The LPC is required to make recommendations on the pace of increase in the National Living Wage such that it reaches 60 per cent of typical earnings by 2020, subject to sustained economic growth. The key challenge this year has been uncertainty in relation to the economic outlook following the decision to leave the EU, and whether we needed to go more slowly than our previous intention of straight line increases in the relative value of the rate.
The 4.2 per cent increase keeps the National Living Wage on course for the 2020 goal. The recommendation was a finely balanced decision. On the one hand, it is a significant increase at a time of average pay growth of around 2 per cent and should help protect low-paid workers from the higher inflation likely to result from the depreciation of sterling. On the other hand, it is lower than we previously projected and should help manage risks to employment.
Looking ahead, the cash figure for 2020 is inevitably very uncertain. However, using October 2016 data, we estimate 60 per cent of median earnings will be £8.61, within a range of £8.50 to £8.73. This is down from £9.16 in the spring’.
The Low Pay Commission is an independent body made up of employers, trade unions and experts whose role is to advise the Government on minimum wages. The National Living Wage is the legally binding pay floor for workers aged 25 and over. The other minimum wage rates comprise: the 21-24 Year Old Rate, the 18-20 Year Old Rate and the 16-17 Year Old Rate.
Our remit gives us different requirements in relation to the NLW than for the four other bands of the minimum wage. For the NLW we are asked to make recommendations on the pace of increase towards a target: an ‘ambition…that it should continue to increase to reach 60 per cent of median earnings by 2020, subject to sustained economic growth’. For the other rates we are asked to ‘help as many low-paid workers as possible without damaging their employment prospects’.
Our full recommendations for April 2017 are set out in our 18th report, laid in Parliament today, and letter to the Secretary of State for Business, Energy and Industrial Strategy, found here.
We said in our last report in February that, in the absence of economic shocks or other strong evidence, we thought that the default for the NLW would be a straight line rolling path to the 60 per cent target - spreading our (annually updated) estimate of the increase in relative value needed to hit the target evenly over the remaining years to 2020. Our recommendation today reflects this approach, but the cash level is somewhat lower than expected in the spring when we projected £7.64 for April 2017. This reflects automatic adjustment in the level of the NLW target in view of weaker pay growth and forecast pay growth.
The new rate will increase pay for typical minimum wage workers (26 hours) by nearly £300 per year rising to nearly £600 for full-time minimum wage workers. An increase of 4.2 per cent is, after the introduction of the National Living Wage in April, the largest increase in the main rate of the minimum wage since 2006.
We estimate that the £7.50 rate will raise coverage - the number of workers paid at or below the NLW - by up to 390,000, from 1.6 million jobs (6.7 per cent of the cohort) in April 2016 to up to 2.0 million (8.3 per cent) in April 2017. Looking at progress towards the 60 per cent target, we estimate that the £7.50 rate will represent an increase in the relative value of the NLW for workers aged 25 and over of 1.1 percentage points, up from 55.8 per cent of the value of typical earnings (October 2016) to 56.8 per cent (October 2017).
Rates for workers under 25 and apprentices are lower than the NLW in reflection of lower average earnings and higher unemployment rates. International evidence also suggests that younger workers are more exposed to employment risks arising from the pay floor than older workers. Unlike the NLW (where some consequences for employment has been accepted by the Government), the LPC’s remit requires us to set the other rates as high as possible without causing damage to jobs and hours. Additional considerations this year included: uncertainty in the economy, with any slowdown likely to affect younger workers first, with serious consequences for future employment and earnings; and a new calendar that meant younger workers were getting a minimum wage six months after their last one rather than the usual twelve. The rates for under-25s and apprentices have previously changed on October 1st. In 2017, they will move to an April calendar, increasing at the same time as the National Living Wage, which was introduced to align with the tax year.
We were also asked to provide an indicative rate for the National Living Wage from April 2018. This is inevitably uncertain because pay forecasts are likely to change, but using those available in October we project that the on-course rate will lie in a range of £7.80-£7.91. Using its forecasts published today, the OBR estimates a figure of £7.90. For 2020, the LPC’s projected rate for 60 per cent of median earnings is £8.61, within a range of £8.50 to £8.73. Using its forecasts published today, the OBR estimates a slightly higher figure, of £8.80.
The National Living Wage is different from the UK Living Wage and the London Living Wage. Differences include that: the UK Living Wage and the London Living Wage are voluntary pay benchmarks that employers can sign up to if they wish, not legally binding requirements; the hourly rate of the UK Living Wage and London Living Wage is based on an attempt to measure need, whereas the National Living Wage is based on a target relationship between its level and average pay; the UK Living Wage and London Living Wage apply to workers aged 18 and over, the National Living Wage to workers aged 25 and over. The Low Pay Commission has no role in the UK Living Wage or the London Living Wage.
- The members of the Low Pay Commission comprise:
- Sir David Norgrove, Chair
- Prof. Sarah Brown, Professor of Economics at the University of Sheffield
- Kay Carberry, TUC
- Neil Carberry, Director of Employment and Skills, CBI
- Clare Chapman, Non-Executive Director & Remuneration Committee Chair at Kingfisher PLC
- Prof. Richard Dickens, Professor of Economics, Sussex University
- Peter Donaldson, Managing Director, D5 Consulting Ltd
- John Hannett, General Secretary, Usdaw
- Brian Strutton, General Secretary, BALPA
- Our recommendations comprise: