The UK’s National Minimum Wage: Brilliantly bold or business burden? Too high or too narrow? Excessive or extend?

Celebrating the 25th anniversary of  the National Minimum Wage (NMW) at a delightful Resolution Foundation birthday event last Wednesday night gave me the chance to reflect on its remarkably positive impact over this period. Over half of us in a poll at the meeting felt it has been the most positive and effective government economic intervention of our generation, furlough scheme and Bank of England independence notwithstanding. And it was particularly heartening to see the praise coming from all political, economic and stakeholder perspectives – government minister, heads of the TUC and CBI, labour market economists, everyone.

For this has also been a triumph for that almost old-fashioned sounding concept, in this age of populism and social media extremes, of social partnership and co-operation. The wage setting process through recommendations to government from the independently established body the Low  Pay Commission has, everyone seemed to agree, achieved the intended balance between fairness and support for the lowest paid in our society with affordability for employers and the UK economy.

Their remit, set each year by the government, has always included the requirement to avoid recommending rates which drive excessive price inflation and particularly importantly, do not harm the employment prospects of the low-paid themselves, the major fear at the time of its implementation. The LPC’s first report – published in 1998, after it had held more than 200 evidence-gathering meetings across the country – cited examples of exploitation that the law was designed to address, including a security guard job advertised at £2 an hour, with the successful applicant expected to supply their own dog.

The same cross-party, multi-stakeholder approach achieved similar success on pension auto-enrolment, which since 2012 has led to a tenfold increase in the total membership of defined contribution occupational schemes, from 2.1 million to 21 million in 2019. It might realise similar gains if applied to our other major social problems, such as homelessness and housing.

But reading some of the negative business commentary in the  Financial Times the following morning over my coffee, on the ‘business burden’ and ‘respite required’ from the high recent increases in the NMW, brought me back to earth with a proverbial bump. It is according to the Daily Telegraph ‘ a thorn in Britain’s side’.

The fight is still not totally won and it has highlighted that I was very much amongst the converted and disciples of higher low pay and social justice and equality on Wednesday night. The low pay, ‘pay as cost’, let-the-free-labour-market-rip advocates are still very much alive and well amongst our political and business leaders.

So in this blog I want summarise the successes of the statutory minimum wage since it was implemented in April 1999. But also I will recognise some of its shortcomings now in our very different uber-flexible employment market, and indicate how I think it needs to change and evolve to continue to have the most impact and benefit, for our economy and society, for the low paid and their employers(even if they don’t all recognise this). 

Successes and benefits – more people earning more

The most obvious beneficiaries of tomorrow’s uplift to the minimum wage rate will be the estimated 1.6 million employees on the current minimum who will be moving to the princely sum of £11.44 per hour for adults, representing an annual increase for a full-time employee of £1,800. That’s twice the number benefitting from the NMW when it was first introduced, representing almost 9% of the UK workforce according to the House of Commons Library.  

Moreover as most firms also adjust the pay of workers paid close to the minimum rate, The Department for Business and Trade estimate 2.7 million workers will directly benefit from the 2024 increase. Eligibility is also seeing a welcome extension this year through a reduction in the age threshold to 21-year-olds from the current minimum age of 24, meaning that a 21-year-old will get a 12.4% pay increase.

This year’s award of 9.8% is the third highest increase in the NMW’s history since it was set initially at a relatively cautious £3.60ph in 1999, which was slightly below half of average earnings at the time and also in the lower half of countries with a similar statutory requirement.

It should mean the new rate very likely hits the target set for the statutory minimum by the government with their inaccurately renamed National Living Wage of reaching two-thirds of average earnings. This represents the threshold rate for low pay as defined in its international comparisons by the OECD and puts us nearly at the top in these comparisons of minimum wage ‘bite’ as a ratio of earnings, alongside of France and South Korea.

The average annual rate of increase has actually doubled since George Osborne announced the NLW in 2016, allowing Chancellor Jeremy Hunt to boast in his last Budget speech that ‘the National Living Wage has helped halve the number of people on low pay since 2010’.

Conveniently forgetting that his predecessor Michael Howard strongly opposed the minimum floor’s introduction, with the prediction that it would ‘destroy’ up to two million jobs. Its introduction was a bold move facing considerable opposition. Economists agree on very little, but the vast majority do now seem to accept that even these larger NLW increases have not driven redundancies and unemployment.

