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That is not good news for Londoners.

Supported by the Mayor, London's living wage campaign has begun to deliver real successes and I pay tribute to the Mayor and to The East London Community Organisation—Telco—for their very effective strategies, which have been really successful. Telco and the Transport and General Workers Union campaigned to raise the hourly rate of cleaners working in banks who were earning as little as £4.20 an hour.

In 2004, Barclays bank increased the pay to contract cleaners to £6 an hour in its new headquarters in Canary Wharf, with 15 days' entitlement to sick pay and eight extra days’ holiday; two months later, HSBC topped that. Following threatened demonstrations, the Deutsche bank in the City agreed to pay its cleaners a significant increase to a living wage level. Deutsche bank made a profit of £674 million in the last quarter. The increase in pay to its cleaners will cost it an estimated £350,000 a year, which clearly will not cause the bank any pain or any detectable dent in its profits.

It is time to change the culture; employers need to know that we as taxpayers are not prepared to subsidise bad employment practice, because that is effectively what we are doing. Despite the successes I have mentioned, and others, there is a long way to go; in London, one in seven employees receives less than the poverty wages of £6.15 an hour, and one in five less than the living wage of £7.05 an hour. London is Britain's low-wage capital as well as its snouts-in-the-trough capital.

The reason for this debate is to put some important questions on the table: is it possible to have differential minimum wage policies for different regions, thus recognising the massive differences in the cost of living within the United Kingdom? Would the London
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economy sustain differential wages? What would be the impact on the regional and national economies?

Sarah McCarthy-Fry (Portsmouth, North) (Lab/Co-op): Given that there is already a London weighting allowance, does my hon. Friend agree that that analogy should apply to the minimum wage?

Lyn Brown: I thank my hon. Friend for that example, which is a logical extension of the issues that are clearly seen in the pay of civil servants and, indeed, Members of Parliament. There is a London weighting for those in inner-London constituencies which there is not in the minimum wage.

In my introduction I said that I wanted to reflect on the poverty trap, which will not be solved even by the living wage. Wage increases mean that some lose their tax credits, some their housing benefits, and some pay more tax and national insurance; all pay a marginal tax rate that would make a banker’s eyes water. This is not an argument against the living wage—far from it—but an argument that seeks to highlight the other difficulties faced by communities who want to work.

I shall give an illustration of how the poverty trap works. The social regeneration unit of the London Borough of Newham—a fabulous, dedicated group of people— worked out the consequences of an increase from the national minimum wage to the living wage for my constituents—from £5.05 an hour to £7.05—for a couple with a three-year-old child who between them work a 50-hour week, and who pay an average private rent for the area and average council tax. Let us imagine that the employers have an “A Christmas Carol” moment, and decide to move my constituents up from the minimum wage to that magic living wage figure of £7.05 an hour, an increase of 40 per cent. in gross earnings. What happens? They get £100 more in gross income; less tax credit; less housing benefit; less council tax benefit; more PAYE; more national insurance. They see £10.31 of their £100 increase. In other words, a marginal tax rate of 88.7 per cent.

I have lost count of the number of constituents who have raised this issue with me. I have constituents who have asked their employers to retract their wage increase because they were worse off than they were before they received it. I have constituents who work part-time who want to increase their hours to full time, who want to progress at work, to have a career and to access shared-ownership housing schemes but who simply cannot afford the additional rent they would have to find for their private rented accommodation to take that first step. They find themselves in the poverty trap, and cannot find their way out.

We must do something to ensure that the real gains of this Labour Government are not defeated by the poverty trap. In the case that I described the hourly rate of the individuals concerned would need to be doubled to ensure that their wages took them beyond its grasp. Doubling wages is unrealistic, so we have to find alternative solutions.

The poverty trap is too complex an issue to address in detail here, and there is no easy consensus. There are attractions in addressing housing benefit, for example, which is at the end of the food chain of the tax and benefit system, by increasing earnings disregards and reducing the rate of withdrawal of benefit as income
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rises. But I am aware that that moderates but also extends the problem up the income scale, and it is only tinkering. We need to be bold; frankly, we need to think outside the box.

I have four over-riding questions. First, is there a way to recognise the huge differential in living and housing costs through some form of differential minimum wage policy for the capital? We would need to assess the impact of such a policy on regional labour markets.

Secondly, can we, and should we, raise the threshold of income tax and national insurance to larger groups of workers? Should that be nationwide or regional? Should there be regional variations in tax codes, for example?

