How much do you earn? Many of us would like to ask this question of our friends (though it is often a taboo), for two main reasons. One is because we are curious about how highly they are valued by their employers. The other is because it gives us a clue to what kind of living standard they can afford. When we think in these terms, we often consider wages, earnings and incomes as interchangeable concepts.

In fact, they are not, and it is helpful to distinguish each, and to think about how they relate to each other. My hourly wage rate perhaps best represents how much my employer values my work (I may not be paid hourly, but an annual salary expresses something similar – the full-time rate for my job). On the other hand, my earnings over a week, month or year depend on both my wage rate and on how many hours I work; and my family’s earnings are the result of how much we work collectively, as well as the wage rates of each of us who work. This helps determine our overall household income, which expresses how much money we have coming in. However, what we earn is not the whole story, since income is best thought about net of taxes, and includes “unearned” elements such as benefits, pensions and investment returns. Another feature of income is that it can be adjusted for household size when thinking about whether it is high enough to meet people’s needs, or whether it is too low to escape poverty (see Box 4.1).

As a consequence of all these steps from an hourly wage to a household income, two people working side-by-side on the same wage rate may enjoy very different living standards. This makes the concept of a “living wage” far from straightforward. It is at best a simplified approximation, using methods described in Chapter 2, of what wage tends to produce adequate income levels, given prevailing family and working patterns.

The imperfect relationship between wages and incomes raises three key questions, which this chapter considers in turn. First of all, to what extent do people who are low paid live in low income households? This sets the context in which better pay can be used as a tool to help workers avoid low income and poverty.