The government accepts minimum wage rate recommendations
The Low Pay Commission today welcomed the Government’s acceptance of its recommendations for the rates of the minimum wage affecting workers under 25 and apprentices to apply from 1 October 2016 - including:
its first recommendation for the effective new minimum wage for 21-24 year olds, where the Government agreed that it should increase by 3.7 per cent to £6.95 an hour.
an increase in the Youth Development Rate, affecting 18-20 year olds, of 4.7 per cent to £5.55 an hour.
an increase in the 16-17 Year Old Rate of 3.4 per cent to £4.00 an hour.
an increase in the Apprentice Rate of 3 per cent to £3.40 an hour.
For workers aged 25 and over, the Government is introducing the £7.20 National Living Wage - in effect a fifth minimum wage rate - from 1 April 2016. The LPC will make recommendations this Autumn on the rate of the National Living Wage to apply from April 2017, bearing in mind the Government’s ambition for the rate to reach 60 per cent of median earnings by 2020, subject to sustained economic growth. It will continue to advise on the other rates on its previous basis: protecting as many low-paid workers as possible without damaging jobs or the economy.
The key focus for these recommendations was the position of 21-24 year olds because - as a consequence of the introduction of the National Living Wage - this group effectively becomes a new age band within the minimum wage (the previous adult rate - applicable to workers 21 and over - now only affects these workers).
Commenting on the above recommendation, LPC Chair David Norgrove said:
Establishing a new pay floor for 21-24 year olds raises important issues of principle. On the one hand, we heard concerns that a lower rate for this group compared to workers aged 25 and above would be unfair, difficult to use in the workplace, and lead to firms substituting younger for older workers. But we also received evidence that a level set near to the National Living Wage could price 21-24 year olds out of employment, and make it harder for firms to adjust to higher pay costs.
In reaching a view, we bore in mind that Government limited the National Living Wage to workers aged 25 and over because younger workers are more exposed to the employment risks of a high minimum wage. Critically also, the LPC’s objective for workers under 25 is to recommend rates that should not reduce employment (unlike for the National Living Wage, where our role is to advise the Government on a path where some consequences for jobs have been accepted).
Unemployment rates for 21-24 year olds are twice as high as those for 25-30 year olds and the ‘bite’ already the highest of any age group. However, 21-24 year olds have seen falling unemployment rates and pay growth twice as fast as for workers aged 25 and above. Our recommended increase balanced these considerations, delivering a higher increase than last year in both cash and percentage terms. It means both the real and relative value of the minimum wage for 21-24 year olds is likely to reach its highest ever level.
Our recommendation is made against the backdrop of forecasts and evidence from the Government predicting solid growth in the economy, employment and earnings. Should economic and pay performance prove weaker than anticipated, we will take this into account in future recommendations”.
Notes to Editors
The National Minimum Wage is the UK’s pay floor – designed to protect low-paid workers without significantly adversely affecting employment or the economy. The Low Pay Commission is an independent body made up of employers, trade unions and experts whose role is to advise the Government on the minimum wage. It makes recommendations based on a careful review of evidence including: in-house economic analysis; wide consultation with stakeholders; independent commissioned research; and a programme of front-line visits to employers and workers across the UK.
The Government has laid in Parliament and we have published today our 17th Report. We also publish the accompanying letter
(PDF, 94.8KB, 4 pages)
to the Secretary of State for Business, Innovation and Skills. These set out a detailed review of the evidence on which our recommendations are based as well as preliminary views on the National Living Wage and the LPC’s likely future approach to it.
There are currently (to end March 2016) four rates of the minimum wage – the adult rate, applicable to workers aged 21 and over, the Youth Development Rate, applicable to 18-20 year olds, the 16-17 Year Old Rate and the Apprentice Rate. From April 2016, workers aged 25 and over will be entitled to a new fifth rate – the National Living Wage. The introduction means that the existing adult rate will in future only apply to 21-24 year olds. The focus of the recommendations the Government has accepted today is the rates other than the National Living Wage where we have advised on the levels to apply from October 2016.
Unlike in previous years, the new rates are set to last for six months only (from 1 October 2016 to 31 March 2017). This reflects a change in the minimum wage calendar. The National Living Wage was introduced on a different cycle to the other rates – changing in April rather than October. Following a review, the Government has concluded that the rates for all workers should be aligned in April next year. In a new remit for the LPC, published today, it has asked the LPC to report in the Autumn on the level of all the rates to apply in April 2017 including the National Living Wage and new rates for the minimum wages discussed here.
The National Living Wage has some differences to the rates for workers under 25 and apprentices. In particular, it is subject to a 2020 target. The Government’s ambition is that the value of the National Living Wage relative to average earnings - or bite - should increase to reach 60 per cent of median earnings by 2020 “subject to sustained economic growth”. Analysis in July 2015 by the Office for Budget Responsibility estimated that as a consequence of the introduction of the National Living Wage there will be 20,000-120,000 fewer jobs by 2020 than there otherwise would have been, albeit the wider economy will in the meantime gain 1.1 million jobs overall. Recommendations on the other rates will continue to be made with a view to avoiding any job losses.
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.
As well as its recommendation for the rates, the Low Pay Commission has also recommended an increase of 65 pence in the accommodation offset to £6.00. The offset is the one benefit-in-kind that can count towards the minimum wage. This is the maximum daily sum employers who provide accommodation can deduct towards those costs.
Workers under 25 years old and apprentices are likely to be about a fifth of the total cohort on minimum wages after April 2016, a proportion that will fall over time if the National Living Wage increases in value towards 2020 faster than the adult and youth rates. In absolute numbers, there are just over 430,000 NMW workers under 25 and minimum wage apprentices.