Low Pay Britain 2020

Before the crisis, the rising National Living Wage was driving down low pay.

• In 2019, low pay on our core definition (the number of people earning below two-thirds of median hourly pay) fell for the sixth consecutive year, falling from 17.0 per cent of employees in 2018 to 15.5 per cent in 2019, the lowest rate since 1978.
• The proportion of employees paid below the real Living Wage (the voluntary rate that reflects the cost of living) also fell, from 24 per cent in 2018 to 21 per cent in 2019 – its lowest level since 2011.
• Rates of low pay continue to vary significantly across groups. Low pay is much more prevalent among younger employees (69 per cent of 16-20-year-olds and 28 per cent of 21-24-year olds were low paid), workers in the hospitality sector (52 per cent of whom were low paid) and workers in the private sector (20 per cent of private-sector employees were in low pay, compared to 4 per cent of those in the public sector).

The low paid have borne the brunt of this crisis

• The nature of the crisis, with the impact concentrated on the sectors which provide face-to-face services, means the economic impact has been felt most heavily by the low paid. In June, employees earning below the real Living Wage were around twice as likely as higher-paid earners to have lost their job, been furloughed, or lost hours and pay as a result of the crisis.
• Low-paid workers have also faced greater health risks. Low-paid workers were around a third less likely than higher-paid ones (44 per cent, compared to 83 per cent) to have been working from home at the peak of the lockdown in May.

Policy makers deciding on the path of the minimum wage for 2021 face a difficult decision

• With much uncertainty about the future path of this crisis, policy makers face a difficult task setting the 2021 NLW and associated youth minimum wage rates. This policy framework of setting the wage floor relative to typical pay means we are likely to see much lower NLW increase this year. On last year’s earnings forecasts, we would have expected an increase of around 50p for 2021. With wage growth uncertain but significantly lower than previously forecast, an increase of around 15p looks more likely (if the Low Pay Commission continues its approach of maintaining a smooth path to its 2024 target).
• There are good reasons to be cautious this year. There are big unknowns about the impact of significant minimum wage increases in any downturn, but particularly one in which the future path of the virus and therefore also the economy are particularly uncertain. Moreover, the key minimum wage sectors are facing the largest demand and supply shocks in this crisis. We might expect that firms in those sectors will be less able to respond to minimum wage increases than normal given low investment and little price flexibility.
• By contrast, the decision on whether to press ahead with lowering the age threshold for the NLW to 23 in 2021 is less material and we believe should be implemented. Few 21-24-year-olds earn their age-specific rate, and an overall cautious uprating would ease the impact of the threshold reduction on those sectors (such as retail and hospitality) that employ many young people.

Risks of setting the minimum wage too high or too low should be mitigated by other policy measures

• To protect family incomes, the Government should protect the £20-per-week addition to Universal Credit and tax credits that was introduced in April 2020. Doing so would increase incomes in the bottom decile by 14 per cent, compared to a scenario in which awards dropped back to their pre-2019 levels (uprated by inflation), as is current Government policy. Raising the NLW by even as much as 50p would, on the other hand, only raise incomes by 0.7 per cent in the bottom decile.
• Risks of setting the minimum wage too high should be mitigated by both broad-based fiscal stimulus (supporting demand and giving businesses the confidence to retain workers), but also via targeted wage support policies such as sector-specific wage subsidies.

The Government should stick to, and build on, the target of ending low pay

• The 2024 target to end low pay has an in-built flexibility. If the pandemic has a lasting negative effect on productivity and pay, this will be reflected in a lower nominal target for the minimum wage. And we have lots of evidence about the impact of raising the wage floor in more normal times – employment effects have proved to be small, even in places where the minimum wage has been pushed to levels similar to the UK’s ambition for the coming years.
• Also contributing to optimism about the potential for further increases it the minimum wage is the fact that the number of people paid it has been flat since 2016, at just below 7 per cent of employees. This is contrary to expectations that a rising wage floor would lead to ever increasing bunching of workers earning it, with wage differentials disappearing. Employers have been able to protect wage differentials. This is true across the key low-paying occupations we assess, with the typical wages of groups including care workers, cleaners and retail assistants maintaining their differentials to the NLW since 2016.
• Alongside a rising wage floor, other policies to improve the lives of the low paid are needed. Improvements should include better access to (and improvements to the generosity of) sick pay, more control over hours and shifts, and wider access to and better enforcement of existing rights.