House of Commons Library

National Living Wage announcement

Published Monday, July 13, 2015

A summary of the Budget announcement that the Government will introduce a "National Living Wage".

During the Financial Statement the Chancellor announced (see above at 1:01:07) the introduction of a new requirement in minimum wage legislation, described as a “National Living Wage” (NLW).  The key features of the NLW are to be:

  • it will be available to workers aged 25 and over;
  • at an initial rate of £7.20 per hour; and
  • it is to be introduced during April 2016.

If the NLW is introduced at £7.20 per hour, it will be 50p higher than the comparable National Minimum Wage rate in force at the time.  The Chancellor indicated that the initial rate of £7.20 is based on a Resolution Foundation review of the National Minimum Wage, chaired by Professor Sir George Bain (founding Chair of the Low Pay Commission).

The National Living Wage, the Living Wage and the National Minimum Wage

The NLW is distinct from the existing Living Wage, currently set at £7.85 per hour outside London, and £9.15 per hour in London.  The Living Wage is paid voluntarily by employers and set according to the cost of achieving an adequate standard of living, as judged by the Greater London Authority (for the Living Wage in London) and the Centre for Research in Social Policy at Loughborough University (for the Living Wage outside London).

The NLW will sit alongside the existing National Minimum Wage, which is prescribed at different rates for apprentices (£2.73); those under 18 (£3.79); those 18 to 20 (£5.13); and those 21 and over (£6.50).  It appears as though, once the NLW is introduced, the 21-and-over National Minimum Wage rate (£6.70 from October 2015) will become a 21-24 rate, with the NLW applying to those 25 and over.  This has led some to describe the NLW as a new minimum wage rate rather than a living wage as described above.   

Setting the National Living Wage

It is not entirely clear how the NLW will be implemented.  Currently, the National Minimum Wage Act 1998 provides the skeleton for minimum wage law, fleshed out by the National Minimum Wage Regulations 2015 (SI 2015/621).  The rates are set annually by additional regulations, which come into force each October.  It may be that the NLW requires new primary legislation.

The National Minimum Wage is set by Government with the advice of the Low Pay Commission, who make annual recommendations in response to a remit set by Government.  The Budget document (page 33) indicates that the NLW will form a new aspect of the Low Pay Commission’s remit:

The government will ask the Low Pay Commission (LPC) to set out how the new NLW will reach 60% of median earnings by 2020. Based on the OBR’s earnings forecasts, this means that the NLW will reach the government’s target of over £9 by 2020.

The NLW’s basis on 60 per cent of median earnings follows the recommendations of the aforementioned Resolution Foundation review, which concluded (page 10):

Our view, based on UK and international evidence, is that a wage-floor worth 60 per cent of the median wage is a reasonable lodestar, indicating the most that a minimum wage could contribute to the goal of reducing low pay over the medium to long term.

In their analysis of the Budget announcements, the OBR estimated that, based on an assumption that median earnings will rise in line with average earnings (p200):

the NLW will rise from £7.20 in April 2016 (equivalent to around 55 per cent of estimated median hourly earnings for employees aged 25 and over) to around £9.35 in April 2020 (reaching 60 per cent of expected median hourly earnings for that group) in steps that imply the rise relative to median hourly earnings is a straight line. The effective minimum wage for the affected age group will therefore be over 13 per cent higher in 2020 than would otherwise have been the case.

Impact

In terms of its direct effect on earnings, the OBR estimates that (p201):

around ¾ million people aged 25 and over would move from receiving the NMW to the higher NLW. Just under an additional 2 million people would move from having hourly earnings between the £8.25 assumed NMW and the £9.35 assumed NLW to at least the NLW. Hourly earnings of around £9.35 would place an individual at the 16thpercentile of the earnings distribution.  Assuming that spillover effects extend to the 25th percentile implies that an addition 3½ million people will also be affected, taking the total number of people affected to around 6 million.

According to the OBR, assuming no change in employment or hours worked, the NLW would result in a 0.3 per cent increase in whole economy compensation of employees, which employers could respond to in a variety of ways, including: reducing hours; reducing jobs; replacing over 25s with younger workers; or increasing prices.  It estimates that as a result of the NLW, by 2020 there will be 60,000 fewer jobs than there would otherwise have been.

To help offset some of the employer costs associated with the NLW, the Budget document sets out that, alongside a reduction in corporation tax, the Government will increase the National Insurance contributions Employment Allowance from £2,000 to £3,000 a year (p34):

This will help all businesses and charities, particularly smaller ones, with additional wage costs. As a result, up to 90,000 employers will see their employer NICs liability reduced to zero. When introduced in 2014, the Employment Allowance offset the NICs costs of employing 4 workers full time on the NMW. The increase in the Employment Allowance will mean firms will be able to continue to employ 4 workers full time on the new NLW next year, without paying any NICs.

As to the NLW's interaction with reductions in tax credits, in its post-Budget briefing the Institute for Fiscal Studies (IFS) said (p3):

quite different groups are affected by the different policies. They have different aims and different effects. Many of the gainers from the higher wage are single childless or married to someone on higher earnings. They are outside the tax credit system altogether.

Although the IFS sees the policies as targeting different groups, they note that the more important tax credits are to a worker’s income “the less likely they are to be compensated by the higher minimum wage” and that “the increase in the minimum wage simply cannot provide full compensation for the majority of losses that will be experienced by tax credit recipients” (see p3 of the IFS post-Budget briefing).

Further reading

HM Treasury, Summer Budget 2015HC 264, July 2015

OBR, Economic and Fiscal Outlook, Cm 9088, July 2015

IFS, Summer post-Budget briefing, Paul Johnson’s opening remarks: 9 July 2015

Resolution Foundation, More than a minimum: The review of the minimum wage – Final report, March 2014

The National Minimum Wage: rates and enforcement, Commons Library Briefing SN06898, October 2014

The Living Wage, Commons Briefing Paper SN06675, June 2015

Commons Briefing papers CBP-7255

Author: Douglas Pyper

Topics: Employment, Pay

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