Thirdly, can we address some of the underlying factors that make the problem of poverty pay such a difficult nut to crack—for example, the continued existence of a deep poverty trap, and a shortage of housing that is affordable to those who want to work? Would the Government consider appointing a panel of experts to make one more effort to solve the poverty trap that is the key to working incentives?

Fourthly, should we make a commitment to continue to increase the national minimum wage at a rate that is significantly higher than inflation, as we have done in recent years, as a major contribution to the promise to reduce child poverty? Such a commitment needs to take account of the painless increases in the minimum wage in past years, and the real benefit of local spending to the economies of deprived areas.

It would be reasonable to ask what my proposals are on such an issue. I have argued that London has a particularly acute problem of low wages, which impacts gravely on child poverty and health inequalities, a cycle of deprivation that is reflected in the poverty indices. It is exacerbated by a cost of living far in excess of that of most of the rest of the country. Finding solutions to these problems is clearly not easy, otherwise we would have found them.

It is a complex subject. We need to review the inter-relationship of the benefits available to in-work families and the taxation paid by them, with a view to diminishing the deep poverty trap. We need also to build on discussions with the Department of Trade and Industry about socially irresponsible contracting; to create an equivalent to the Greater London authority’s living wage unit in all regions of Britain; and to review the terms of reference of the Low Pay Commission. Finally, we need to create regional living wage strategies that integrate with neighbourhood renewal and regeneration, particularly to ensure that workers in low-paid sectors in deprived areas benefit from Government investment. I accept that they are not glamorous or headline-grabbing proposals, but neither are they impractical.

One thing that the Government have done really well over the years is to change the terms of the debate and to shift the middle ground. I want the middle ground to be shifted again so that it will no longer be acceptable for the armies of low-paid workers to remain unrecognised at the cost of society’s well-being. A wage that achieves an adequate level of warmth and shelter, a healthy and palatable diet, social integration and the avoidance of chronic stress for earners and their dependents is an entirely reasonable policy step. It
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would build on the concept of the minimum wage, and it is an essential prerequisite for the objectives that would reduce inequality to which we on this side of the House are fiercely and strongly committed.

1.41 pm

The Paymaster General (Dawn Primarolo): I congratulate my hon. Friend the Member for West Ham (Lyn Brown) on securing the debate, which is on the impact of the Government’s economic policies on worklessness and poverty in West Ham. Those listening this afternoon will immediately have recognised why she deserves her reputation as a great champion for her constituents, particularly those who, because of grinding poverty, are least able to speak for themselves.

I shall outline the Government’s strategy in tackling the issues that my hon. Friend has identified, touch on London’s particular problems, and conclude by answering the points that she raised. The Government’s long-term goal is employment opportunity for all—a modern definition of full employment—and ensuring that employment pays, which is what my hon. Friend wants. Delivering that requires that everyone should be provided with the support that they need to find employment and to develop skills—and, indeed, to earn a decent wage. As she knows, the Government are firmly of the view that the best route out of poverty is paid employment of the sort that enables people to live their lives constructively.

The Government have taken many important decisions to help achieve that goal. As my hon. Friend said, we introduced a national minimum wage, and I shall return to that subject later. We have also reformed the tax and benefit system, and substantially increased the gains of working for most groups. In particular, the working tax credit ensures that everyone has improved incentives to work, which consequently tackles the unemployment trap. A single person living in London, with housing costs of £80 a week, would see a £40 per week gain from full-time work at the national minimum wage; and a lone parent facing housing costs of £120 per week would gain £63 per week when working full-time work at the minimum wage.

The number of people in employment has risen by 2.4 million, and our employment rate is 74.5 per cent., the second highest among the G8 and close to record highs. However, as my hon. Friend said, London’s labour market poses particular challenges. Of all the regions, London—if I may call the capital city a region—has shown the smallest improvement in employment rates since 1997.

In 2005, London’s employment rate was 69 per cent., compared with 75 per cent. in the rest of the UK. That is despite the fact that London has created new jobs at an average rate of 70,000 a year since the early 1990s. The people coming to London have made the difference. London’s population differs from the rest of the country in many ways. It is home to more people with the characteristics associated with disadvantage in the labour market, and it is home to more people with multiple barriers to work. Skills and mobility problems are key factors in the relatively high rates of worklessness in the capital. Another is housing.

