The end of low pay? Charting the future of the minimum wage
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From its controversial introduction 20 years ago, the National Minimum Wage has gone from strength to strength, including with the more ambitious National Living Wage introduced in 2016. Next year the UK will have one of the highest wage floors in the world, but the future path of the minimum wage in the 2020s remains undecided. With widespread support for further minimum wage rises the Chancellor has announced that he wants to end low pay altogether, and has appointed world-leading minimum wage expert Professor Arin Dube to review the evidence of minimum wage impacts around the world. So, as the UK heads towards the top of the international minimum wage league table, where should the UK’s wage floor go from here? Can the minimum wage be increased further? What is the right pace of increases to balance the benefits of higher wages with risks to jobs? What would further rises mean for the growing share of the workforce on the legal minimum? Which sectors and parts of the country would be most affected? At the event to mark the launch of Professor Arin Dube’s review we heard from him and a Senior Cabinet Minister. The Resolution Foundation also presented new research on the future of the minimum wage from its Low Pay Britain report. Speakers Chancellor of the Exchequer Philip Hammond MP Professor Arin Dube, Chair of the government’s review of the impacts of Minimum Wage Professor Sarah Brown, Professor of Economics at Sheffield University and LPC member Dr Kathleen Henehan, Policy Analyst at the Resolution Foundation Torsten Bell, Director of the Resolution Foundation
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The end of low pay? Charting the future of the minimum wage
- 1. May 19@resfoundation 1 Low Pay Britain 2019 Philip Hammond MP, Chancellor of the Exchequer Professor Arin Dube, Chair of the government’s review of the impacts of Minimum Wage Professor Sarah Brown, Professor of Economics at Sheffield University and LPC member Kathleen Henehan, Policy Analyst at the Resolution Foundation Torsten Bell, Director of the Resolution Foundation #lowpay Wifi: 2QAG_Guest Password: Welcome_Guests
- 2. 2 The UK’s minimum wage has risen substantially National Minimum Wage/National Living Wage (nominal and 2019 terms, CPIH-adjusted) @resfoundationNotes/Source: RF analysis of ONS, Annual Survey of Hourly Earnings (ASHE) & CPIH deflator
- 3. 3 It has driven up hourly pay for the lowest earners Average (real) annual growth in hourly pay, 1998 to 2018, by earnings percentile @resfoundationNotes/Source: RF analysis of ONS, Annual Survey of Hourly Earnings (ASHE)
- 4. 4 Initial worries were about employment – which is doing fine Employment rate and level, 1975 to present @resfoundationNotes/Source RF analysis of ONS, Labour Force Survey (LFS)
- 5. 5 More recently there is a puzzle on hourly vs. weekly pay Change in pay (real) on previous year, by percentile, 2017-18 @resfoundationNotes/Source: RF analysis of ONS, Annual Survey of Hourly Earnings (ASHE)
- 6. 6 But average hours of minimum wage workers aren’t falling Average hours worked of minimum wage workers and by hourly pay decile @resfoundationNotes/Source: RF analysis of ONS, Annual Survey of Hourly Earnings (ASHE)
- 7. 7 Instead the jobs boom means new entrants doing fewer hours Hours worked, relative to bottom weekly decile average, of ‘entrants’ (from non-work) within the bottom weekly pay decile @resfoundationNotes/Source: RF analysis of ONS, Annual Survey of Hourly Earnings (ASHE)
- 8. 8 What next for the minimum wage? @resfoundation
- 9. @resfoundation • Chancellor: ‘end low pay’ • Labour: set to level of the ‘real’ living wage (and abolish youth rates) 9 Both main parties want to push the rate higher still Implies 66% bite (of 25+ earnings ?) A £10 rate. If introduced in 2022 implies: • 69% bite (all worker earnings), • 66% bite (25+ earnings).
- 10. 10 The UK’s minimum wage is already more ambitious than most Minimum wage as proportion of full-time, all-age pay, 2000 and 2017 @resfoundationNotes/Source: RF analysis of OECD Statistics
- 11. 11 The UK’s minimum wage is already more ambitious than most Minimum wage as proportion of full-time, all-age pay, 2000 and 2017 @resfoundationNotes/Source: RF analysis of OECD Statistics
- 12. 12 These are big changes for our labour market Share of workers covered by actual NMW/NLW in 2018 or if NLW rose to a 66 per cent bite @resfoundationRF analysis of ONS, Annual Survey of Hours and Earnings 2018
- 13. @resfoundation • Continuing with the recent pace of NLW increases (2x nominal earnings) could mean abolishing low pay in 2023 • But shocks happen – a hit to earnings growth could mean the minimum wage bite being too high for several years • Proceeding at the 1999-2020 pace (1.5x nominal earnings) could see the target reached by the middle of the 2020s 13 What pace is the right pace?
