Is the “national living wage” worth shouting about?

living-wage
Iain Duncan-Smith punches the air as the national living wage is announced./BBC

The headline announcement in this week’s budget was the introduction of a compulsory national “living wage”. But will the increase to the minimum statutory pay rate really make a difference to employees, and what will be the impact on employers?

Anyone observing last week’s summer budget on social media cannot have escaped some of the memes emerging of Iain Duncan Smith as he punched the air in glee at the announcement of a new minimum wage for those aged 25 and over, the so-called national living wage (NLW).

The work and pensions secretary has been depicted as a cartoon Minion, “like he’s just seen his Nando’s order brought to the table”, and brandishing neon rave sticks at a nightclub.

But while those behind the first all-Conservative budget since 1996 celebrated a political coup – £9 by 2020 for the over-24s is a significant increase on the current national minimum wage and way above Labour’s election promise to increase it to £8 over the same period – is the new national living wage worthy of such exuberant celebrations?

First, we already have a voluntary living wage, as set by the Living Wage Foundation (LWF), which stands at £7.85 nationally and £9.15 in London – the Government’s new statutory rate from next April will sit below this at £7.20. Some 1,600 employers already pay the voluntary living wage, many of them extending this to under-25s.

Rhys Moore, the foundation’s director, broadly welcomed the Chancellor’s announcement but has concerns that for thousands, and particular those under-25 or in London, the statutory rise won’t be enough to live on.

He told Personnel Today: “In all honesty it’s not what we or many people would recognise as a living wage as it’s not based on an assessment of the cost of living. It’s a hugely positive step but we have raised some questions.”

Cost of living

The Government justifies the new rate based on forecasts from the Office for Budget Responsibility (OBR), and will work with the Low Pay Commission to aim for it being equivalent to 60% of median earnings by 2020, which by then will be £9.

The LWF, by contrast, works out its rate on what it costs to maintain a basic standard of living, as opposed to “what the market can bear” on a proportion of median salary.

Cuts to tax credits and frozen in-work benefits, also announced in the Budget, are likely to affect that cost of living for some people significantly. This has led the LWF to brand the move as “effectively a higher national minimum wage” – little more than a shrewd re-branding exercise.

An analysis by the Resolution Foundation reached the same conclusion: “The title of the new policy – the national living wage – adds significant confusion to what was already a muddled debate on the purpose and definitions of the various rates,” the thinktank said. “The NLW is a large increase in the legal wage floor, a role that is currently played by the NMW.”

Spencer Thomas, an economic analyst at the Institute for Public Policy Research, said it will be important for employers to make the distinction clear. “This will provide a welcome pay boost for many, and has the potential to improve productivity in low-wage sectors,” he said. “But it is important that proponents of the living wage, including businesses that currently pay it, are clear in differentiating from the new national living wage.”

What about the under-25s?

And, while more than 2.5 million workers will get a pay rise thanks to the national living wage announcement, around two million under-25s will not be covered, as the national minimum wage rates will stay in place for apprentices, under-18s, 18 to 20-year-olds and 21 to 24-year-olds.

Moore added: “We have spoken to a few employers since the announcement and their concerns are about the starting point of age 25. Many take an age-blind approach already but there is a worry about whether this will be sustainable. If there’s a steep increase in pay between the ages of 24 and 25, how will this play out? Will employers let people go?”

Osborne argues that a cut to corporation tax to 19% in 2017 and 18% in 2020, plus a 50% increase in the Employment Allowance so employers pay less in national insurance, will offset the cost of the rise in national living wage.

However, some have argued that the hike in pay could mean fewer jobs are created, with the CBI branding the move as a “big gamble”. The OBR itself has calculated that Britain’s pay rise will cost 60,000 jobs, but that there will be almost one million more in total.

Mark Beatson, chief economist at the CIPD, is sceptical of this estimate. “The OBR says it will have little net effect on employment, but their forecasts rely on assumptions about future productivity growth that have proved wrong to date,” he said.

Labour MP Frank Field, chair of the Work and Pensions Committee, agreed that wage rises would need to lead to higher productivity if they were going to produce real gains for the economy.

He said: “What’s crucial now is to ensure that the level at which it’s set by the end of the parliament is matched by productivity increases so it is sustainable.”

Productivity

Shortly before the Budget, consulting firm KPMG issued a report looking at the economic impact of raising the minimum wage to the same level as the current voluntary living wage.

This found that the net impact on productivity if this happened would depend on how the higher wage bill was met, and any increase in motivation would lessen as it became the norm.

“Current living wage employers may be benefiting from a first-mover advantage – their jobs are more valued because they pay more than other low pay jobs, which is boosting motivation and productivity — in which case, benefits may dissipate with wider adoption,” said the report.

So, while an 11% increase on the current national minimum wage will undoubtedly help many low-paid workers, questions remain over whether the Government’s flagship budget announcement will deliver – or whether the impact on jobs will be more than the “fractional” effect that Osborne has led us to believe.

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