Summer Budget 2015: Unpacking the National Living Wage

9^th July 2015

Yesterday’s budget speech was notable for a number of reasons — not least that it was the first Tory budget for 19 years. Content wise, there were key announcements on welfare, apprenticeships, housing, and devolution. But it was the Chancellor’s plan for a National Living Wage that has dominated the headlines so far.

The National Living Wage will be worth £9 an hour by 2020 for over-25s, with a new wage floor of £7.20 from next year. This compares to the £7.85 called for by Living Wage campaigners.

ResPublica has long called for a Living Wage to help people out of the poverty trap and reduce welfare dependency, so we warmly welcome this announcement. According to the Resolution Foundation’s Commission on Living Standards, 20% of people are paid less than the living wage, so it’s clear that the minimum wage alone is not enough to tackle poverty. The Low Pay Commission, whose role it is to recommend the National Minimum Wage (NMW) level, has for too long been too conservative, and the NMW has as a result often lagged behind inflation. The changes announced yesterday will boost the pay of 6 million people.

The challenge for policy makers looking to tackle low pay has been how to introduce a higher minimum wage sustainably. The Government plans to cut corporation tax from 20% to 18% by 2020 and double Employment Allowance – the level at which firms pay National Insurance – to £3,000, which will help firms to offset some of the cost. This should mean the National Living Wage makes economic sense for businesses and is viable in the long-term. Excluding under-25s will also ensure young people taking their first steps into the world of work will not be priced out of the jobs market.

But does it go far enough? The minimum wage was already due to rise to £7, so in the short-term the low paid will be no better off. And with tax credit cuts, many may be worse off.

Of those currently earning between the minimum wage and the Living Wage, 40% live in households in the top half of income distribution — so increasing the minimum wage whilst cutting tax credits may actually be regressive. And the Living Wage Foundation calculates their Living Wage on the basis of tax credits at their current level, so the gap between the National Living Wage and the Living Wage Foundation figure is wider than first appears.

Another issue is what this means for the work of the Low Pay Commission and the Living Wage Foundation. The Low Pay Commission currently calculates the NMW based on the ability of employers to pay. Its remit will have to change if the Government is serious about a living wage, which is calculated according to the cost of living, and its work will need to more closely resemble that of the Living Wage Foundation. The latter, alongside Citizens UK, has done significant work to push forward the cause of the lowest paid — more so than organised labour. One of the most successful institutions of social policy in the UK risks being crowded out.

An interesting dimension to this debate is the Government’s decision to introduce a national rather than regional living wage. With the current London Living Wage at £9.15, the Living Wage Foundation say that the new National Living Wage will not be enough for 586,000 Londoners even if it was introduced at the 2020 rate today. The other side of this coin is that employers must absorb higher costs regardless of their size or location.

One solution to this would be for the Government to follow the Living Wage Foundation’s lead and introduce a two-tiered system to include a London Living Wage. Another option would be to look at localising the Low Pay Commission. This would allow wage floors to reflect different economic conditions around the country, and could be tested by giving a city such as Manchester the power to set its own wage floor. Having been raised during yesterday’s debate in the Commons on the budget, it will be interesting to see if this is something the Government chooses to address.

BudOverall, then, the National Living Wage is a good step towards tackling low pay, but there is still room for development of the Government’s current proposals if it is to be an effective long-term solution.