Budgeting for the National Living Wage in the social care sector

The centrepiece of the 2015 Summer Budget – the National Living Wage (NLW) ‘premium’ on the minimum wage for those aged 25 and over – has been rightly welcomed by many as delivering a pay rise to millions of Britain’s low paid workers. However, as with the debate around each annual increase in the National Minimum Wage (NMW), we’ve witnessed some predictable warnings as to the number of employers that will struggle to absorb the wage hike, with jobs or services potentially at threat.

In fact, large parts of the economy should be able to absorb this wage increase relatively easily. The OBR has estimated that the NLW (or ‘premium’ minimum wage as it might more accurately be named) will increase total employee compensation across the economy by just 0.1 per cent. But doubtless, there are areas of genuine concern.

In no sector is this concern more real than social care. Its cocktail of low and falling wages, tight budgets, rising demand for services and little scope for productivity gains (at least in the short term) means the ability to absorb wage increases is very limited. Given that the majority of care services are paid for out of the public purse, unless we want deterioration in service quality or availability, or even more minimum wage non-compliance than already exists, the bottom line is that national funding for care will need to rise to meet the costs of raising pay.

That was the conclusion of a major report from the Resolution Foundation published earlier this year, which made the case for raising pay to the voluntary Living Wage, and set out both the public funding required for this and the benefits this investment might bring. To focus the minds of those who now need to put the Summer Budget into practice, we’ve replicated our modelling from this report to calculate the number of care workers affected by the new NLW and the increase in public funding for care that it necessitates.

Casting forward to 2020 – the date for which the Chancellor has set his ambition of an NLW of over £9 – we estimate that between 700,000 and 1 million frontline care workers (around 50 to 60 per cent of the total) will benefit directly from this wage increase.[1] These are big numbers, reflecting the scale of low pay in care and expected growth in the workforce as demand for services rises.

In terms of costs, it’s important to highlight that even before the NLW came into being this week, there was a funding requirement to meet expected above-inflation increases in the NMW over the next five years. We take the OBR’s expectation of what the NMW will be in 2020 – £8.25 – and estimate a public funding requirement of £1 billion to meet this minimum across the frontline care workforce, relative to a situation in which funding rises just in line with inflation and rising demand (the likely starting point for many negotiations between commissioners and providers).

Repeating this process for the OBR’s expectation of what the new NLW will be in 2020 – £9.35 for those aged 25 and over – gives an additional public funding requirement of £1.3 billion specifically associated with this new Summer Budget policy, relative to a situation in which only the £8.25 NMW applies. The total public investment in social care required to meet both NMW and NLW commitments therefore amounts to £2.3 billion in 2020.

Finally, as in our previous analysis, we consider the potential savings to the public purse (due to higher tax receipts and lower in-work benefit spending) that such investment in the wages of a low paid workforce would bring. ‘Netting’ off these savings almost halves the costs, as shown in the table below. As we set out in our previous report, the overall fiscal impact of a higher wage floor is difficult to judge, and there are reasons to think it may be greater or less than our estimates suggest.[2] But it is notable that the OBR’s broader modelling also returns (modest) fiscal gains from the National Living Wage.

In the wake of the Summer Budget, some have criticised the Chancellor’s approach – significantly raising legal minimum pay levels while reducing support available through the tax credit system – as shifting the burden of helping people on low incomes from the state to the private sector. Notwithstanding the merits of such criticism, in the case of social care at least, it’s clear that much of the bill remains his to pay.

[1] The range in our estimate reflects different assumptions for the future size of the frontline care workforce, and for changes in the distribution of care worker wages around the National Minimum Wage in coming years. See the full report for further details.

[2] One reason why the fiscal savings might be lower than in our original report is that the NLW implies wage increases across all sectors (rather than just the social care sector), meaning inflationary pressure might be greater than we judged in the previous analysis.