage Foundation itself, which as an arm of Citizens UK relies on member subscriptions for income and therefore there is a mutual interest between the Living Wage Foundation and employers in sustaining accreditation levels (Heery et al., 2017). For example, although there are no documented cases of ‘de-accreditation’, a small number of organisations have allowed their accreditation to ‘lapse’ in situations where the annual increase has been considered unaffordable (Heery et al., 2017).

Broadly speaking, Bunyan (2016) argues that the ‘carrot’ of reputational benefits from paying the Living Wage, combined with the ‘stick’ of campaign pressure and naming and shaming exercises, has been effective in sustaining the Living Wage within individual organisations. However, it is not the case that the concept of a living wage has become more broadly institutionalised to the extent that any deviant action by organisations that do not engage in the campaign invariably leads to ‘enforcement’ in the sense of facing social sanctions or loss of legitimacy (Aguilera et al., 2007; Streeck and Thelen, 2005). Furthermore, the lack of trade union representation in many accredited Living Wage firms weakens the possibility of identifying non-compliance and cases of hollow-shell Corporate Social Responsibility (CSR) initiatives referred to as ‘greenwashing’ (Harvey et al., 2017). This underlines the clear need for more robust systems of institutional enforcement and regulation around the Living Wage, underpinned by ongoing internal monitoring and dialogue between managers and worker representatives such as trade unions.

The Living Wage and civil society organisations: opening or closing the door to trade unions?

The Living Wage has been held up as one of the most successful civil society-led initiatives to reduce poverty and inequality in the UK in recent decades (Bunyan, 2016: 500). Like the United States, this situation has arisen in part because the relative weakness and fragmentation of wage setting has arguably created a vacuum into which new campaigning groups and Civil Society Organisations (CSOs) have been pulled. But whereas for CSOs the sole objective is to persuade employers to adopt the Living Wage, for unions the promise of regular and meaningful collective negotiations over pay and conditions is arguably the real prize (Sellers, 2017).

For example, the first living wage agreements were signed by the national trade unions the Transport and General Workers Union (TGWU, now UNITE) and UNISON, and trade unions in the UK have gradually shifted from a servicing to an organising model in order to reach out to more diverse workforce groups (Sellers, 2017). However, the well-recognised bureaucratic rigidities of large generalist unions meant that the CSOs involved in the Living Wage campaign, such as TELCO and Citizens UK, were quicker and more agile at connecting groups of marginalised workers and taking their claims directly to management. Indeed, much of the initial bottom-up pressure on employers came through the faith and community groups within the TELCO coalition that the office cleaners were already engaged with, and TELCO activists adopting more ‘agitational’ methods rather than relying on traditional union organising drives to build long-term bargaining power and legitimacy. Furthermore, the dominant role of the Living Wage Foundation and Citizens UK in establishing the accreditation system potentially poses challenges for traditional labour organisations in respect of negotiating living wage agreements with employers, and leveraging living wage campaigns to organise low-paid workers (Lopes and Hall, 2015). In some cases the unions have felt threatened where campaigners have mobilised for action in workplaces where collective agreements were already in place. Typically, unions do not want ‘quick wins’ in the form of local living wages agreed outside of higher-level collective agreements since these may detract from the longer-term objectives of rebuilding collective bargaining power among low-paid workers (Johnson, 2017; Sellers, 2017).

Nevertheless, the UK experience suggests that the Living Wage is broadly compatible with the presence of collective agreements and trade unions. Although there are significant clusters of accredited firms in sectors that are relatively non-unionised such as construction and retail, the presence of large Living Wage employers in the public sector means that the actual coverage of workers is strongly concentrated in unionised parts of the economy (Heery et al., 2018). In the US, campaigners have tended to start with local councils ‘because they can’ (Freeman, 2005), and attempt to build alliances with sympathetic politicians (Swarts and Vasi, 2011). A similar pattern can be observed in the UK. Trade union membership density in UK local government is 42 per cent compared with 23 per cent of all workers (BEIS, 2017), and this appears to have facilitated the relatively rapid spread of the Living Wage among local councils across the UK: around half of the 403 local authorities in England, Scotland and Wales claim to pay their staff a living wage although only around 100 are accredited (Prowse and Fells, 2016).

