https://minimumwage.blog.gov.uk/2016/09/30/new-minimum-wage-rates-for-under-25s-why-are-they-different/

New minimum wage rates for under 25s: why are they different?

Age/group Previous hourly rate New hourly rate
National Living Wage (25+) £7.20 £7.20
21-24 year olds £6.70 £6.95
18-20 year olds £5.30 £5.55
16-17 year olds £3.87 £4.00
Apprentices £3.30 £3.40

On Saturday (1 October), the minimum wages for workers under 25 go up, with hourly pay for 21-24 year olds rising by 3.7 per cent and hourly pay for 18-20 years rising by 4.5 per cent. The new rates are the highest ever for these groups of minimum wage workers in real terms, surpassing their pre-recession peaks.

But why do younger workers not enjoy the same pay rate as those aged 25 and over, who are entitled to receive the National Living Wage?

Even before the introduction of the NLW the LPC faced a variant of these questions, with workers aged 20 and younger being entitled to lower rates than those aged 21 and above. The creation of a new rate for 25 and overs from April this year effectively created a further age band for 21-24 year olds.

The basic reason for lower minimum wages for younger workers is to protect employment. The existing age structure of the minimum wage was designed by the Government in light of evidence that younger workers are more at risk of being priced out of jobs than older workers, with worse consequences if they end up unemployed.

Under the LPC’s remit we face different requirements for workers of different ages. For those over 25, we are required to advise on the pace of increase of the National Living Wage (NLW), such that it meets the government’s ambition of reaching 60 per cent of median earnings by 2020, subject to sustained economic growth. For workers under 25 and apprentices, we are required to recommend rates that will not damage employment. So, in determining our recommendations for the relative value of the rates for younger workers, we have to consider what is affordable, based on labour market evidence.

Research has shown that youth unemployment has scarring effects, with a wage penalty for early spells out the labour market apparent in reduced earnings into people’s 40s.

It also reflects the reality that average wages of younger workers are sharply lower than those of older workers, perhaps a consequence of lower average experience, higher training costs or a weaker bargaining position.

Looking at 21-24 year olds:

• Unemployment for 21-24 year olds not in full-time education is twice as high as for 25-30 year olds.

• Median pay is much lower - £8.26 an hour for this group in 2015 compared with £11.01 for 25-30 year olds - likely reflecting lower average experience.

• A leading indicator of possible stress in employment arising from the minimum wage is its value relative to median wages, or ‘bite’. Lower median pay for 21-24 year olds means that the bite is much higher for 21-24 year olds than for older workers. Indeed, it was already (at £6.70, the minimum wage until today) the highest of any age group at nearly 79 per cent (compare the government’s target for workers aged 25 and over of 60 per cent by 2020).

In light of this evidence we concluded when thinking about the pay floor for this age group that it could not currently be set to the same level as the NLW without risks to employment. Doing so would mean very large increases in the bite and coverage of the rate, with the latter rising by half immediately and tripling by 2020. Under the approach we have taken, employers are of course still free to extend the NLW to younger workers and, in practice, many appear to be doing so.

Looking ahead, in the absence of changes in relative performance, the pay floor for younger workers may well increase less rapidly than that of workers aged 25 and over towards 2020. However, we have previously said that we also intend to take into account concerns that - if too large a gap opens between the pay floor for different ages - this will also cause problems (for example, disincentives to hire or retain employees near the boundary and substitution by younger workers).

This balance is reflected in today’s increase for 21-24 year olds: 3.7 per cent to £6.95 an hour means that the real value of the minimum wage for this group will be at its highest ever level. The increase for 18-20s is also significant, with 16-17s getting slightly lower rises in view of weaker employment and pay growth.

As we have said before, none of this means that the LPC is relaxed about the pay of younger workers. Quite the opposite – high bites of the 21-24 Year Old Rate (and the other rates for workers aged 20 and under) emphasise our concern to push the level as far as the market can bear. We have previously committed to larger increases for younger workers than for adults when economic circumstances permit. But younger workers are a litmus test for the minimum wage: as required by our remit, we will continue to seek to strike a balance.

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