Is today’s minimum wage rise the calm before the storm?

The next few years will be virgin territory on low pay and minimum wages

 

It’s a cliché but if a week is a long time in politics, the seven months since the announcement of today’s increase in the National Minimum Wage (NMW) feels like an eternity. Back in March, the announcement that the minimum wage would rise by 20p to £6.70 an hour felt a little cautious given it was the same 3 per cent bump as the previous year, despite the economy appearing to be in better health. It seems the chancellor shared that impression.

Fast forward to today’s increase, and though it shouldn’t be sniffed at – it directly boosts the wages of 1.4 million workers – it now looks more like the calm before the storm. From next April, the new ‘National Living Wage’ (NLW) will see the UK’s wage floor embark on a new phase of much faster rises.

Today’s increase is nonetheless a useful opportunity to evaluate how the NMW’s role has changed since its introduction and what lessons can be learned to equip us for the next few years.

Findings from the Resolution Foundation’s forthcoming Low Pay Britain report illustrate how the minimum wage’s impact has grown since 1999. Just after its introduction, only one in every 60 employees earned at or below the NMW. By last year, it had risen to one in 20.

That is due in part to a serious ratcheting up of the NMW’s value. An intentionally-low initial rate coupled with analysis that suggested a higher wage floor was affordable has meant the NMW has risen faster than the wages of typical workers. The chancellor’s new wage floor takes that ambition to new levels. We estimate that one in nine workers will gain directly from the NLW in 2020, when its value should be over £9 an hour.

The first question this raises is whether there will be negative employment effects. The OBR has projected that 60,000 jobs will be lost as a result, while our analysis finds that in most industries the policy will add less than 1 per cent to wage bills.

That doesn’t mean we can be complacent about its effects – the pressures will be felt more in low-paying sectors like hospitality and social care – but it does underline that the NLW’s effect on jobs shouldn’t be the only concern as the policy is brought in.

The minimum wage has evolved from being an absolute minimum for a small minority of workers to something of a ‘going rate’ in some industries. The question of progression off the wage floor is more important than ever. Some wage compression will be inevitable; it’s one of the ways employers have dealt with the higher labour costs brought by the NMW.

But because the remit given to the Low Pay Commission – the body tasked with recommending the NMW’s rate – focused on the minimum wage’s impact on employment, less attention was given to the consequences of more and more workers being bunched together at the bottom rung.

We know that only about one in four workers currently manage to escape low pay over a decade. The fear is that without an emphasis on opportunities to climb the pay ladder, the NLW may worsen that situation.

The next few years will be virgin territory on low pay and minimum wages. What’s needed is a detailed vision for how the NLW will be implemented successfully.

That should go beyond minimising the impact on low-paid jobs to helping the people working in those roles to move onto higher wages over time. A greater emphasis on skills, apprenticeships and training will be crucial to make sure the National Living Wage doesn’t become a wage for life.

Conor D’Arcy is a policy analyist at the Resolution Foundation

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