Future of national minimum wage

A sensible national minimum wage policy can boost pay without harming unemployment, and without large offsetting declines in working hours or non-wage benefits, according to a new discussion paper from the Resolution Foundation think-tank. The paper's authors review the lessons learned since the national minimum wage was introduced in the UK fifteen years ago, and look at its future role in tackling low pay.

Key points

  • The UK national minimum wage (NMW) has evolved from a 'bold and experimental' intervention into a permanent and generally uncontroversial policy tool. The Low Pay Commission, which recommends the NMW rate, has won widespread support, with its decisions endorsed by a solid academic consensus. All mainstream political parties back the NMW, and public support remains exceptionally strong.
  • But whereas extreme, exploitative, low pay has been nearly abolished, one in five workers still earn below £7.49 an hour (two thirds of median pay) – just £13,600 a year for working full time, and too little to afford a basic standard of living. This proportion has risen steadily over time and is markedly higher in the UK than in comparable economies.
  • Low pay has become a more worrying and apparently more structural challenge in recent years. It is becoming clear that it will not be solved through a 'light touch' approach of pursuing growth and investing in skills. The lower half of the labour market simply is not creating higher-quality jobs in the way economists once anticipated.
  • The costs to the state of pay below the 'living wage' (defined as the wage needed for a minimum standard of living – £7.45 an hour in 2013) now amount to more than £2 billion a year in in-work benefits and foregone tax revenues.
  • A more assertive effort is needed to tackle low pay at its source, rebalancing the responsibilities of employers and the state – rather than trying to compensate for a lack of wage growth through rising benefit spending.
  • The UK has so far stressed a simple approach, in which the NMW is relatively isolated from broader labour market institutions. This has helped enforcement and communication: on the other hand, the UK NMW has a narrower impact than minimum wages in some other countries. In some sectors the NMW now risks becoming the going rate for entry-level staff, rather than putting upward pressure on the many employers who could afford to pay more.

The discussion paper is intended to set the scene for a new project by the Resolution Foundation over the coming months. An expert panel of leading labour market economists and policy experts will ask whether there are practical ways in which the NMW and LPC can be strengthened – while not jeopardising the success achieved to date.

: James Plunkett and Alex Hurrell, Fifteen Years Later: A Discussion Paper on the Future of the UK National Minimum Wage and Low Pay Commission, Resolution Foundation

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