The LPC’s own research studies have found no correlation since its introduction between the size of the increase and numbers out of work, meaning that the current Chancellor can also claim that there are an extra four million jobs now in the economy than there were in 2010.

Evidence-based policy also helps to explain the success of the NMW. Baroness Philippa Stroud, Chair of the Low Pay Commission said that ‘achieving the two-thirds target is a significant milestone’ and that ‘the evidence suggests the increases to date have been implemented steadily and carefully so as not to damage employment opportunities’. Some of their international comparisons have shown some effect of minimum wages on the employment prospects of young people and hence the continuing caution with the extension of rates there.

The LPC’s research has also highlighted other benefits from increasing pay levels for low paid workers. An Oxford University research study for example, shows that the resulting wage rises can significantly improve the mental health of low-paid workers.

Those on the receiving end of inequality and unfairness in the UK labour market have also benefited from the NMW. The Covid crisis highlighted how unevenly distributed across the economy low pay is and the appalling terms and conditions of many keyworkers, such as those in the care sector. Workers who are female, in the private sector, in part-time employment, in temporary jobs, and from a Bangladeshi or Pakistani background are more likely to have a minimum wage job. And more than half of them (54%) work in three occupations: retail, hospitality, and cleaning/maintenance.

So the NMW has certainly contributed in disproportionately raising the pay of these groups and thereby also contributed to closing gender and ethnicity pay gaps . Since the NLW’s introduction the decades long pattern of higher pay increases for the highest paid decile of staff compared to the lowest decile has also been reversed, at least in terms of work earnings if not total wealth growth. Between 1998 and 2023, overall UK median hourly pay grew by 19%, with no real increase since the 2008 financial crash, compared to the healthy 72% lift in the NMW.

To give some concrete examples, over the NMW’s lifetime median hourly pay for bar staff has risen by 66% in real terms, by 52% for cleaners, and 43% for sales assistants.

So the NMW has undoubtedly seen considerably more people earning considerably more money than would otherwise have been the case - £6,000pa more according to the Resolution Foundation’s calculations. What’s not to like?!

The Downsides – declining living standards and poor enforcement

Chatting with the excellent Sunday Times journalist Tom Calver in the week who was researching for his piece this morning on the NMW, his key interest was in trying to understand and explain an important paradox. On the one hand the UK has had a relatively rapidly increasing minimum wage rate moving up to a comparatively high level by international standards. Yet at the same time the UK population is experiencing the worst parliament ever for declining living standards and poverty levels are  continuing to increase.

The UK is experiencing soaring levels of derivation, hunger and foodbank usage, as can be seen in the latest figures from DWP on Households below Average Income for 2022/23, also published in the week. Their poverty stats showed 600,000 more people fell into absolute poverty – ministers’ preferred poverty measure – in 2022-23, when inflation was at its 10% peak, including worst of all, more than 300,000 children.

During that year 12 million people were in absolute poverty – equivalent to 18% of the population, including 3.6 million children. And perhaps the scariest stat of all, and the most damning for employers and HR functions (given Beveridge’s obvious assumption in developing his original welfare state proposals that the ‘evil’ causing ‘want’ was ‘idleness’, so once you had a job you were ok), is that 69% of those poor kids have at least one parent in work.

Actually there's another paradox here related to the UK's earnings distribution. The bottom decile of earners have indeed  got closer to the average wage and the highest paid since 2016, because of the higher NLW increases, (although that gap is still wider than it is in France and Germany for example). But the average hasn't increased at all relative to prices, so even the average worker is no better off than they were in 2005. We are all poorer, but that hits you worst if you are only on £11.44ph rather than what you and I earn.

Tom’s conclusion in his piece this morning therefore is that the NMW is ‘no silver bullet’ in raising peoples’ standards of living and addressing poverty. That’s especially when faced with the rocketing inflation the UK suddenly experienced in 2022 following the Covid and Ukraine crises. This peaked out at over 11% 18 months ago, but was much higher in essentials such as food and energy, which the poor and low paid spend the greatest part of their income on.

