Low paid Britain is set for a parliament of pay rises – let’s make them a success

Budgets are always full of surprises and last year’s Summer Budget contained one of the biggest ever: the announcement of a National Living Wage (NLW). The NLW is the new compulsory wage floor for workers aged 25 and over, it will be introduced at £7.20 an hour this April and is projected to reach £9 an hour by 2020.

With the introduction of the NLW now less than a week away, it’s a good time to take stock of its potential impact now and over the rest of the parliament.

Almost two million workers are expected to have their pay topped up to the National Living Wage this year. For those currently on the minimum wage, it will mean a pay rise of over 10 per cent – four times the average pay rise.

And the gains don’t end there, because minimum wage rises also create ripple effects further up the pay ladder as employers seek to keep gaps between their lowest-paid staff and those on the next rung up. We estimate that a further 2.6 million employees will benefit indirectly from the NLW, taking the total number of beneficiaries to 4.5 million in 2016.

So who and where is set to benefit from the National Living Wage this year?

Firstly, we know around two in three workers set to get a pay rise are women. This reflects the fact that, although the gender pay gap is closing, it is still the case that women are more likely to be working in lower paying roles than men.

Secondly we know that over half of those expected to benefit work in just three sectors – hospitality, retail and admin & support services. As our research has shown, implementing the NLW will be particularly challenging in these sectors.

Thirdly, some cities stand to experience a far bigger shake-up to their labour markets than others. For example, more than one in five workers in Sheffield, Nottingham and Birmingham will be affected by the NLW when it is introduced. In contrast, only one in ten workers will be affected in cities like London and Oxford, where pay and living costs are already high compared to the rest of the country.

The biggest rise in the NLW will come this year, but what about its impact over the parliament as a whole? As the chart below shows, Britain’s lowest earners are set for several more years of above average pay rises. As a result by 2020 around six million workers will benefit from the NLW. It’s worth pausing here to note that by 2020 the government will be shaping the pay of almost a quarter of Britain’s workers – a truly radical change from the late 1990s when the UK had no national wage floor whatsoever.

Clearly pay rises of this magnitude aren’t without challenges, particularly in low paying sectors. In hospitality for example, close to half of all workers will eventually have their pay affected by the NLW. The move to £9 will require a concerted effort to raise the productivity of the lowest-paid workers. The good news is that there a lot of willingness among employers to do this. The bad news is that for all this goodwill, raising productivity is something we’ve been notoriously bad at in Britain for some time now. That will have to change pretty soon.

The Chancellor has done the easy part by announcing the new National Living Wage. But now comes the hard part – ensuring it’s implemented successfully. To do this government will need to work closely with employers to share success and understand any problems that arise. It should also listen carefully to the Low Pay Commission, whose successful stewardship of the National Minimum Wage puts them in a prime position to advise. In addition, making the National Living Wage a success should also be high on the to-do list of the new city and regional Mayors that will be elected across the country next year, particularly those in places like Sheffield where its impact will be huge.

The National Living Wage is a bold and ambitious policy. If it’s going to be a success, the government and businesses need to match that ambition in their strategy for its implementation.