Backslide Or Double Down - How Should The Prime Minister Handle The National Living Wage?

07/09/2016 08:36
ASSOCIATED PRESS

Theresa May has only been in her new job for a couple of months but she's already put her stamp on the government. The most obvious break from the previous administration has been the change of personnel. But while the previous Chancellor and his allies are no longer around the Cabinet table, it may be that one of his flagship policies, the National Living Wage (NLW), plays a central role in her One Nation strategy. An important decision on its future now looms.
The plan as set out by George Osborne at the Summer Budget last year was for the NLW to reach around £9 by 2020. At the time, business opposition was markedly more measured than the furore surrounding the National Minimum Wage in the late 1990s.

But as with many things, the referendum and Theresa May becoming Prime Minister have reopened the debate, and a number of trade bodies are calling for it to be increased at a slower rate. Expect more of this in the run-up to a crucial meeting of the Low Pay Commission in October and the government's response around the Autumn Statement.

From the other side, opposition MPs, possibly scarred by such a brazen raid on Labour's territory, have responded by launching an arms race on an already extremely ambitious policy - calling for the minimum wage to be even higher. New Resolution Foundation analysis today suggests tacking in either direction is misguided as it overlooks the flexibility already built into the policy.

In the eyes of many, £9 in 2020 is the goal. But the Treasury has always been clear that their target for 2020 was a wage floor worth 60% of what the typical person aged 25 or over earns. This means that if the wages of those in the middle grow more slowly, so too will the National Living Wage. Using the independent forecasts compiled by HMT in August, weaker wage growth that economists now expect in the wake of the referendum result means the rate is on track to reach £8.70, rather than the £9 forecast in March.

But what would happen if the trade bodies got their way and we saw backsliding on the National Living Wage? There are two scenarios we can explore. First, it could rise at a similar pace to that seen post-2008 for the minimum wage. If this were to occur over the next four years, we would expect a full-time earner on the NLW to be approximately £1,000 worse off relative to the current government plans.

A second, more severe scenario would be one in which it simply grows in line with typical pay. This would mean the hit rises to roughly £1,500. Either scenario would obviously put a large dent in the pay packets of low-paid workers. Another important consideration is that with inflation projections higher too, the real-terms value of the rate - what it would be worth in today's prices - is also set to be lower.

Together, this means the National Living Wage could be worth somewhat less than what had been expected when it was launched and more manageable for employers. But this shouldn't detract from the major step forward on low pay the policy represents - or the challenge some employers in the lowest-paying sectors will still face.

Instead, the Prime Minister should stick to her guns and ignore calls from either side on what the value of the NLW should be - and quickly turn to the far more challenging task of actually implementing it. After all, the task of tackling Britain's huge low pay challenge isn't any less pressing as a result of the referendum. The announcement of the National Living Wage will always be associated with George Osborne. But if its implementation is managed skilfully, it could rank high among Theresa May's lasting achievements.

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