Combined with state benefits and social security policies which display  so many short-comings from the point of view of protecting and raising people’s living standards, with for example: some of the lowest levels of sick  pay in the OECD; the two-child cap on benefits; and the failure to move payments up in line with inflation and as quickly as the NMW: - then Tom’s poverty paradox starts to become somewhat easier to fathom.

The rate of statutory sick pay it was announced last week will only be increased by 6%, when the government in effect recognised that  it’s too low to live on with the emergency uplift in the rate during the Covid crisis. And France recently announced that it would be doing the opposite to the UK and incentivising people to have more kids, with escalating benefits per additional child, in order to try to help to address their similarly low birth rate and ageing population.

Poor enforcement of the NMW by HMRC (although they are better resourced than just about any other aspect of the UK’s enforcement of labour law, including modern slavery), with the 524  recently ’named and shamed’ employers representing the tip of the proverbial iceberg of abuse and ignorance, only adds to the difficulties experienced in reality by low paid workers. Official figures for 2023 show that 365,000 workers are recognised as being paid below the theoretical minimum wage, again almost certainly a huge under-estimate of the real picture.

So however strong the NMW rate, not only as Tom says is it not a ‘silver bullet’ for adequate living standards, but according to the Guardian’s Heather Stewart it represents:

‘a small island of progress in a labour market that has seen short-term, zero-hours contracts proliferate, out-of-work and sickness benefits eroded, and fire-and-rehire policies going unpunished.’

The Labour Party, which is maintaining its 20% lead in this morning’s election polls, has of course proposed in its New Deal for Working People to address many of these issues, originally highlighted and accepted by the government in the Taylor review (2017). It promises if elected to ‘strengthen workers’ rights and make Britain work for working for people’ -  through ‘high-quality, secure, rewarding jobs we’ll make work pay’ and states that:

‘Better pay would end the self-defeating low wage, low investment, and low productivity cycle that the country has been trapped in for the last decade. It will also help to tackle the cost of living crisis by ensuring everyone is paid enough to live on’.

The main components of the deal are banning zero-hours contracts, ending fire and rehire, and scrapping qualifying periods for basic rights such as unfair dismissal, sick pay, and parental leave. Labour also proposes trialling strengthened collective bargaining in establishing compulsory, sector-based ‘fair pay’ agreements, initially in the social care sector, one of the lowest paying areas of the UK  economy.

This copies the approach being pursued in New Zealand. And it is interesting to note that a country like Sweden, despite its higher and less unequal pay distribution, has not historically had a statutory minimum wage: it hasn’t needed one. Extensive and effective collective bargaining ensures that pay rates balance employer affordability with employee needs.

The Future

Neither main party has said yet what exactly it  sees for the future of the NMW. Both Shadow Deputy PM Angela Rayner and Chancellor Rachel Reeves have spoken about moving to ‘a genuine living wage’. Current Chancellor Jeremy Hunt seems to believe that with the achievement of the two-thirds of  average earnings level tomorrow its ‘job done’, representing the ‘end low pay in this country, delivering our manifesto promise… making sure work always pays’.

The government’s new remit for the LPC, also published last week, says that they should retain this two-thirds level through their next set of annual recommendations, disappointing those of us who felt 75% of average earnings should be the next step of ‘bold ambition’.

But the real Achilles heel of our NMW is that it will still, even after tomorrow’s very welcome increase, be almost two quid an hour, or  £3,500 a year, below what the Living Wage Foundation calculates you actually need to earn to live in London. Their recommended and cost-calculated Real Living Wage (RLW) is £13.15 ph.

As my last blog for IES on minimum wage developments around Europe highlighted, the EU law passed at the end of 2022 aims to ‘promote the adequacy of statutory minimum wages and thus help to achieve decent working and living conditions for employees in Europe’. Partly influenced by  this and the high inflation experienced across Europe since then, the cost of living is undoubtedly growing in influence in setting minimum wage levels, and it needs to in the UK too.

Around half of the EU states have either automatic indexation in their NMW rate, such as France and Belgium, or list it as an important factor to be taken into account, as in Spain and Portugal.

Now too, partly because of the poverty paradox, there is movement towards copying the UK’s targeted average earnings level approach, but also moving towards recognising ‘real’ living wage levels in calculating statutory minimum wages. Romania and Malta are both passing legislation to make a living wage formula the main determinant of their minimum wage and larger economies such as Germany, who like the UK have pushed up their minimum wage  at a faster rate than average earnings in recent years, are also considering the issue of real wage levels and living standards following their rapid surge in price inflation.