Given the fragmented and decentralised nature of wage setting in the UK, a key objective for the unions and workers is to leverage localised agreements to build more general upward pressure on pay and conditions. The challenge here is that many employers appear to buy into the Living Wage largely as a symbol of business ethics and reputation, often under the broad banner of Corporate Social Responsibility (Werner and Lim, 2016), rather than as a direct response to campaign pressure or trade union activity around low pay and inequality. In this context, rather than businesses genuinely attempting to forge alliances with community and labour groups in pursuit of social goals, the Living Wage may actually serve as a defensive strategy of ‘co-opting’ critics and deflecting claims for regular negotiations over pay and conditions (Ptashnick and Zuberi, 2015). Indeed, the Living Wage has yet to make significant inroads into firms and sectors that seek competitive advantage from low labour costs. In the private sector, firms that have proven to be most receptive to the Living Wage tend to be found in higher paying sectors where the potential adverse effects are lowest (Heery et al., 2017).

Institutionalising living wages through legal and joint regulation

The limitations of the system of soft or ‘private’ regulation that has developed around the Living Wage in the UK encourages us to look at alternative mechanisms through which living wage effects could be embedded within low-wage labour markets.

One mechanism would be to increase the statutory wage floor up to the level of the true Living Wage. In the UK, after several years of slow growth in the NMW, the current government’s attempt to label a premium for workers aged 25 and over as a ‘National Living Wage’ arguably reflects the positive influence of the true Living Wage campaign on government policy-making. However, the relabelled minimum wage is effectively a small hourly premium paid only to workers aged 25 and over. More problematically, from the perspective of tackling poverty, recent research by the Child Poverty Action Group (CPAG) shows that the weekly earnings of two full-time ‘national Living Wage’ workers supporting two children is £49 short of what is required to live a ‘basic no-frills lifestyle’, and that recent increases in the NMW have largely been clawed back in reduced in-work transfers.

In the same way that the UK’s minimum wage policy is institutionally ‘isolated’ from other wage-fixing mechanisms such as collective bargaining (Karamessini and Grimshaw, 2017), the Living Wage campaign can only, if at all, align with weak mechanisms of collective bargaining. This results in many low-wage workers being reliant on employer discretion for payment of a higher living wage and reduces the likelihood that wage differentials are protected for workers paid above the living wage (so-called ripple effects). Similarly, the lack of co-determination rights at the corporate level reinforces more broadly the marginalisation of public interest considerations in the private domain of the corporation: in a business context characterised by shareholder value and wealth–maximisation, it is only instrumental motives, directly linked to firm competitiveness and profitability, that might persuade employers to consider ‘social value’ in wage determination. Unlike Germany’s strongly institutionalised minimum wage policy that provides a platform for supplementary collective bargaining between the social partners (Bosch, 2018), UK government policy continues to abstain from actively supporting collective bargaining and worker voice at corporate level. The government’s ambition for the minimum wage to reach 60 per cent of median earnings by 2020, while welcome, signals greater unilateral state control over the minimum wage fixing process (Karamessini and Grimshaw, 2017). Moreover, in the absence of social dialogue mechanisms to sustain wage differentials for low-wage workers (e.g. between supervisory and non-supervisory grades), a higher minimum wage is likely further to compress wages in low-paying sectors such as cleaning and hospitality (Low Pay Commission, 2016).

