Minimum wage - a promising but uncertain future
03 June 2019
The Resolution Foundation has published its ninth annual report on low pay which focuses on the minimum wage in terms of the big changes it is driving to the labour market and its uncertain future with its five-year uprating period coming to an end next year.
The Low Pay Britain 2019 report focuses on the minimum wage, for two reasons:
- It is driving big, welcome changes to the labour market. As the UK’s wage floor celebrates its 20th birthday, recent increases in its level have driven the first sustained reduction in low pay for four decades. Since the higher ‘National Living Wage’ (NLW) was introduced for those aged 25 and over in 2016, the percentage of employees in low pay (paid less than two-thirds of median hourly pay) has fallen from 20.7 per cent in 2015 to 17.1 per cent in 2018.
- The minimum wage is at a crossroads, with an uncertain future. The five-year uprating period instituted in 2016 comes to an end next year, and policy makers need to decide where to take it next. The Chancellor and the Labour Party have both announced ambitious plans for its future, either of which would result in the UK having one of the highest minimum wage rates in the world. This report offers a framework for how to marry such (welcome) ambition with caution given that we do not know where the optimal level of the wage floor lies. The Resolution Foundation focuses more on the journey, rather than the ultimate destination – how fast to boost wages for the lowest earners while managing the inevitable risks to employment.
The Low Pay Britain 2019 report sets out a loose framework that tests, under three successively more challenging scenarios, the pace of NLW growth, relative to earnings growth, that would allow policy makers to revert the minimum wage back to its optimal ‘bite’ in relatively short order without having to introduce nominal cuts to the minimum wage. The framework proceeds from five key arguments about the impact of the minimum wage:
- There is an optimal point, relative to earnings and productivity, at which the minimum wage should sit. This is the point at which the benefits of a higher wage floor for lower earners is outweighed by employment falls or other negative side effects;
- It is reasonable to conclude that we have not yet reached this optimal point, but for exactly that reason we do not know where that optimal minimum wage is and are unlikely to become aware until some negative effects have been felt;
- The challenge is to increase the wage floor’s bite in such a way that we can swiftly return to the optimal level if evidence emerges to show we have exceeded it;
- For reasons both political and economic, minimum wages are to a significant extent nominally rigid downwards, i.e. it is difficult to reduce them in cash terms. The pace of nominal earnings growth is, therefore, a central driver of the flexibility of the wage floor’s bite, determining the pace at which we can return to an optimal bite if we find we have exceeded it;
- The optimal pace of increases would take into account the fact that shocks, including weak nominal earnings growth, can happen.
The full report is an insightful read - Low Pay Britain 2019.
What has happened to the hourly and weekly pay of NLW workers?
The LPC has also written an interesting blog pulling information from the report on “What has happened to the hourly and weekly pay of NLW workers?”
LPC annual consultation draws to a close
The LPC’s annual consultation on the levels of minimum wage rates, including the impact on employers, closes later this week on Friday 7 June. The CIPP policy team will shortly be publishing the results of their survey, and evidence from the Policy Think Tank (to be held on 10 June – places still available at the time of publication).