Proportion of low paid workers set to fall to lowest level since the mid-80s

‘Low pay’ gap will almost halve over the parliament

The proportion of low paid employees across Britain is set to fall to its lowest level since 1985, according to a forthcoming report from the Resolution Foundation.

Low Pay Britain 2015 will show that the lifting of the legal wage floor associated with the new ‘National Living Wage’ (NLW) will reduce the extent of low pay across Britain from 21.4 per cent in 2014 to 18.8 per cent by 2020 – its lowest level since 1985. This represents the first significant shift downwards in decades, with the prevalence of low pay having hovered around 20 per cent for the last 20 years.

The report shows that the NLW is also set to reduce the ‘depth’ of low pay by moving millions of workers closer to the low pay threshold, even if they don’t cross it. Among those who remain low paid, average earnings will close to within 9 per cent of the low pay threshold by 2020 (down from an average of 14 per cent in 2014), almost halving the ‘low pay’ gap over the parliament from £7.9bn £4.4bn. The Britain’s position in the international low pay league table will also improve slightly, though the extent of low pay will remain above most other European countries.

The Foundation notes that while the National Living Wage is set to transform Britain’s low pay landscape, it will have a far more limited impact on raising the living standards of low-income households. While the NLW will limit the income losses stemming from welfare cuts announced alongside it in the Summer Budget, it will not make a considerable difference. The severe losses faced by households in the bottom half of the income distribution will be reduced by just 13 per cent.

Other findings from Low Pay Britain 2015 include:

• The number of employees earning less than the voluntary Living Wage will rise to a record 24 per cent (6.5 million employees) next year, and could increase to 30 per cent by the end of the parliament depending on how the living wage is set;
• Over two-thirds of hotel and restaurant workers are low paid, as are around two-in-five retail workers;
• Women remain much more likely to be low paid (27%) than men (17%);
• Employees in the East Midlands (26%) are most likely to be low paid (and twice as likely as those working in London); and,
• Employees aged 30 and under are more than twice as likely to be low paid (38%), as those aged 31-60 (15%).

The Resolution Foundation welcomes the long overdue fall in low pay that will take place over the parliament, and says that it is vital now that government works closely with both the Low Pay Commission and employers to ensure the NLW is a success.

But the Foundation warns that while government’s focus on higher pay is an important way to boost living standards, it must be supported by measures to boost employment and ensure that the tax and benefit system lifts incomes and encourages work. It notes that the Summer Budget will have weakened work incentives and reduced incomes for many low-income households, despite the welcome increase in pay.

Matthew Whittaker, Chief Economist at the Resolution Foundation said:

“Britain’s low pay landscape is set to be transformed over the next five years by the new higher wage floor. The significant fall in low pay over the next five years will be very welcome after two decades of standing still.

“But a change of this magnitude won’t be without big challenges and government must work closely with both the Low Pay Commission and employers to ensure that the national living wage is implemented successfully, and avoids unintended consequences.

“And while it is welcome to see progress being made on low pay, the wider picture on living standards is more troubling. Many working households will find themselves worse off, even as the national living wage improves their pay, as a result of the tax credits cuts announced alongside it. It’s important the government doesn’t miss the bigger picture on living standards.”

Proportion of employees below selected low pay thresholds, 1968-2020