The reintroduction of wages councils would establish a more participative mechanism to protect low-wage workers, facilitating collective voice over the choice to introduce a living wage and negotiation over how to preserve wage differentials in response to a rising base wage rate. Wages councils used to set minimum wage rates in ‘sweated’ trades where workers were unorganised and collective agreements were either weak or absent. Employers and unions typically shared equal representation on each council under an independent chair, and wages councils were designed to stimulate collective bargaining (although with limited success, Brown, 2017). At their peak in 1945 wages councils covered around 2.5 million workers, but were largely abolished during the 1980s under Margaret Thatcher (Sellers, 2017). The Labour Party has pledged to reinstate a wages council for farm workers in England (abolished in 2013). While narrow in coverage, it could act as a template for other low-wage sectors and offer a route for unions to re-establish their role in collective pay setting (Hughes and Dundon, 2018).

A related approach with broader coverage would be to develop and extend sectoral collective bargaining, as put forward by the Institute of Employment Rights (Ewing et al., 2018). This would include establishing National Joint Councils (NJCs) in all sectors where no effective sectoral bargaining takes place, taking into account, among others, the extent to which a significant proportion of workers are in households receiving state benefits (i.e. where it appears the state is subsidising low wages) or where the rate of growth of median earnings has significantly fallen below the rate of inflation. Going beyond the remit of Wage Councils, discussed above, the primary responsibility of NJCs would be to: establish collective bargaining machinery; negotiate substantive collective agreements; administer collective agreements; resolve disputes in their sector between employers and trade unions, and between workers and employers; and represent the interests of the sector to various government departments. This could be linked to the notion of ‘union-default’ policy (i.e. automatic membership enrolment), which is seen as a means to rebuild union membership and workplace co-determination in those parts of the economy that would benefit from greater levels of engagement, participation and democracy (Harcourt et al., 2019). Unions should still also seek to leverage local living wage campaigns to recruit new low-paid members as has been the case with the Broadcasting, Entertainment, Cinematograph and Theatre Union (BECTU) living wage strike action and protests at cinemas across London (Sellers, 2017). UNISON have also successfully supported mainly Latin American migrant subcontracted workers at the University of London in their campaign for a living wage and have subsequently signed a recognition agreement with the private sector cleaning firm (Alberti and Però, 2018).

Unions in some instances also build on existing collective agreements where they exist. For example, in addition to negotiating the Living Wage as the entry rate in sectoral agreements, a key objective for the unions in the public sector is to use living wages as a platform for supplementary bargaining to achieve ripple effects. UNISON have long made the Living Wage the basis of their annual pay claim in both local government and the health service, but by negotiating a flat rate increase for all workers (e.g. £1 per hour) the lowest rates would be raised up to a living wage while preserving absolute pay differentials for workers higher up (although percentage differentials would be reduced). Following several years of stalemate in local government, agreement was reached between the main trade unions, UNISON, Unite and the GMB, and the local government employers to implement a bottom-weighted settlement over two years (2018–2020) that would increase the base rate of the sector agreement to £9 per hour (the 2018/19 UK Living Wage) while also preserving consistent differentials between pay rates in the lower half of the wage distribution. This represents a major breakthrough within the public sector context, but the main threat to achieving collectively agreed living wage rates along with a positive ripple effect is the ongoing macroeconomic policy of austerity and pay restraint in the UK public sector that has severely restricted pay growth since 2010.

Diffusing the living wage through public procurement

In order to improve the diffusion of a voluntary living wage, living wage agreements need to be extended along supply chains. This is because, since the 1980s, organisations in all sectors of the UK economy (and similarly in other European countries) have sought to reduce wage costs by outsourcing services deemed to be peripheral to their core business, including catering, cleaning, security and other relatively low-paid jobs. Cost-led competitive outsourcing is a key factor explaining the persistence of low-wage work in the UK (Grimshaw et al., 2019).

Accreditation with the Living Wage Foundation requires employers to promote the Living Wage among their suppliers. Some lead firms in the private sector, such as KPMG, have agreed living wage contracts with their cleaning and facilities providers (ISS). However, the relatively small scale of contracts within individual firms and the internal segmentation of staff within outsourcing providers across different contracts means that only a small proportion of subcontracted workers typically benefit. Living wage clauses in public procurement on the other hand have the potential to create a significant diffusion effect by setting minimum standards for subcontracted public sector workers. The devolved administrations of Scotland and Wales have championed the Living Wage for centrally awarded contracts, and across England there is evidence that individual public bodies have incorporated living wage clauses into external contracts for low-paying services such as construction, care and cleaning (Druker and White, 2013; Jaehrling et al., 2018; Wright and Brown, 2013).

