National Minimum Wage: Effects and future
Do you know the hourly minimum wage rates for workers in Northern Ireland? Currently, the rates are determined under three separate schemes: the ‘National Living Wage’; the ‘National Minimum Wage’; and, the ‘Real Living Wage’. The National Living Wage and the National Minimum Wage are statutory rates that apply for the whole United Kingdom (UK). The Real Living Wage, however, is a non-statutory, voluntary scheme establishing regional rates. The topic of minimum wage rates draws interest in Northern Ireland, which has both the highest percentage of low paid jobs and the lowest median hourly wage in the UK (see this survey of hours and earnings from NISRA for more on this).
This blog article explains each hourly minimum wage rate and highlights key distinctions between them, prior to focusing on the National Living Wage (NLW) in particular. The article considers the NLW; introduced in April 2016, with the aim of raising pay and productivity, with some tolerance for job loss, as explained by the LPC. The article also highlights some key effects arising from the NLW’s implementation in the UK – in terms of the labour market, productivity and workers. Hopefully, it serves to increase understanding amongst those with an interest in the area.
Terminology
When considering minimum wage rates, it is helpful to define terms at the outset, to aid discussion.
Median Wage
The ‘median wage’ is a measure of the average wage. It is calculated by sorting the wages earned by all workers, from lowest to highest, and then finding the middle value. Half of all workers earn more than the median wage, half earn less than the median wage.
Low Pay
The UK Government currently defines ‘low pay’ as an hourly wage of less than 66% of median wages. This is an accepted value, used by the OECD (Organisation for Economic Co-operation and Development). This definition can be useful when comparing different countries, for instance. A low pay worker is someone who is paid a low pay wage. This includes, but is not limited to, those earning the NMW and the NLW.
National Minimum Wage
The National Minimum Wage (NMW) is the statutory minimum wage that ‘UK workers aged under 25’ can earn in the UK. The NMW was first introduced in April 1998. The Low Pay Commission (LPC), a non-departmental public body, recommends the NMW rate, with the aim of helping as many low-paid workers as possible, without significantly adversely impacting employment levels and the economy. In 2019, the NMW rates are £4.35 for workers aged under 18, £6.15 for those aged 18-20, and £7.70 for those aged 21-24.
National Living Wage
The NLW is the statutory minimum wage that ‘workers aged 25 and over’ can earn in the UK. The 2019 NLW rate is £8.21 per hour. The setting of the NLW differs from the NMW. The UK Government sets the rate with the aim of reaching 60% of the gross median hourly wage by 2020. It hopes to achieve this goal next year. The rate-setting is based on advice provided by the LPC. The uprating of the NLW allows for some job losses and changes in employment, unlike the NMW. The coupling of the NLW with ‘median wages’ seeks to link low-paid workers’ pay with the UK’s broader economic growth.
Real Living Wage
The Real Living Wage (RLW) is not set out in legislation. Rather, it is a voluntary rate set by the Resolution Foundation (RF), not the Government, on behalf of the Living Wage Foundation (LWF). It is calculated based on the cost of an acceptable living standard, with input from members of the public. The RLW rate reflects the different regional costs of living, unlike the NLW and the NMW. Currently, there is a £9.30 per hour rate for all UK areas except London, which has a £10.75 per hour rate, reflecting the cost of living differences. Those organisations, firms and businesses paying the RLW are eligible to become RLW accredited. Examples include Liverpool Football Club, the Ulster Bank, the National Assembly for Wales and the Scottish Parliament.
Minimum Wage Worker (MWW)
The term Minimum Wage Worker (MWW) refers to workers who are paid the relevant statutory minimum wage for their age, e.g. a 24 year old minimum wage worker earns the NMW, while a 26 year old minimum wage worker earns the NLW.
Effects of the NLW on the UK Labour Market
This section considers the NLW’s effect on numbers and hours worked by NLW workers in the UK.
Has the NLW caused job losses?
When the NLW was first introduced in April 2016 across the UK, workers aged 25 and over saw a 7.5% increase in their hourly wages. This increase was larger than the median wage growth. Since then, the NLW rate continues to rise faster than median wages. As the NLW rate increased, so has the number of people receiving the NLW. An obvious impact of this is an increased wage bill for those paying the NLW rate for their workers. A potential measure to offset such increased wage costs includes the implementation of job cuts by NLW paying firms within business and industry.
In 2015, the Office for Budget Responsibility (OBR) estimated that there could be increased job losses of 60,000 by 2020 due to the NLW. Since that OBR forecast, academic research was undertaken in 2018 for the whole UK, but not accounting for regional variation. That study subsequently found that the forecasted job losses did not transpire. Overall, it indicated that the NLW raised wages with limited effects on employment. The study did find some adverse employment effects on women who work part-time. Another academic study undertaken on NI indicated that up until June 2018 the NLW rate did not impact job levels.
