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Ian Brinkley
Economic Advisor
Ian Brinkley

The Future of the Minimum Wage

Authors: Ian Brinkley Ian Brinkley

28 February 2014

The Low Pay Commission’s recommendation of a 3% rise in the NMW was a significant change in direction. Ministers had given the clearest possible  signal that they would welcome a real terms increase in the NMW and given the strengthening labour market it would have been a much bigger surprise if the Commission had recommended a below inflation increase.

The view that the Chancellor supports a £7 minimum wage is widely believed but that is not quite what he said. He noted that the NMW had fallen in value since 2008 when compared against prices and indicated that in the future it could increase in real terms on the back of the economic recovery.

Of much more substance and significant was the supplementary remit supplied by the Secretary of State for Business, Innovation and Skills in September 2013. This asked the Commission to spell out what conditions would be necessary for the NMW to increase at a faster rate than it had in the past, and how government policies that impacted on labour costs and take home pay might influence the Commission’s decisions. The Commission has usually tried to give employers some idea of what the next rise might look like, but this is the first time that Ministers have specifically asked for a longer term view.

The response from the Commission summarised in their letter and in the executive summary of their report – the full report will be published shortly – makes several important points:

Firstly, the Commission could find no single indicator that would be of much use in signalling the long term path for the national minimum wage. This is also the conclusion of the Bank of England which has recently reviewed its “forward guidance” on future interest rates and moved away from the unemployment rate to a basket of indicators.

Secondly, the Commission stresses the importance of productivity growth especially in low paid sectors. As the Commission Chair says in his formal letter to the Secretary of State “higher productivity is in the longer term the only real answer to low pay”.  The Commission notes that the government policies such as training and education and other measures are important especially in low pay industries.

Thirdly, the Commission signals the start of a new phase: “The Commission aims to recommend progressive real increases in the value of the minimum wage, restoring and then surpassing its previous highest level…2014 will mark the start of a new phase of bigger increases than in recent years in the work of the Commission. This may be less dramatic  than it sounds. The Commission is anticipating a sustained recovery and a return to more “normal” times where average earnings growth outpaces prices. Under these circumstances if it kept the NMW in line with earnings growth, it would still deliver a real terms increase when measured against prices.

More significant would be if the Commission gets back on the “escalator” – in other words, for the NMW to increase faster than average earnings. This is harder to do. As the Commission notes, the NMW has not fallen in value against average earnings and its “bite” has increased since 2007 to an historic high. The Chair’s letter, however, gives an implicit support for Living Wage campaigns – noting that a quarter of low paid workers are employed outside the low pay industries and that “Many employers may be able to raise their wages without damage to their businesses. We welcome the current pressures on such employers to raise the pay of the lowest paid.

Low pay will remain a political issue in the run up to the next election. The future of the Low Pay Commission, the NMW and the Living Wage will all be up for discussion. But as the Commission makes clear, an effective strategy for increasing low pay must also look at a wide range of policy measures to improve productivity across the low pay sectors and the impact of government policies at the sectoral level, especially public procurement and regulation. In the next few months we will set out some our ideas on the key elements in such a strategy.

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