The addition of living wage clauses to public contracts has broadly tended to rely on a wide interpretation of the range of factors that make up the assessment of the most economically advantageous tender (Barnard, 2011). For example, living wages have been incorporated into the contract award stage where working conditions are linked to the subject matter of the contract itself (e.g. delivering a high quality and reliable service), and where the higher costs to the contracting body can be balanced out by the wider gains to the local community (McCrudden, 2007). A number of rulings by the Court of Justice of the European Union (CJEU) in the late 2000s seemed to limit the willingness of public bodies to impose ‘binding’ living wage requirements on external contractors. The well-known Laval (2007) and Rüffert (2008) cases ruled that wage clauses, in as much as they seek to extend collectively agreed pay and conditions to posted workers rather than just legal minima, are incompatible with the freedom to provide services under the EU Treaty (Koukiadaki, 2014). Reflecting this, there was something of a trend (even among those local authorities that have achieved or are seeking accreditation) towards ‘soft negotiation’ around living wage clauses where local authorities consider contracts on a case-by-case basis rather than attempting to adopt a blanket living wage policy for all contracts (Johnson, 2017).

While the revised 2014 EU procurement directives, the Bundesdruckerei (2013) and RegioPost (2014) cases, as well as the revised Posted Workers’ Directive, attempt to reconcile freedom of movement of services with wage clauses in procurement, none of these directly address living wages which are not set out in legislation, collective agreements or administrative provisions (Semple, 2017). However, living wage clauses can be accommodated within the new EU procurement regime, by being included not only as contract performance clauses but also as contract award ones. The adoption in the UK of the Social Value Act in 2012, which requires public authorities to consider social value for all service contracts subject to the legislation, has provided additional impetus for the incorporation of living wages in public contracts, albeit evidence is still limited in terms of its effectiveness in doing this.

Employers have tended to respond positively to living wages where they enhance the reputation of firms as ethical or responsible businesses (Wright and Brown, 2013), and where they are seen to prevent unfair wage competition from ‘rogue’ firms. In some cases living wages (where they are fully costed) are perceived by contractors as an instrumental means to improve recruitment and retention and to help professionalise lower-paying occupations and industries such as cleaning (Koukiadaki, 2014). At the same time, support for living wages among employers tends to be strongest among large firms where enhanced regulation would protect their market position rather than smaller firms where deregulation would facilitate market entry (Koukiadaki, 2014), and the agreement of living wage clauses does not appear to have created significant inroads for the unions into private sector contractors (Prowse and Fells, 2016). The main barrier to embedding living wages is the increase in fees required to cover the additional costs of raising pay, along with other employment conditions such as guaranteed hours contracts. This requires a clear political commitment (typically from Labour Party politicians) to increase resources for outsourced care services, although commissioning authorities with expert knowledge of the local market can offset some of the higher wage costs by renegotiating management fees and overheads (Jaehrling et al., 2018).

