Adam Corlett: Living wage alone is not enough

editorial image
0
Have your say

A pay rise for six million people sounds great but the new national living wage is a policy that that cannot stand in isolation.

THE National Living Wage is set to bring much-needed pay rises – but it can’t solve our living standards challenge alone.

After an unprecedented six-year pay squeeze, wage levels have finally started picking up. Yet average pay remains no higher today than it was in 2004 – still some £30 a week lower than the pre-financial crisis peak. It’s unlikely we’ll get back to that peak before the end of the decade.

Britain has a particular problem with low pay – something that pre-dates the turmoil of recent years. More than one in five members of our workforce are low paid – a lower proportion than in the US, but significantly higher than across most of Europe.

With all this in mind, the Chancellor’s surprise announcement in July’s Budget of a new ‘national living wage’ from next April is a really big deal. Despite the name, the new measure has no connection to the Living Wage campaign, but is instead a supplement on the national minimum wage for the over-24s.

It will be set initially at £7.20, some 50p higher than the minimum wage. By 2020, the government expects the wage to top £9, roughly £1 higher than the national minimum wage.

Our estimate is that it will benefit almost one-in-four employees by 2020. But the impact across Yorkshire and the Humber will be even greater, with almost three in 10 workers expected to benefit – 580,000 people in total. People working in Yorkshire will be twice as likely to get a pay rise as those in London.

Roughly 320,000 people across the region will get a direct pay increase as a result of the new legislation, with an average increase of £1,200. We also expect a further 260,000 who earn just above the new wage floor to gain because employers will be under pressure to maintain pay differentials within their workforce.

Not surprisingly, the gains are greatest for those most likely to be low paid, so women should do better than men. The gender pay gap is still too big, but this move will help to narrow it a little.

But while there’s a lot to be positive about, it would be wrong to think that this one move ill ‘fix’ the UK’s living standards challenge.

Crucially, only a portion of the wage gains will actually work their way through to household incomes. That’s because recipients will be paying more in tax – and because many lower income households will have their tax credits cut as they earn more. Many will find they only take home 20p of every £1 pay increase.

Factor in the £13 billion of cuts to working-age benefits announced alongside the National Living Wage in the Budget and it becomes clear that the new measure – which is expected to boost wages by £4.5 billion – will provide only partial protection against the ongoing pressures facing many household budgets. Boosting pay at the bottom should serve as a complement to state support, not a substitute for it.

And we’re in unknown territory in terms of how employers will react – after all, they’re the ones being asked to stump up the £4.5 billion. We might expect some combination of price rises, job losses, reductions in non-wage payments like pension contributions and cuts in profits.

The latter might sound more palatable than the first three, but they all ultimately have consequences for household incomes. The hope must be that the higher minimum wage will spur employers to invest in new technology, training and innovation in order to boost productivity and make the pay rise affordable.

Some industries are more exposed than others. Those with the highest incidence of low pay – including retailers, restaurants and hotels – will face the greatest challenge. And if you’re not overly sympathetic towards low paying firms facing the prospect of reduced profits, you should at least be concerned about what will happen in social care – with some arguing that the combination of rising wage costs and funding cuts from government will mean a reduction in service availability in a sector that is already overstretched. It’s vital that the government provides the money to deliver its own policy in this area.

Of course when the national minimum wage was introduced in the 1990s, portents of doom from some quarters proved misplaced – firms adapted without shedding jobs. But the success of the minimum wage is due in large part to the carefully considered approach of the independent Low Pay Commission – the body charged with recommending the rate

each year.

It’s important that this expert body continues to play a key role in navigating the path to the desired end-point.

A pay rise for six million people sounds great – and it is – but the new national living wage is a policy that that cannot stand in isolation. The government must follow up with a detailed plan for implementation – taking account of what more needs doing to support employment, skills, public services and living standards more generally.

Adam Corlett is an economic analyst at the independent think tank Resolution Foundation.