The IFS asks – would a delay to the imminent increase to the Minimum Wage be wise?

26 March 2020

With thanks to the Institute for Fiscal Studies….

The observatory piece looks at the intended increases to the National Living Wage (NLW) from April 2020 and considers whether it would be sensible to delay the rise, in response to the current situation relating to coronavirus.

The article discusses the fact that the planned increase to NLW to £8.72 in April 2020 was decided in response to how the labour market looked back in October, which is clearly substantially different to how it looks now, due to the COVID-19 outbreak.

The Chancellor announced a raft of temporary increases to benefits designed to protect individual incomes during the current crisis, which are due to come into force in April, in line with when the NLW and NMW rates are due to increase. The IFS considers the costs that this will impose on employers and suggests that the rises are less desirable and there is a case for the planned increases to be delayed.

Working-age benefits have been cut significantly over the past five years, to meet the Conservative 2015 manifesto pledge to cut £12 billion off the annual benefits bill, alongside increases in minimum wages, especially for anyone aged 25 plus. The NLW rose by 15% between 2015-16 and 2019-20, from £7.24 per hour to £8.32 per hour), and the average Universal Credit entitlement in most working households fell by 19%. The increases to minimum wages do not offset the cuts to benefits, with different households targeted by the policies, and the overall size of welfare costs much bigger than the increase in net earnings afforded by the NLW. The minimum wage rises occurred in times when employment levels were high and increasing, so at the ideal point to introduce such large rises.

The increases to benefits include uplifting the basic allowances of Universal Credit and Working Tax Credit, covering more rent for private renters in Universal Credit and Housing Benefit, and suspending the ‘minimum income floor’, which can substantially reduce the Universal Credit entitlements for the low income self-employed. This will mean that the real average Universal Credit entitlement among working households will be back to the same level as it was in 2015-16. The IFS states that it is to be expected that a more extensive benefits system is in place now, as the government tries to protect families from financial deprivation resulting from Coronavirus-related job losses and the inability to work. Higher benefits serve to discourage work, but this is not a relevant issue now, as few employers are hiring and many workers are being told to self-isolate or need to look after their children.

As the reforms to benefits are implemented, the NLW is also set to increase by 5%, in real terms. The IFS proposes that it’s more difficult to see the case for raising minimum wages in light of the current crisis. The government has also announced several policies that specifically aim to avoid massive job losses and business failure, and the IFS suggests that to increase employer costs via the increase to minimum wages has the potential to undercut these aims. The article considers whether the Low Pay Commission (LPC) would have recommended a NLW rate of £8.72 back in October had they known that the coronavirus outbreak would take place.

The IFS suggests that the government should postpone the upcoming rises until the crisis has ended and that it should ask the LPC if there is potentially a case for a temporary cut to minimum wage rates to mirror the temporary increase in benefits. Minimum wage workers able to continue working would be affected negatively by this change but those in households in receipt of Universal Credit would be more than compensated by the increase to benefits, and the upcoming increase to National Insurance thresholds would reduce the extent to which minimum workers would see their take home pay fall between March and April.

The concluding statement is that the crisis strengthens the case for raising welfare benefits, which the government has already done, but weakens the case for increasing minimum wage rates.

CIPP comment

At the time of writing, the government has not made any announcements relating to NLW and NMW rates from April 2020, so the new rates should be implemented from 1 April 2020.

 


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