THE BLOG
03/09/2015 05:34 BST | Updated 02/09/2016 06:59 BST

The National Living Wage Is a Bold Step Forward on Low Pay - But It Won't Make the Living Standards Challenge Disappear

The 'National Living Wage' - a top-up to the minimum wage for workers aged 25 and over - was the rabbit pulled from the Chancellor's Red Box at the Summer Budget back in July. But beyond the headline figures published alongside it, it was hard to be sure who the main beneficiaries would be. A new report by the Resolution Foundation breaks down just who is set to gain, where and by how much.

The 'National Living Wage' - a top-up to the minimum wage for workers aged 25 and over - was the rabbit pulled from the Chancellor's Red Box at the Summer Budget back in July. But beyond the headline figures published alongside it, it was hard to be sure who the main beneficiaries would be. A new report by the Resolution Foundation breaks down just who is set to gain, where and by how much. While it's clear that big claims made for the policy are not an illusion - chunks of working Britain will get a pay rise - the higher wage floor won't magically solve all the concerns around living standards.

Across the whole of the UK, six million employees - nearly one in every four workers - stand to see their wages increase in 2020 as a result of the National Living Wage (NLW). That doesn't mean all six million of those workers will be on the same wage. Past experience suggests that when the wage floor rises the effect ripples up the pay ladder. We expect that 2.8million of the six million affected are likely to already be earning above the NLW.

Those gains won't be shared evenly. Women are the main beneficiaries, with three in every ten female workers having their pay topped up, compared with fewer than one in five men. This is because women are much more likely to be in low paid roles. The same applies to part-time workers, 40% of whom are set to benefit, compared with 16% of those full time.

The widest variation emerging from this report is regional, with employees outside of London the big winners. While in some parts of the country more than one in four are set to benefit - 28% of employees in Yorkshire and the Humber for example - in London it's 14%. While that's still a sizeable section of the workforce, the policy will have much more bite in the Midlands and the North. This will obviously be welcomed by employees but some firms in the most-affected areas will undoubtedly feel the added pressure.

Those are the gross gains i.e. before taxes and benefits. If we want to understand what the NLW will mean for families and their living standards, we need to turn our attention to net household income gains. On this issue, several competing and often confusing claims have been made. The evidence lets you tell some very different stories about the NLW's influence.

Looking first at the very lowest income households, they aren't set to gain greatly from the NLW. This is because members of these households are not likely to be in work. Efforts to put more money in the pockets of these families will be more reliant on policies related to unemployment or inactivity.

So the NLW is not a measure to help the very poorest households. But what about those across the bottom half of the income distribution? Here the picture is more mixed. Although the majority of the gross gains (54%) go to households in the bottom half, their share falls to 45% on a net basis, with lower-middle income households pocketing less of their pay rise. Rather than revealing any trickery, this is an inevitable consequence of how the tax and benefit system interacts with pay increases. As well as the additional tax and National Insurance these families will have to pay, middle-income households are also more likely to be claiming in-work support. Our analysis focuses on 2020 and assumes Universal Credit (UC) has been fully rolled out. This means that many of these families with modest incomes will lose 65p in every additional £1 of earnings as UC is withdrawn. In its current format, UC is not set up to maximise the potentially large positive role it could play in making work pay.

Before it's introduced, we need to be pragmatic about what the National Living Wage can and can't achieve. As a wage floor, there's only so much it can do to help support the incomes of low to middle income families. But that's why it's so crucial that the framing around it doesn't present the gains from the NLW as a replacement for the cuts to in-work support announced in the Summer Budget. Our report concludes that the NLW will only mitigate about 15% of the losses families in the bottom half will feel thanks to those net changes. The NLW is a bold step forward on low pay but we shouldn't think that this will make the living standards challenge disappear.

Conor D'Arcy is a policy analyst at the Resolution Foundation