As the cost-of-living crisis deepens, every employer in the country is having to review what they are paying their employees. In the charity sector, that debate is particularly complex. There is a moral dimension: it is fundamental that money donated for charitable purposes is used in the most effective manner possible, and the public has concerns that is not being achieved when pay is perceived as excessive. There is also a purely financial dimension: when funds are in short supply and there is huge need in the country, prioritisation is a challenge charity leaders must constantly wrestle with. And there is an economic dimension: as an employer, the charity sector does not sit in isolation, and it has to compete with the rest of the economy for staff.

In the wake of a pandemic in which one in four charities experienced a decline in income of 40% or more, the sector is now anticipating a recession which would put charitable services, campaigning and community support under even greater demand. Money is undeniably tight and staff costs are already a major line of the sector’s expenditure, accounting for around 40p in every £1 of spend.

Yet there is already a large gap between pay in the sector and the rest of the economy. This new research demonstrates the scale of that pay gap by making use of the largest household survey in the UK.

After accounting for differences in personal (e.g. age and qualifications) and job (e.g. industry and occupation) characteristics between those working in the charity sector and the rest of the economy, we find the hourly wage gap to be 7.0%

The pay gap widens as people progress through their careers, peaking at 9.4% for those aged 46 to 50.  People with higher levels of qualifications experience a bigger difference in their pay than those with lower levels of qualifications, earning an average £40,000 less over their working lifetimes than their similarly qualified peers in the rest of the economy.

Meanwhile, men working in the charity sector record a larger pay gap relative to non-charity counterparts than is the case for women, coming in at 12.3% and 4.7% respectively. Nevertheless, the charity sector continues to endure a gender pay gap of 4.1%.

This affects charity workers as individuals, but it also has multiple impacts on the sector more broadly – affecting how it is valued, its competitiveness as an employer, and its effectiveness at meeting its goals.

Collectively, charity sector employees were paid an estimated £1.47 billion less than their counterparts in the rest of the economy in 2019, assuming that people worked the average number of hours estimated in the Labour Force Survey. These comparatively lower wages affect the sector’s valuation because employee compensation is a key component of how Gross Valued Added (GVA – a key measure of sector productivity) is calculated. If employees are being paid comparatively less for undertaking the same type of work in the charity sector as roles in the rest of the economy, then their work in the charity sector is being undervalued.

In terms of the impact on what the charity sector achieves, the UK needs charities to fulfil their vital role as effectively as possible; supporting people, campaigning for change and building communities. That need could not be clearer than it is at this moment.

As such, it is important to consider how low pay might have weakened the charity sector as an employer and how it might threaten its sustainability into the future. Comparably lower wages mean that charities have a more limited pool of people willing or able to contribute their skills by working within it. That limited pool is also less diverse, with lower pay likely to be making it more difficult for people from less advantaged backgrounds to take up opportunities in the sector – a long-standing problem that diminishes charities’ effectiveness, acting as a drag on their ability to support the people who need it.

Already there are clear indications that the cost of living crisis is causing this pay gap to grow: Bank of England survey data suggests businesses grew their average wage costs by 5.6% in the year to May 2022, compared with 3.8% among charities. At a time when four in five charities report that they are struggling to recruit, it is vital to ask whether the charity sector can afford that widening of the pay gap. Funders, policymakers and charity leaders must take pay seriously if the sector is to recruit and retain a good quality and diverse workforce that enables it to achieve its full potential.  

Read the full report