Higher ground: who gains from the National Living Wage?

2 September 2015

Conor D’Arcy

Adam Corlett

Laura Gardiner

In this note, the first in a series looking at the opportunities and challenges associated with the National Living Wage, we focus specifically on who stands to gain. Which groups of workers will benefit, and by how much? And how does this wage legislation interact with the tax and benefits system, and therefore household incomes? In future papers, we will consider the industries and occupations where the NLW will bite hardest and explore how firms might react to the introduction and development of the NLW.

Key findings

4.5 million employees will see their hourly wage rise as a result of introduction of the NLW in 2016. Of those, 1.9 million earning less than the NLW are set to be brought up to at least that level, with a further 2.6 million gaining from spillovers.
By 2020, a total of 6 million employees – 23 per cent of all employees in Britain – are likely to have received some increase in their pay as a result, with 3.2 million being brought up to at least the NLW and another 2.8 million moved onto higher wages through spillovers.
By 2020, the average gross gain to employees directly benefiting is expected be £1,210 while for those who only benefit from spillovers, it is estimated to be £240 (in 2016 prices). Clearly however, the precise size of the pay rises experienced by individuals will vary depending on their previous pay levels and the hours they work.
The NLW is expected to boost the wages of three-in-ten (29 per cent) female employees by 2020, compared with 18 per cent of men.
We estimate that this will have a modest impact on the mean gender pay gap, speeding up the pace at which it narrows by up to one-fifth.
Yet, despite more women being affected, on average they will receive smaller cash gains in 2020 (£690 annually) than men (£860 annually). This is because more women than men work part time, leaving them with smaller annual gains.
25-30 year olds are expected to make up nearly one-in-five (18 per cent) of those affected in 2020.
While accounting for a smaller proportion of the overall gainers (because they account for a relatively small part of the overall workforce), 42 per cent of all those aged 66 and over are set to receive a pay boost by 2020.
As a proportion of the typical (median) wage across all workers the wage floor ‘bite’ is projected to rise from 61 per cent in 2014 (NMW) to 72 per cent in 2020 (NLW) in the East Midlands.
As well as the East Midlands, more than one-in-four workers will be affected in Wales, the West Midlands and Yorkshire and the Humber by 2020.
In contrast, London’s ‘bite’ only increases gently, from 40 per cent in 2014 (NMW) to 47 per cent in 2020 (NLW) meaning just 14 per cent of employees stand to be affected.
The distribution of lower-paid workers across households means that just over half (52 per cent) of the gross wage gains flow to families in the bottom half of the distribution, with the biggest cash gains recorded in the middle part of the distribution.
After accounting for tax and benefits – under half (45 per cent) of the net income gains are set to flow to households in the bottom half of the income distribution in 2020.
Looking solely at working-age households (where the NLW has most relevance), the share of the net income gains flowing to the bottom half increases to 54 per cent.

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