CIPD Voice: Issue 18
Many people look forward to the 1st of April every year, not because of the large corporates telling bad jokes, but because it’s the day the National Minimum Wage (NMW) and National Living Wage (NLW) rates go up. This year saw two million people get a pay bump on what was the policy’s 20-year anniversary.
The National Minimum Wage was a flagship policy of Tony Blair’s Labour Party during its successful 1997 general election campaign. Business, the Conservative Party, and some economists opposed the NMW, arguing it would be destructive to jobs and reduce Britain’s economic competitiveness.
As it turns out, in the UK the NMW had no significant impact on employment, and by the turn of the millennium the Conservatives had taken a U-turn and as the Low Pay Commission put it in February 2003, the NMW: 'has ceased to be a source of controversy and become and accepted part of our working life'.
The NMW was pretty simple and had just two rates back in 1999: £3.00 for 18-21-year olds and £3.60 for those aged 22 and above. Fast forward to 2019 and there are five rates. The latest addition was introduced in 2016 after George Osborne announced that a ‘National Living Wage’ would apply to those aged 25 and over:
The ‘youth rate’ set in 1999 was at first intended to offset training costs for young workers but was widely criticised as in practice it incentivised managers to employ younger people in a bid to cut costs.
The TUC have recently calculated that the new 21-24 year-old bracket means that people under 25 are missing out on an estimated £200 million a year in minimum wage pay as the average 21-24-year-old minimum wage worker is earns £800 a year less than their over-25 counterparts.
The Low Pay Commission (LPC) published a blog in 2016 stating that their reason for the differing rates is that younger workers are more at risk of being priced out of jobs than older workers, with worse consequences if they do then end up unemployed. The Government also reasons that the lower rates are there to protect employment and that unemployment for young people is damaging, so they must maintain a lower wage to avoid this.
The LPC estimates that 15% of workers in the 21-25 age group are being paid less than the NLW, which amounts to 337,000 young people. Young people especially will argue that it’s unfair that a third of a million young people in minimum wage jobs are missing out on more pay because of their age, and The House of Lord’s Intergenerational Fairness Committee’s new report, Tackling intergenerational unfairness, also reported that young people feel that equal pay should be received for equal work.
That argument isn’t new - the Labour Party’s 2017 manifesto boasted a 20-point plan for security and equality at work which promised to bring the NMW up to the level of the Living Wage, expected to be at least £10 per hour by 2020, for everyone aged 18 and over. They predicted that their policy would mean a pay rise for 23% of workers, and in areas like West Somerset, Weymouth and Dorset, more than 40% would get a pay rise.
The Shadow Secretary for Business, Energy and Industrial Strategy, Rebecca Long-Bailey, argued that “people should be rewarded to a full day’s work and need the dignity that comes with decent wages”. Indeed, the IFS has calculated that median annual earnings are 3.2% lower than in 2008, before the financial crash and there are 4 million workers in poverty.
The Living Wage, often called the ‘real’ Living Wage so as not to confuse it with the NLW, currently sits at £10.55 in London and £9.00 for the rest of the UK. The jump between earning £7.70 and £9 is not insignificant, so maybe the Labour Party has a point?
The CIPD’s Spring 2018 Labour Market Outlook found that just 11% of companies report that the NMW and NLW are dampening future pay increases, so what would the real economic impact be of getting rid of the 21-24 year-old age bracket?
Some people might argue that we shouldn’t stop at 21, and we should put also get rid of the 18-20 bracket, leaving the LPC with just three rates to set every year: under 18, 18+, and the apprentice wage. They might have a point, after all, people aged 18 and above pay the ‘adult rate’ for their council taxes, prescription charges, and dentist appointments, so why should their pay fall behind?
In the Spring Statement, Philip Hammond built upon George Osborne’s plan for the LPC to work toward raising the NLW to 60% of median earnings by 2020. The Government has commissioned a review of ‘the employment and productivity effects of minimum wage rates’ to Arindrajit Dube, a centre-left American economist, to explore this idea. The chancellor’s plans might be seen as an ambitious move by some but will stunt the ability of young people who are already known as the ‘boomerang generation’ to move on and up in life if their wages aren’t growing at the same rate as over 25s.