UNISON’s national ethical care charter seeks to make a clear link between the outsourcing and contracting practices of public bodies and the working conditions faced by predominantly female workers. So far around 20 (of 350) local authorities in England, Wales and Scotland have committed to the key standards of the charter which include a full living wage and guaranteed hours contracts for subcontracted workers. However, recent campaigns and legal challenges led by the Independent Workers’ Union of Great Britain (IWGB) may yet fully ‘internalise’ the payment of living wages in the public sector. In 2018 the High Court granted permission for a judicial review of a decision by the Central Arbitration Committee (CAC) that rejected an application of IWGB to be recognised by the University of London for collective bargaining. The application was made in respect of a group of workers who were not employed by the University but by Cordant, which is a supplier of a range of services to the University. While the union argued that the University of London was the de facto employer of security staff, porters and receptionists, as it ‘substantially determined’ the workers’ terms, the CAC held that to allow the IWGB’s application would be ‘a recipe for chaotic workplace relationships’. The High Court will now consider whether denying the outsourced workers the right to collectively bargain with the University of London is a breach of Article 11 of the European Convention on Human Rights. This would have significant ramifications for the regulation of outsourced services since the client firm at the top of the supply chain would not only be jointly responsible for the minimum level of pay and conditions for subcontracted workers but would also have to negotiate with those unions acting on their behalf (as in the US doctrine of ‘joint employer’); such an outcome would likely erode the cost advantages of outsourcing. The IWGB has made significant progress in organising workers in outsourcing services providers in London, arguing that the main unions have not effectively represented migrant workers, and are seeking to achieve the Living Wage alongside guaranteed hours contracts through a mixture of collective bargaining, protests, strikes and legal action.

Conclusion and future directions

As in the US, the UK Living Wage campaign has proven to be a remarkable (if somewhat localised) success; raising the pay of typically female and often unionised workers at the bottom of the labour market with few adverse effects in terms of job losses or reduced hours. From a business perspective there are clear reputational gains from adopting the Living Wage alongside improvements in staff morale, productivity and retention and the spread of the Living Wage across all parts of the UK and a wide range of sectors is impressive. From a social perspective, the campaign has successfully ‘mainstreamed’ the Living Wage into the public debate around pay and inequality, while also providing a ‘solution’ to the question of how to address poverty pay in the form of an independently calculated hourly wage rate. In this respect, while the campaign necessarily relies on the concept of wages as a living to make a persuasive moral argument, it has also been presented as a precondition for the effective functioning of a market-based economic system that seeks to limit inequality and promote inclusive economic growth (Figart et al., 2002).

The institutional impact is however more mixed. On the one hand, the absence of coordinated wage setting in the UK, combined with a relatively large segment of low-wage workers, has created fertile ground for the Living Wage campaign both to emerge and to expand since the early 2000s. On the other hand, however, it is these same institutional deficiencies that arguably limit the wider effects of the Living Wage through ripples along the wage structure and diffusion along supply chains. The lesson from the UK is that where social partners do not have the resources or the political capital to engage in effective ‘institution building’, progressive wage polices such as the Living Wage, however innovative and disruptive they may be at the level of the organisation, are unlikely to develop beyond non-binding and relatively disorganised forms of private or ‘soft’ regulation.

For example, despite the rapid increase in employer accreditations with the UK Living Wage Foundation, worker coverage is low, with fewer than 200,000 workers benefiting from a living wage out of a total of nearly six million low-paid workers in the UK. The positive rate at which employers are signing up to the Living Wage is welcome but sustained efforts are needed to bring in larger employers in sectors such as retail and hospitality that are so far under-represented among accredited employers. Furthermore, it appears that many employers adopt the Living Wage largely for reputational gains and/or out of a sense of moral duty, rather than as a result of trade union or grass-roots campaign pressure. As such, there is only limited evidence that the Living Wage provides a platform for new or extended negotiations over pay.

The reintroduction of wages councils and the development of sectoral collective bargaining agreements (linked to a union default model) are two complementary institutional mechanisms through which coordinated wage setting involving employer and trade union representatives in low-wage sectors could be developed. The trade unions have leveraged their existing institutional legitimacy in parts of the public sector to negotiate living wages within sector collective agreements, and have recently achieved some positive ripple effects in UK local government by negotiating a three-year bottom-weighted settlement. Although recent legal challenges may ultimately shift the responsibility for negotiating wage rates from subcontractors back to public sector clients, in the short term we identify the adoption of living wage clauses in public contracts for low-paying services such as cleaning, catering and care services as a key platform for ensuring diffusion of a living wage that has so far proved elusive in the UK.