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Our policy response has been based on national welfare-to-work policies, including the new deal and, more recently, pathways to work. Those policies have helped. We have seen them working in West Ham; between 1997 and 2006, we saw a reduction of more than 2,000 in the number of unemployed claimants. Indeed, the new deal has made headway; as my hon. Friend acknowledges, it has helped nearly 4,000 people in West Ham.

The Government are also providing additional resources for area-based initiatives. For instance, my hon. Friend is aware of the action teams, one of which operates in the Newham area. The actions teams target those who face serious challenges to getting work or staying in work, and they often concentrate on the groups that are hardest to reach, including the long-term unemployed.

In addition, in the welfare reform Green Paper, my right hon. Friend the Secretary of State for Work and Pensions proposes a city strategy to address questions of worklessness in urban areas. The strategy is aimed at improving co-ordination at the local level. It will be a valuable tool, and we will need to build on it to address the points raised by my hon. Friend.

My hon. Friend has been a great champion for the Olympics in 2012, as they will provide some 12,000 jobs. We must ensure that investment in the Olympics creates decent jobs that will go to my hon. Friend’s constituents and others who live in the area.

The Government’s strategy has four separate strands. They are to provide financial support for families that need it; to support employment opportunity for all; to tackle material deprivation, which is what my hon. Friend rightly concentrated on; and to deliver excellent public services, one of which is housing. We are providing financial support and making the necessary reform, but we need to build on that. We are creating employment opportunities, but we need to do more. We are tackling material deprivation by promoting financial inclusion and improving housing, which is a great challenge in the capital. We are also delivering excellent public services in order to improve children’s life chances and to deal now with the poverty that my hon. Friend describes. I know that she wants us to break that vicious cycle.

My hon. Friend went on to raise further matters, and I shall briefly respond. We need to explore, outside today’s debate, how the city challenges in the welfare Green Paper might focus much more on London and working in partnership. I turn first to the national minimum wage.

Variations in the national minimum wage are already vast, and not just between London and the rest of the country. There are also variations within regions. For instance, my region of the south-west includes Cornwall and Bristol, but the variations can be enormous in terms of labour market opportunities. Trying to respond to regional differences would make the national minimum wage impossible to operate and, more important, impossible to police. It would increase the chances of it being exploited by those few employers who would try to pay below the national minimum wage.

We take advice from the Low Pay Commission, which has considered the issue. The commission is our
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expert panel and is independent. I do not know whether it is possible to ask the commission, in light of the welfare reform Green Paper, to consider specifically the issues in cities. Those who represent rural areas might say that the situation is the same in some isolated rural areas, but perhaps we can pick up the issue and see whether the commission can take it forward. However, regional variations in the minimum wage would be a nightmare and difficult to enforce.

Housing benefit already takes into account regional differences in housing costs, and of course people’s eligibility fluctuates according to whether their rent is lower or higher. A great deal of work has been done on trying to reduce the tapers and the effect of the tapers on housing benefit and therefore the marginal rate of tax that my hon. Friend described. The solution is to provide decent jobs that are well paid and to invest in public services, and the Government are confident that that can be done in London.

My hon. Friend touched on the use of tax codes. The Government strategy has been to try to lift families out of paying tax, and I think that she will be familiar with the following figure because she heard me give it only last week. In 1997, fewer than 2.5 million families paid no tax; now, more than 3 million families pay no tax. The effect of our measures, particularly tax credits and child benefit, has been to lift families out of tax.

The recent Organisation for Economic Co-operation and Development figures show that the gross tax of a
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one-earner family of two adults and two children on about £21,000 a year has gone down from just over 19 per cent. to about 9 per cent. Their exposure to tax has been reduced. Again, that has been done by using the main planks of policy that I have described.

I encourage my hon. Friend to keep pushing the points that she has made and to keep challenging the Government in this crucial area, which is about people getting out of the poverty trap and breaking the cycle. We need to recognise the combination of factors involved, including housing, employment, lack of child care, other social deprivation indicators and special additional support in respect of skills or language if English is not the first language. In particular, we need to continue with the strong partnership that has developed with the Greater London authority and the Mayor’s office in examining the particular challenges in London—not in wealthy parts of London but in constituencies such as that represented by my hon. Friend—to ensure that the Government’s policy finally puts an end to the vicious poverty cycle that her constituents are experiencing. She is so right to champion their cause, and again I congratulate her on obtaining the debate. I do not have instant solutions for her today, but I hope that she will be reassured that the Government have the levers in place, although we need to do more.

Question put and agreed to.

Adjourned accordingly at seven minutes to Two o’clock.

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