A £6.70 minimum wage – how ambitious a rise is it?

The Low Pay Commission, the body tasked with advising the government on the national minimum wage’s (NMW) annual increase, has recommended it rise by just over 3 per cent, from £6.50 to £6.70, from October 2015. The second in its “new phase” of above-inflation rises after years of falling in real terms, any real increase will be a help to the 1.2 million employees who earn the NMW and the far larger number whose wages are affected by it. But with the recovery looking increasingly sure-footed, would a larger rise have been affordable?

The current rate

• The adult minimum wage is currently £6.50, having risen from £6.31 in October 2014.
• The rise to £6.50 was the first meaningful real-terms increase in the value of the NMW in six years. (The increase from £6.19 to £6.31 in October 2013 was a real terms (CPI) gain of 2p but it had fallen in each of the previous four years.)
• The rise to £6.50 represented a nominal increase of 3 per cent and a real terms (CPI) increase of 2.6 per cent.
• The ‘bite’ of the NMW – its value as a percentage of median hourly earnings – is set to stand at 54.3 per cent in April 2015 (based on adjusting the latest Bank of England projections of mean wages). The government’s evidence to the LPC found the bite stood at 55 per cent in April 2014.

£6.70 in context

The government is likely to accept the LPC’s recommendation of £6.70 but what other potential rises would have been feasible? Figure 1 charts a selection of these.

Simply maintaining the NMW’s real-terms value against CPI would have required a cash-terms increase to £6.61. That, however, would have been a worst-case scenario, meaning that the lowest earners would find their wages only just keeping pace with prices even as inflation falls to record lows – CPI rose by 0.3 per cent last month.

The rise to £6.70 replicates last year’s 3 per cent increase. At a time when inflation is so low, this will give a welcome boost to minimum wage earners. But given the economic recovery has become more established in the year since the rise to £6.50 was announced and last year’s rise didn’t prevent employment rates from returning to record levels, there is a case to be made that a larger increase would have been justifiable. Add to that the Bank of England’s projections of an increase in average wages of 3½ per cent by the end of the year and the wages of those at the bottom look set to lose ground on average workers’.

The LPC’s analysis suggests the rise to £6.70 means the NMW has now recovered three-quarters of the value it lost over the downturn. An NMW of £6.77 would have seen it return to its peak value. Were growth in the NMW to return to its annual pre-crisis trend i.e. its ‘normal’ pace before the downturn, it would have risen to £6.82 this October. Taking it to £7 would have represented a new high in real-terms. Such a move would have required 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. More implausibly, had the NMW continued to grow throughout the downturn at its pre-crisis pace, the NMW would be rising to £8.72 in October.

Figure 1: Potential paths for the National Minimum Wage

Source:    RF analysis of ONS, Bank of England and OBR.

Notes: In determining the real-terms value of a given minimum wage in October 2015 and beyond, the Resolution Foundation uses inflation estimates from the Bank of England and OBR, adjusted to account for the time periods they cover. This may result in some difference from others in terms of the precise nominal figure required to restore the peak value of the minimum wage, although any such differences will be small.

Political ambitions for the short and medium-term

What does the future hold in store for the NMW and the LPC? The NMW’s popularity across the political spectrum has been underlined in recent months by various politicians and parties voicing their support for faster increases.  For example:

• Secretary of State for BIS Vince Cable wrote to the LPC in September 2013 asking it to “explore the consequences” of faster annual rises in the NMW, in order to restore its pre-crisis value.
• In January 2014, the Chancellor argued that an above-inflation increase would be “affordable”, citing £7 as the figure to which the NMW would have risen by October 2015 had it kept pace with inflation over recent years.
• At their party conference in September 2014, Labour announced a plan to overhaul the NMW and LPC, aiming for a ‘bite’ of 58 per cent by 2020 (taken here as meaning the rate introduced in October 2019), which they claimed meant raising it to £8.
• The Green Party has pledged to increase the NMW to the national Living Wage (£7.85) immediately, and then to £10 by 2020.
• The SNP have argued for the minimum wage to be devolved to Scotland after which the Scottish minimum wage would be guaranteed to rise by at least inflation each year, overseen by a Fair Work Commission.
• Plaid Cymru have pledged to raise the NMW to the level of the national Living Wage by the end of the next parliament. Resolution Foundation analysis based on the methodology through which the Living Wage is set estimates this would be equivalent to a NMW of £10.45 in 2020.

Table 1 provides a summary of these various statements.

Table 1: The parties’ stances on the National Minimum Wage and Low Pay Commission

Conclusion

Any time the minimum wage rises faster than prices, it’s a help to the UK’s lowest earners. 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 underwhelming 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 average workers. And they’ll still be earning less in real-terms than they did in 2008. In previous years, projections for average wage growth have proved to be overly optimistic but at least some of the factors like – the composition of the workforce – that held wages back last year should drop out this year. We’ve seen more job to job movement and investment is picking up which hopefully will pass through into productivity. All this means growth should be closer to projections than in recent years. The Low Pay Commission made always has a difficult balancing act to perform but this year’s rise seems slightly cautious.

While raising the wage-floor is crucial, it will only ever be one part of a serious approach to reducing low pay, something that is sorely lacking at the moment. The latest figures suggest 5.2 million employees are low paid in Britain.[1] Without a plan to reduce that figure, through improving the skills, productivity and progression as well as wages of low paid workers, the low pay debate is unlikely to change greatly no matter what the NMW’s level.

References:

Conservatives https://www.gov.uk/government/speeches/british-chambers-of-commerce-pm-speech

Greens http://greenparty.org.uk/news/2014/09/05/the-green-party-calls-for-a-%C2%A310-minimum-wage-for-all/

Labour http://www.labour.org.uk/blog/entry/an-8-minimum-wage

Lib Dems https://www.gov.uk/government/news/government-sets-out-2015-minimum-wage-remit-to-low-pay-commission http://www.libdems.org.uk/industrial-sized-holes-in-labours-new-business-strategy https://d3n8a8pro7vhmx.cloudfront.net/libdems/pages/7566/attachments/original/1423563538/A_D_2015_spring_for_web.pdf

Plaid Cymru http://www.partyof.wales/news/2014/09/12/plaid-pledges-pay-rise-for-250-000-welsh-workers/

SNP http://www.snp.org/media-centre/news/2014/nov/sturgeon-calls-devolution-minimum-wage

[1] A Corlett & M Whittaker, Low Pay Britain 2014, October 2014