National Living Wage (NLW) Introduction

Today’s National Living Wage introduction means a welcome pay rise for over 4 million low-paid people this year, with women and part-time workers most likely to benefit. 

“That’s hugely good news on the back of the biggest squeeze on living standards on record, but of course such an ambitious policy is not risk-free. It’s vital that government works closely with businesses to get the implementation right as part of a wider move to reduce our Britain’s reliance on low pay, low productivity ways of working.

“A higher minimum wage can’t be expected to tackle Britain’s chronic low pay problem alone. We now need to focus on the big challenge of ensuring more employers have strong pay and career ladders. That in the end is how people can escape low pay altogether.”  

What is the National Living Wage (NLW)?

It is a higher minimum wage for workers aged 25 and over. This will apply from 1 April and will start at £7.20 per hour. Rather than an arbitrary figure, £7.20 is intended to equal 55 per cent of the typical (median) hourly pay of those aged 25 and over. The government’s ambition is for the NLW to rise to 60 per cent on that measure by 2020, which is currently projected to be £9.

Who benefits?

• * 4.5 million employees will benefit in 2016, rising to 6 million in 2020.
• * Of the 6 million employees – 23 per cent of all employees in Britain – 3.2 million workers are expected to be brought up to the NLW, while a further 2.8 million workers who already earn above the NLW will benefit as employers seek to maintain pay differentials between staff.
• * The average direct gain is £1,210, while the average indirect ‘spillover’ gain is £240.

Gender and age

• * Three-in-ten (29 per cent) female employees are set to be benefit from the NLW, compared to 18 per cent of men. Women will account for around 60 per cent of the 6 million beneficiaries.
• * 25-30 year olds are expected to make up nearly one-in-five of those affected in 2020.
• * 44 per cent of those aged 66 and over are set to benefit.

Geography

• * More than one-in-four employees in the Midlands, Wales and Yorkshire and the Humber are set to benefit, compared to just 14 per cent of workers in London.
• * Almost three in ten employees across the Sheffield City region will be affected by the NLW – more than any other City region in the UK.
• * Among smaller cities, the most affected are Norwich, Swansea and Hull (all 31 per cent).
• * Across local authority areas, Torridge in Devon is Britain’s leading National Living Wage ‘hotspot’ – where the highest proportion of workers will benefit.

Industry

• * 46 per cent of those affected work in three industries; retail, hospitality and admin & support services.
• * In hospitality, close to half (48 per cent) of all employees will be affected by the NLW.
• * 1.4 million retail workers are set to benefit from the NLW, more than any other industry.

Wage bills

• * The total wage bill across Britain is set to rise by £4.5bn (0.6 per cent) as a result of the NLW.
• * Hospitality is set to experience the biggest increase its wage bill (+3.4 per cent).
• * Smaller firms are likely to feel it the most – microfirms will experience a 1.5 per cent increase in wage bills, compared to 0.7 per cent for larger firms.

Employer responses

• * Almost half of all employers said they would be affected by the NLW to same extent.
• * The most popular main response to the NLW among employers was raising productivity (30 per cent). Small employers were more likely to say they would absorb costs through lower profits.
• * Relatively few employers said they would slow recruitment (15 per cent), reduce hours (9 per cent), or hire more workers under 25 (8 per cent).

A brief history of the National Minimum Wage (NMW)

The NMW was introduced in 1999. At the time some commentators warned that up to two million jobs could be at risk. The Low Pay Commission have described ‘four phases’ of the NMW.

The introductory phase saw the NMW brought in at a cautiously low rate (£3.60) and then raised slowly in order to monitor any adverse effects on employment. A smaller than expected number of jobs were affected, with roughly 0.4m covered by the adult rate in 2001.

The NMW then increased rapidly, particularly between 2002 and 2006 when it rose by 27 per cent across the period. The pace slowed in the run up to the crash but remained above inflation.

A third phase saw the NMW fall in real terms between 2008 and 2013, primarily due to smaller nominal increases but also higher inflation. Despite this, the number of workers paid at the wage floor grew steadily as wages stagnated, meaning 1m jobs were at the NMW.

The fourth phase immediately prior to the introduction of the NLW saw a return to real-terms growth, with the NMW increasing by 3 per cent in 2014 and 2015. In 2015, 1.1m jobs were estimated to be paid at the NMW (£6.70).

The NMW – now the legal wage floor for those aged 21-24 – is set to rise to £6.95 in October 2016. It will increase again in April 2017 with all minimum wage rates rising in April from that point onward.

The OBR has projected the path of the NLW to 2020, taking into account expected wage growth for those at the median. This will change as new wage data and forecasts are updated but they project that it will equal £7.60 in 2017, £8.05 in 2018, £8.50 in 2019 and £9 in 2020.