Minimum wage rises faster than inflation but still below its peak value

3 per cent increase to £6.70 means the minimum wage is still below its previous peak

This year’s rise in the National Minimum Wage means it still lags its peak value, analysis by the independent think-tank the Resolution Foundation shows. The above-inflation increase from £6.50 to £6.70 will be a boost to minimum wage earners and is the second meaningful real-terms increase in a row.  However, the think-tank argues that strengthening economic conditions and a buoyant jobs market mean a slightly larger increase to restore the minimum wage to its real-terms value in 2008-09 would have been justified.

The minimum wage is set to rise by 3 per cent in October 2015, roughly the same percentage by which it rose in October 2014. Last year, the Low Pay Commission described its decision to recommend a 3 per cent increase last year – rising from £6.31 to £6.50 – as reflecting “a new phase” for the minimum wage, following a period in which it had suffered repeated falls relative to inflation. But that lost ground has yet to be fully made up. The Resolution Foundation estimates that an increase of 4.2 per cent to £6.77 would have been necessary to take the minimum wage back to its highest ever value in real-terms, which it held in 2008-09.

As well as providing a direct boost for the UK’s 1.2 million minimum wage workers, the move will have the potential to indirectly benefit millions more hard-pressed low paid workers whose employers use the wage floor as a reference point in wage setting. Estimates suggest that around 30 per cent of workplaces take some account of the minimum wage in pay settlements.

The Resolution Foundation estimates that a worst-case scenario in which this year’s increase in the minimum wage simply kept pace with inflation would have resulted in a rate of £6.61, but points out that this would mean that the lowest paid would have lost ground on other workers. Had the minimum wage increased to £6.73, this would mean the UK’s lowest earners were fully keeping pace with the expected wage increases of typical earners.

If the minimum wage in 2015-16 grew in line with its trend prior to 2008 – when it tended to rise more quickly than typical earnings – it would stand at £6.82 from October. More dramatically, had the trend pre-crisis growth continued uninterrupted by economic downturn, then the rate would be far higher and would be about to rise to around £8.70.

Recent interventions by the two main political parties also point to a preference for a significant increase in October. Speaking in January 2014 the Chancellor indicated £7 would be the level the minimum wage would have reached by October 2015 had it kept pace with inflation, though he stopped short of suggesting this should be a target. Such a move would require a 7.7 per cent increase, representing the largest nominal increase since 2004 and the biggest real-terms rise since the minimum wage became firmly established in 2001.

Labour has set an ambition for a minimum wage of £8 by the end of the next Parliament. The Resolution Foundation estimates that reaching this level via a steady year-on-year trajectory would imply an increase to £6.78 this year.

Responding to the announcement, Conor D’Arcy, Policy Analyst at the Resolution Foundation said

“Any time the minimum wage rises faster than prices, it’s a help to the UK’s lowest earners. And it’s welcome that it’s gone up significantly faster than inflation for two years in a row.  But against a backdrop of steady economic growth, falling unemployment and the expectation of a further pick up in average wages, the size of the recommended increase will feel a little cautious to many minimum wage earners.

“If forecasts for average wage growth prove correct it means those at the bottom will lose a bit of ground on middle-earners. And they’ll still be earning less in real-terms than they did in 2008. The Low Pay Commission always has a difficult balancing act to perform but this year’s rise seems slightly cautious.”

“It’s vital that the debate about low pay becomes more ambitious. With one-in-five employees suffering from low pay in Britain – a figure well in excess of those recorded in most of our European neighbours – there is a clear need to put in place a long term strategy to reduce the scale of our low pay problem.”

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Notes for editors: The Resolution Foundation estimates future median pay with reference to Bank of England and OBR projections for mean pay growth and CPI inflation.