The National Minimum Wage Is A Remarkable Success Story – Where Next To Tackle Inequality?

Twenty years since the minimum wage came into effect, the policy has stood the test of time – increasing the wage floor could one way to further tackle in-work poverty
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The National Minimum Wage, which came into effect 20 years ago today, has been a remarkable success story. It has largely eliminated extreme low pay and confounded sceptics who warned it would kill jobs. Crucially, it has stood the test of time, achieving a lasting political consensus.

Whereas in the 1990s the Conservatives vehemently opposed a minimum wage, today’s Conservative government has significantly increased the wage floor by introducing the National Living Wage - a new higher minimum wage for workers aged 25 and over. As with the introduction of the Minimum Wage, initial evidence suggests this has increased wages for the lowest paid, with a minimal impact on employment. Indeed, the employment rate has never been higher.

Two decades on however, it is worth considering where next for the minimum wage. The Chancellor recently announced a review of international evidence on the impact of minimum wages, ahead of planned increases to the National Living Wage. Labour has committed to going further by raising the minimum wage to the value of the real Living Wage – which is calculated based on the cost of living – and extending it to workers aged 20 and over.

Increasing the wage floor could be part of the solution to tackling in-work poverty. There is good evidence that both the introduction of the National Minimum Wage, and later the National Living Wage, led to rapid increases in earnings for the lowest paid, with a particularly positive impact for women and part time workers.

But we need to be realistic about what the minimum wage can achieve alone. While the wage floor has increased in recent years, so too has the number of people in work and in poverty. This is partly because a freeze on in-work benefits has reduced the generosity of the system for low paid workers. Many workers who received a pay rise due to the National Living Wage, lost more as a result of the welfare freeze. Even if we went further and introduced a mandatory Living Wage, this alone would not eliminate in-work poverty. To do so, we would need to ensure our social security system provides enough support for those who are unable to work full time, or who face higher living costs.

We should also be clear-eyed about the potential risks of a higher wage floor. While evidence suggests the National Living Wage has not reduced employment, further rapid increases in the wage floor may do so, particularly for younger workers.

Increasing the wage floor could be part of the solution to boosting stagnant productivity. While the traditional argument has been that we can only justify increases in the minimum wage if productivity grows, some are turning this argument on its head by arguing that raising the wage floor could help drive up productivity, by encouraging employers to invest.

We would also need to think about how the state would need to respond to a higher wage floor; to seize on opportunities and mitigate risks. A higher wage floor would require additional investment in several areas. First, there are direct costs. Paying a real Living Wage in social care, which is heavily reliant on public funding, would require nearly £500million of additional public investment. There would be indirect costs too. A higher wage floor would necessitate a greater focus on – and investment in – adult skills, and a considered industrial strategy to boost productivity in low pay sectors.

But while increasing the wage floor may present costs for government, there could also be significant fiscal and economic benefits. A higher wage floor could mean higher tax revenue and lesser cost in subsidising low pay through in-work benefits. A higher wage floor could also boost the economy, as low-paid workers are likely to spend an increase in income, stimulating demand.

While the National Living Wage has led to many workers receiving a pay rise, it has also led to a greater number paid the legal minimum. Any further rise may see even more bunching around the wage floor. So we should think about how we can support in-work progression to help people move on and up. And alongside a higher wage floor, we should think about other ways to boost incomes and tackle excessive inequality, such as a greater role for trade unions in negotiating pay at a firm and/or sectoral level.

We should also consider whether we should go beyond a ‘national’ minimum wage, by allowing regions and nations the ability to set a higher wage floor, as many American states do. May 2020 will see mayoral elections across the country; so should these mayors have the power to set a higher wage floor that works for their region and better reflects the cost of living?

Finally, we need to think about enforcement. The Low Pay Commission has found that up to one in five minimum wage workers – numbering as many as 580,000 people – may be paid less than they are legally entitled. An increase in the wage floor might lead to an increase in avoidance, so this would need to be tackled.

So – many happy returns to the Minimum Wage. We look forward to seeing what the next 20 years have in store.

Joe Dromey is Deputy Director of Research and Development at Learning and Work Institute

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