In 2010, when I became Chair of the Low Pay Commission (LPC), the consensus was that the once controversial National Minimum Wage (NMW) had become a settled part of the political and economic landscape.
Times change. Think tanks, political parties, and archbishops published reviews on the NMW and the role of the Commission before the election. The Chancellor announced in this summer’s budget a National Living Wage (NLW): new territory for business and workers alike.
The new policy will change the UK labour market significantly. Here is a primer to get up to speed on the basic facts about the policy, and some of the initial reactions we have heard to how it will work in practice.
The minimum wage now - the basics
The NMW is the UK’s pay floor - designed to protect as many low-paid workers as possible without hurting jobs or the economy. It is set annually on the basis of recommendations from the Low Pay Commission: an independent body of employers, unions and experts.
There are currently 4 rates of the minimum wage, which change each October. The main one that everyone has heard of is the adult rate, which applies to workers aged 21 and above, currently set at £6.50 per hour, and rising to £6.70 next month. This is the biggest real terms increase in the NMW since 2007, and returns the rate close to its highest previous real-terms value.
What about the other UK wage rates? There are three other rates for young workers and apprentices: the 18-20 year old rate is £5.13 per hour, rising to £5.30 in October. The 16-17 year old rate is £3.79, rising to £3.87. The Apprentice Rate is £2.73 rising to £3.30. (This facts leaflet has more on all the current and forth coming rates in October 2015).
The National Living Wage
The Government has announced that the National Living Wage will apply from April 2016, at a rate of £7.20. It is effectively a fifth minimum wage rate - mandatory for all workers aged 25 and over (technically, it is comprised of the adult rate, and an initial 50 pence ‘Living Wage premium’). Once in force, only 21-24 year olds will be paid at the adult rate of the National Minimum Wage.
How it is different from the existing rates
First, the level is obviously significantly higher than the current adult rate. It represents a 7.5 per cent increase on the rate applicable after next month’s increase, and 10.8 per cent increase year on year, which will be the joint biggest ever increase in the NMW. The impact is likely to vary markedly by sector. Low pay is concentrated in particular parts of the economy like hospitality and retail and particular occupations like hairdressing. The NLW is likely to have most impact in low-paying sectors where the workforce has an older age profile - for example, social care.
Second, it introduces a new age structure: there will in effect no longer be a single rate applicable to all workers aged over 21. The design of the NLW reflects provisions in the National Minimum Wage Act allowing the rates to vary up to age 25. The existing youth rates of the minimum wage have their basis in evidence that younger workers tend to be less experienced so are more exposed to the possible negative effects of a higher pay floor. It may also reflect the interaction between the NLW and changes to tax credits - for example, 25 is the age threshold for Working Tax Credit, which is set to undergo spending reductions.
Third, it is on a different calendar to the other rates - changing in April, not in October. The Government is reviewing whether to align all the rates around the tax year. Fourth, the level in turn reflects a different basis to the other NMW rates. Where the level of the existing rates has been set on the basis of affordability to employers with a view to having no impact on jobs, the National Living Wage has been set with a different pay and employment trade-off in mind. The intention is to increase pay for older workers, accepting that there may be some job losses - albeit modelling by the Office for Budget Responsibility has suggested these will be much smaller (a mid-range estimate of 60,000 by 2020) than jobs created in the wider economy (1.1 million).
Fifth, there is a different basis for its future path to the current minimum wage rates. For most of its life the National Minimum Wage has been set single year by year. By contrast, there is an ambition for the level of the NLW. The starting point is fixed at £7.20. The end point is to reach 60 per cent of average earnings by 2020 – an objective of over £9 that is “subject to sustained economic growth”. The trajectory is to be determined. The exact cash level in 2020 depends on what happens to average earnings.
What this means for employers and workers (We will discuss the implications for the LPC in a future post)
This is new territory for the UK labour market. A minimum wage set above £9 moves the UK up the league table of minimum wages: by the next parliament, it is likely that only a small proportion of countries around the world like Australia, France, and the New Zealand will have a higher minimum wage.
In our preliminary discussions as part of this year’s evidence gathering process, some firms have welcomed the new rates. Others have told us that they face a number of practical challenges. The most obvious concern is the one already heard in press coverage of sectors like social care and convenience stores: working through the impact of higher pay.
Firms report a double effect: workers currently paid less than £7.20 who will gain directly, and workers higher up pay scales who might gain indirectly as employers seek to preserve differentials. Some firms are concerned at the initial pay increase. Others are focused on planning how to manage the trajectory to 2020, and its interaction with other policy costs like pensions and the new apprentice levy.
But businesses have also raised a wider set of issues including updating systems so that the pay floor for workers of different ages changes at different times in the year, as well as preparing for possible future pay alignment in April of future years. Finally, there has been some debate about the legal and employment relations challenges of pursuing differential pay for 21-24 year olds and those aged 25 and over.
Employee representatives we have spoken to have welcomed the NLW, and argued it is likely to be affordable in practice. Some have expressed concern about complexity, with a likely sharp increase in coverage of the minimum wage - in combination meaning increased pressure on the HMRC, which enforces the minimum wage. Others have expressed concern about the impact on younger workers who may not benefit from the new rate.
All this will form part of the LPC’s deliberations. We are currently consulting on the level of existing rates, with a view to reporting to government in February next year what should happen to them in October 2016. Next year we will be consulting on the future level of the National Living Wage.
Watch this space for more on our new remit and activities, and how you can be involved.
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