A further report published in 2019 and commissioned by the UK Government, comprehensively reviewed existing global studies on minimum wage raises. The report concluded that a higher minimum wage relative to the medium wage was unlikely to cause significant employment effects. Similar to previous studies, that 2019 report found that NLW rate increases did not cause substantial negative effects on the number of jobs, and therefore could be raised. It highlighted that increasing the NLW would increase hourly pay, but would not reduce employment for most people.
Has the NLW impacted hours worked?
Another identified potential impact of the NLW is reduced workers’ hours, arising from workers choosing to work fewer hours, or firms reducing their workers’ hours. The RF found decreases, since 2018, in workers’ weekly pay, for the lowest paid percentiles. Whereas up until 2018, it found increases for those workers. However, the RF explained there was no evidence to suggest that the decreases since 2018 was linked to increased NLW rate. Rather the RF noted that, since the NLW implementation, there had been a reduction in the proportion of NLW workers who wanted more hours. It further found that part of the weekly pay decrease could be attributed to changes in the composition of the NLW workforce. Since the implementation of the NLW, unemployment has been steadily decreasing in the UK. It also noted that new workers had entered the labour market, and some workers had re-entered, who could demand different hours, when compared to those already in the market.
How the NLW affects workers
NLW and austerity: Pay rises, benefits losses
When considering the effects of the NLW on workers, it is worth remembering that the NLW was not implemented in isolation. Shortly before it, the UK Government had introduced significant changes to the benefit systems in the UK, including NI. In 2018, the IFS found that whilst the NLW had brought about increases in individual earnings, increases in household incomes, amongst the lowest income households were muted. Some workers had seen an increase in hourly wage but this gain was reduced by taxes and lower benefit entitlements.
Spill-overs: Impact on non-NLW workers
When NLW workers receive an hourly wage increase, often workers paid above the NLW similarly receive an hourly wage increase; reflecting potential differences between roles, seniority or experience. By maintaining pay structures in this way, it is estimated that the lowest third of hourly workers also received an hourly pay increase. Economists call this effect ‘spill-over’. NI is the region with the largest proportion of workers affected by the NLW in the UK, as note by NISRA. Since the NLW’s implementation, the proportion of NI’s low pay jobs decreased, potentially this arises from ‘spill-over’ effects, as the RF suggested in 2019 in relation to the UK.
Productivity
Since the global recession, UK productivity has stagnated. Some proponents of a higher minimum wage argue that a higher hourly worker wage could lead to an increase in UK productivity. As previously stated, companies may reduce jobs or hours worked, to meet higher wage bills. However, other identified options include reorganisation of business, investment in automation or investment in workers’ skills. These options increase productivity. Despite this, since the introduction of the NLW, UK productivity has remained flat.
In 2018, research findings show that higher minimum wages (NLW and NMW) led to some job automation. They, however, note the effect to be modest. They find that a £1 increase in minimum wages leads to a 0.24% decrease in the number of automatable jobs. Balancing these potential gains in productivity with the negative effects of job changes and losses is essential to evaluating the success of the NLW policy.
Observations
As previously stated, the UK Government currently defines ‘low pay’ as an hourly wage of less than 66% of median wages. However, this definition has no link to living standards. The line seems arbitrary, in that it is entirely possible for people to have pay above this, but still experience poverty. Currently, the 66% of the median full-time gross hourly rate is £8.85. That amount is less than the RLW rate of £9.30. This means some workers receive pay that cannot provide a good quality of life. They, however, are not deemed by the UK Government to receive ‘low pay’. The Nevin Economic Research Institute (NERI) notes a better way for measuring low pay is the percentage of workers earning less the RLW. NERI notes that this potentially is a better indicator of how the NLW is affecting quality of life of workers. It also observes a decrease in this percentage since the NLW’s induction. Given this, should the UK Government consider how it defines ‘low pay’ in the future?
At the time of writing, the current UK Government anticipates that the NLW will reach its intended value of 60% of the median hourly wage in 2020. Since its implementation, the NLW has increased many workers’ hourly pay, has reduced the number of people facing hourly low pay, and has done so without causing job losses. The current Government also believes that the NLW could be increased, continuing to raise pay for workers.
To date it seems that the outworking of linking a minimum wage rate to median wages (as under the NLW) through periods of median wage contraction, remains to be seen; would slowly raising the NLW make it easier to return to an optimal wage rate in an economic downturn, as considered by the RF? Or, would slowly increasing the NLW rate also result in workers facing low pay for longer?
The UK Government at the time of writing had planned to raise the NLW to two-thirds of median wages, and to extend the NLW’s coverage to include 21-year olds by April 2024. That rate is currently anticipated to be £10.50 per hour. Is that rate ideal? Of course, the outworkings of the Westminster election and further study will determine whether this is in fact the case.
In NI, many will watch future developments in this area with keen interest, given the significance of NMW, NLW and RLW rates to them. As noted earlier, a large proportion of small and medium businesses in NI rely on minimum wage workers; their wage budgets need to reflect future rate changes. Similarly, NI’s public services will need to ensure its workers’ wage increases can be paid from the public purse.