In the UK more than 460,000 employees working for 14,000 firms currently receive the LWF’s voluntary real living wage benchmark. Probably a similar number of employers unofficially align their pay to these rates without making the LWF commitments. Our cost-of-living crisis and now growing levels of in-work poverty mean that government and employers need to give serious consideration to how the RLW could be better used to inform, some of us would  say drive, the NMW rate in future.

The original aim of the LPC was to ‘help as many low-paid workers as possible without damaging their employment prospects’. The LPC’s own ‘advice’ to  government published last week, as well as reporting that it continues to find ‘no compelling evidence that minimum wage increases have harmed job levels’ also proposes a modest extension in its own brief to address some of these associated labour market weaknesses that contribute to the in-work poverty paradox, and so better deliver on that original aim.

It recommends increasing rates for young workers by lowering the age of  eligibility for the main rate further and reforming apprentice rates. They also  propose action on insecure work, which they first proposed to government in their  2018 report following the Taylor review, as follows:

‘Government should implement our 2018 recommendations on one-sided flexibility (a right to switch to a contract that reflects a worker’s regular working pattern; a right to reasonable notice of work schedules; and a right to compensation if a shift is cancelled or curtailed at short notice).’

More Cranes Needed

Speaking on BBC’s Analysis programme on low pay last Monday night, professor Damien Grimshaw from Kings College London praised the NMW’s achievements. But with wide international pay and labour market experience, he believes that the UK relies far too strongly on the NMW to do much of the ‘heavy lifting’ of addressing poverty and improving people’s living standards, especially for the most disadvantaged in our society. Other countries have a wider range of mechanisms, with more widespread labour market rights and protections and stronger collective bargaining mechanisms and enforcement, than we currently have in the UK.

That’s why broader labour market measures are undoubtedly needed in the UK. Even the Conservatives have accepted that greater predictability of hours and earnings is desirable, if for them only to be employer-granted on a voluntarily and employee ‘requested’ basis. It’s amusing how some of the ‘doom monger’ business lobbying  group responses to Labour's proposed new deal for workers almost exactly echo their responses to their minimum wage proposals 25 years ago!

25 years of high labour market flexibility and light-touch employment regulation, particularly since the financial crash, has only contributed to the UK having the worst recent productivity record  in the G7 countries and with no increase in average wages in real terms since 2005. Higher wage jobs add more value and are more productive, and governments and employers should be encouraging their creation and the training and progression of low-paid workers up into them.

The NMW has been incredibly effective in raising minimum wage levels to closer to average earnings without having any detrimental impact, as was widely predicted in 1999, on employment levels. Some critics of the minimum wage have argued it is too high, while others believe it has not risen fast enough to reduce poverty in the UK, suggesting the initially desired balance of interests and stakeholders has been successfully delivered over the past 25 years.

But as the Taylor report and examples like P & O demonstrate, it’s a different employment market now. Contractual arrangements and hours of work are more flexible and variable than in 1999. There are over a million employees on ZHCs and probably another 3 million with no predictability over their pattern of earnings, as well as 4 million earning less than a real living wage.

We need to be bold again with the NMW, just like in 1999. The LPC  says the government needs a clear policy going forward and to decide if that should continue to be ‘target-based’, for example to continue moving up to 75% of average earnings, or  ‘principle-based’. I would argue it needs to be both, with a general principle of protecting real living wages and wider living standards incorporated into a broader LPC brief.

For example, the Resolution Foundation says that the government ‘should consider how the level of statutory sick pay has fallen in relation to average wages and could be brought under the umbrella of the commission’. Nye Cominetti there said this  week:

‘Politicians should reflect on why the minimum wage has been so successful – such as the combination of long-term political direction and independent, expert-led oversight – and whether this approach could be broadened to tackle some of the UK’s other low pay challenges.’

Many of us would agree that this needs to go further, well beyond even the expanded boundaries of the LPC, and with much stronger labour market enforcement. More cranes as Damian says are needed!

But an expanded and updated NMW needs to and can continue to be the effective foundation for better pay for low paid workers that it has been over the past 25 years, whilst also supporting wider movement and actions in the UK labour market towards higher pay and productivity over next 25 years.