- 14. @resfoundation • NLW is a 20 year success story • New analysis offers reassurance on hours effects, but we should continue to monitor • Aiming higher is reasonable, but we don’t know how high we can go • Combining ambition with caution on rate rises could see low pay ended by mid 2020s • But we should be sensitive to the evidence, and reinforce rather than undermine the role of the LPC 14 Conclusions
Editor's Notes
- So as the Chancellor just reminded us, this April marked 20 years since the National Minimum wage was introduced. And as you can see, it’s come quite a long way: in real terms it’s grown by 55 per cent, and in nominal terms it has more than doubled. The sharpest growth has occurred over recent years, since the National Living Wage (a higher rate for workers 25 and older) came into force during 2016. In fact, when introducing the National Living Wage in 2015, the then-Chancellor called on the Low Pay Commission to raise the it, such that it would reach 60 per cent of 25 and over hourly median earnings by 2020. In other words, a 60 per cent ‘bite’ And, wishes do sometimes come true, the NLW is indeed set hit that target next year.
- Moreover, it has achieved it’s aim of boosting hourly wages for the lowest paid: over the past two decades hourly pay growth has been strongest for those at the bottom of the distribution (the left hand side of the chart). In fact, it appears that the minimum wage’s effects have rippled up through the bottom third of the distribution.
- Initially, there were concerns that the minimum, and indeed a swiftly rising minimum, would drag on employment. But this doesn’t appear to be the case: employment is today at a record high.
- Now, there are of course some recent trends that bear investigation – a bit of a puzzle for all the minimum wage fans out there. When we focus on the bottom pay decile (the left-hand side of this chart), we found that hourly pay rose for those in bottom hourly pay decile (the yellow line), but actually fell for those in the bottom weekly decile (red line). So what’s happening here? Are employers responding to higher wage bills by reducing hours for those on the minimum wage? In other words, are employment effects beginning to kick in?
- Now there’s quite a bit more detail about this in the report but the short answer is: no, we don’t think so. First, the average number of hours worked for those on the minimum wage (the red line here) has actually continued to rise.
- We think some of the puzzle could be down to compositional effects: for instance, workers who have recently entered the labour market and, are in the bottom weekly pay decile, work fewer hours than all other workers in that decile; In fact, these new entrants are increasingly pushing down average hours worked in the bottom weekly decile
- So twenty years of success: the National Living Wage on course to reach its 60 per cent target and we’re yet to see evidence of substantial employment effects that were long feared. The question is what next?
- Well, we’re probably all aware that ambitions continue to rise. As the Chancellor just commented, he’d like to see the National Living Wage help to ‘end low pay’ – and there are indeed a few ways to define it. The Labour Party also have big ambitions here, including a minimum wage “set at the level needed for a decent life”, estimated at about £10.
- Now the UK already has a minimum wage that’s more ambitious than most. These OECD figures, compare the minimum wage (in this case the UK’s National Living Wage) against median full-time hourly earnings, in 2000 (purple dots) and 2017 (pink dots). Now for the sake of your eyes, the chart here only includes a selection of OECD countries but it’s worth saying that the UK’s current bite is ranked about 9th of all OECD countries and above the OECD average.
- Achieving a 60 (the yellow dot on the UK line), or indeed a 66 per cent bite (the blue dot), would bring the UK well above that OECD average and towards the forefront of minimum wage policy internationally.
- So what would things look like in a world with a minimum wage set to two-thirds of median hourly earnings for age workers 25 and over? In a word: different. The bottom – shaded – half of the bars in this chart show the proportion of the workforce covered by the minimum wage in 2018: 7 per cent of all workers, 9 per cent of women, 6 per cent of men. The top half of the bars – the white sections – show what the coverage rate could have been were a minimum wage set to two-thirds of 25+ hourly pay been in place during 2018. Now it’s worth saying that chart doesn’t account for dynamic effects, like pay rises rippling up and pushing workers above the minimum wage or indeed some of the employment effects we discussed earlier. But it does help to illustrate how different things would be: the share of workers on the minimum wage would more than double, a third of part-time workers would be at the minimum, as would nearly a quarter in the East Midlands, North East and Wales, for instance.
- There is of course an optimal minimum wage level – the highest the minimum wage can go before it begins to generate employment effects that outweigh the benefits of higher pay, for instance. But unfortunately, we don’t know where that optimal point is, and we won’t know until we’ve passed it and employment effects, or other negative outcomes, begin to kick in. So for that reason our report focuses more on the journey – i.e. the pace of increase that will allow us to row back to an optimal level – than on the destination, that being the specific optimal level of the minimum wage, And there are choices to be had: for instance, policymakers could continue with the recent pace of National Living Wage increases (which ran about 2x the pace of nominal earnings growth) and reach two-thirds of median 25+ earnings by as early as 2023. But shocks do happen: a hit to nominal earnings could mean that it takes even longer to row back the minimum’s bite. Without wanting to cut the minimum wage in cash terms, this would mean several years of an above-optimal bite, even if the minimum were frozen. A safer course could see the National Living Wage rising at the longer-run pace, about 1.5x nominal earnings, which would achieve the low-pay target by the middle of the next decade.
- Ultimately, the National Living Wage has been a success, and proof that policy can – and does – make a difference to people’s lives. We should continue to aim higher, but of course be mindful of throwing caution to the wind The Low Pay Commission’s work continues to be integral to this balance, and as we set our ambitions higher it’s important that we be sensitive to the evidence and reinforce the Commission’s role That’s it from me – thanks.