Living wage could save £2bn - think tank research

The living wage would generate an extra £3.6bn in extra taxes and lower benefit payments

Widespread use of a so-called living wage could save the government £2bn a year, according to two think tanks.

The saving has been calculated by the Resolution Foundation and the Institute for Public Policy Research (IPPR).

They say paying staff at least £7.45 per hour outside London, and £8.55 within the capital, would boost the nationwide income by £6.5bn a year.

But the government would collect more income tax and pay out less in benefits and tax credits.

Matthew Pennycook, of the Resolution Foundation, said: "There are significant overall public savings to be made from paying a living wage, on top of the beneficial effects it would have on reducing working poverty."

"Public-sector employers are well-placed to expand the living wage and to set an example which the private sector can follow."

The idea of a living wage is separate from that of the legally-enforced minimum wage.

This has been in existence since 1999, is set annually by the Low Pay Commission, and currently stands at £6.19 an hour for workers aged 21 and over.

Campaigners have been trying to persuade employers to pay a higher living wage since 2005, when it was first adopted by the Great London Authority (GLA).

So far, only about 140 other employers have done so.

The two think tanks suggest that about £3.6bn of the extra money paid out in higher wages under a universal living wage would go straight to the government, in the form of extra income tax and national insurance payments, along with reduced spending on benefits and tax credits for the lowest paid.

As some of those workers would be in the public sector, their wages would cost the government an extra £1.3bn. But that would still leave the Treasury with an extra net income of £2bn a year.

The researchers say that about five million people are paid less than the suggested living wage and that three million households contain at least one adult who is paid below this level.

They say that only 45,000 workers have seen their pay upgraded as a result of campaigns on the issue.