New research shows that the biggest beneficiaries of the new wage will be households in the middle of the bottom wage distribution
In his July Budget, George Osborne announced the introduction of a new ‘National Living Wage’ (NLW) for all employees aged 25 or over. The new NLW is designed to equal 55 per cent of the typical wage for this age group. So from April 2016, minimum wage employees should be earning £7.20 an hour, a 50p increase on the current £6.70 rate.
The government hopes that by 2020, NLW will be 60 per cent of typical earnings, taking it to £9.
The Resolution Foundation, the living standards think tank, has today published a report into who will be affected by the new NLW, and how. It makes interesting reading given the common criticism that government cuts to tax credits will undermine any benefit felt by low-paid workers.
Here are some of the findings:
The NLW is expected to boost the wages of three-in-ten (29 per cent) female employees by 2020, compared with 18 per cent of men. This is expected to have a ‘modest impact’ on the mean gender pay gap, speeding up the pace at which it closes by up to one-fifth. The difference can be explained by the fact that women are more likely to be in low-paid jobs than men.
But although more women will be affected by the change, on average they will receive smaller cash gains in 2020 (£690 annually) than men (£860 annually). This is because more women than men work part time, leaving them with smaller annual gains (see the TUC’s recent research into low pay among part time female workers). The graph below shows the expected gender distribution of the NLW effect.
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The distribution of lower-paid workers across households means that just over half (52 per cent) of the gross wage gains will flow to families in the bottom half of the distribution.
The biggest cash gains will be recorded in the middle part of the distribution. When tax and benefits have been taken into account, under half of net income gains will flow to households in the bottom half of the income distribution in 2020. So it is middle income households who will gain the most from the new NLW.
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There will be large regional variations in how much employees are affected by the new wage. The proportion of the typical wage across all workers, called the ‘bite’ is projected to rise from 61 per cent in 2014 (as a proportion of current minimum wage) to 72 per cent in 2020 (as a proportion of NLW) in the East Midlands. In London, the ‘bite’ will increase more gently, from 40 per cent in 2014 to 47 per cent in 2020.
In the East Midlands, Wales, the West Midlands and Yorkshire and the Humber, more than one-in-four workers will be affected by the wage increase. In london just 14 per cent of workers will be affected.
The Resolution Foundation stresses that the NLW ‘only partially offsets the losses low-income households face after the Summer Budget’, and lower-income families will still be left with a gap in their finances, particularly when Universal Credit (UC) is fully rolled out. It said:
“Families where people are working full time and earning at or very close to the NMW are more likely to have their benefit losses offset by the boost from the NLW. The move to increase wages but reduce out-of-work benefits makes work more financially attractive, but the large cuts to the work allowances in UC– the amount of a money a claimant can earn before their UC payment begins to be withdrawn – has significantly weakened the incentives to work UC was expected to provide.
“Families are more likely to exhaust their UC entitlement once all parents are working full time on the NLW, unless they rent or have two children. This leaves a gap where part-time workers, renters and under-25s will need additional support or new approaches to help them improve their earnings.”
Ruby Stockham is a staff writer at Left Foot Forward
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