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Minimum Wage and Living Wage

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 31 Mar 2021

In this revision video we look at the difference between a minimum wage and a living wage drawing on UK labour market data.

Minimum Wage and Living Wage

What is meant by a minimum wage?

The minimum wage is a legally-enforced minimum hourly rate of pay for all adult workers. It is against the law for employers to pay workers less than the NMW.

How does a living wage differ from a minimum wage?

The ‘Real’ Living Wage is an hourly rate based on the basic cost of living in the UK. It is optional for businesses to choose to pay the living wage to their employees. The living wage is based on the hourly pay in work that people need to get by. Essential bills include housing rent, food, and utility bills.

As of November 2020: The Real Living Wage is £9.50 across the UK and £10.50 in London (reflecting higher costs of living in the capital)

Possible justifications for businesses deciding to pay the real living wage to employees?

  1. Improved employee retention – saves costs of hiring / training
  2. Reduction in staff absenteeism
  3. Stronger industrial relations – lower risk of strike action
  4. Efficiency wage theory -improved pay can lift productivity
  5. Corporate social responsibility – improved reputation
  6. It is also worth considering wider macroeconomic benefits including reductions in welfare claims and increased consumer spending

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