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Ian Brinkley
Economic Advisor
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Ian Brinkley

The Rise of the National Minimum Wage

Authors: Ian Brinkley

02 October 2014

The National Minimum Wage has just been increased to £6.50, a 3 per cent increase. But it is where it will go next that is becoming the focus of attention as the Election draws closer.

 In 2014 the Business Secretary Vince Cable asked the Low Pay Commission to set out what conditions would have to be fulfilled to allow the NMW to increase at a faster rate in the future. The Commission has in response signalled that it may be returning to the “escalator” to increase the relative value of the NMW compared with median earnings. The 2015 remit from the Secretary of State certainly gives them every encouragement to do so.

Some analysts persist in measuring the value of the NMW against the inflation rate and it is indeed true that the NMW fell behind the rate of inflation during the recession. But so did all wages. The more relevant measure is the NMW compared with the median. Here the story is much more positive. The Low Pay Commission did its job and protected some of the most vulnerable workers from the full effects of the recent increase in inflation by increasing the NMW faster than median earnings.

With inflation likely to stay low for several years, the LPC should find it possible to deliver real terms increases in the NMW measured against prices without really trying. The more important and relevant challenge is how fast to increase the NMW against wages. A recent analysis by Steve Machin and Danny Blanchflower suggested that wage growth will remain exceptionally weak until unemployment falls to very low levels. So the LPC may not need to increase the NMW much faster to deliver a higher NMW relative to the median.

The Labour Party has said that it would introduce an £8 an hour NMW target for the Low Pay Commission to be achieved by 2020, should it be elected. This is certainly within reach provided economic conditions remain favourable. The LPC increased the NMW faster than average earnings in the years before 2007. However, as we noted in our recent provocation on low pay , there are significant disadvantages as well as advantages to a future government setting the LPC an explicit  target on the NMW.

The Conservative Party has not made an explicit statement on the future of the LPC and the NMW, but it is reasonable to assume that, should it be elected, it would continue its current supportive policy towards the LPC and the NMW. The Prime Minister in his speech at the Conservative Party Conference welcomed the rise in the NMW and indicated it should rise to £7 an hour before long.

What we still need however is a more comprehensive statement from the main political parties on what a low pay strategy would look like. Whatever happens to the NMW and the LPC, it is not going to make significant inroads into the large number of jobs in the UK economy which are low paid. Similarly, while adoption of the Living Wage on a voluntary basis can be commended, it is equally unlikely to make a big impression.

As we argued in our recent paper, low pay is at heart a productivity problem, and that means a low pay strategy needs to go beyond the necessary but insufficient tools of wage floors and promoting internal progression. As our recent research report shows , a low pay strategy also needs to include industrial and innovation policies, high quality apprenticeships, adult education and skills policies and even planning policies – some studies suggest that the way the planning system works may have depressed productivity growth in retailing, for example. It would be good to think that a future government would give as much attention to raising productivity and investment in low pay sectors as successive governments have to our high tech industries.