Minimum wages | Pearson qualifications

The 'national living wage'

17 April 2019

In April 1999 the National Minimum Wage (NMW) was born – a £3.60 wage floor for everyone aged 23 and over. Up to 7m people — 30 per cent of the workforce — now benefit directly or indirectly from this policy as it celebrates its 20th anniversary.

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Minimum wages are included in Theme 3 of both our GCE Economics A and Economics B specifications. The Financial Times has featured a number of articles in the last two months which relate to the minimum wage and by subscribing to FT4schools you and your students would be able to access these and delve more deeply into this subject.

Some of the points raised in the articles in the Financial Times dated 1 February 2019, 13 March 2019, 26 March 2019, 31 March 2019 and 14 April 2019 are included in the short summary below.

The adult rate set in 1999 has since risen faster than average earnings, with the main rate for employees over 25, now termed the “national living wage”, set at £8.21. Increases in this wage floor have taken place particularly rapidly since 2015 — when Chancellor Osborne set a target for it to reach 60 per cent of median income by 2020.

In 1999, there were dire warnings from opposition politicians of over 1 million job losses, but so far there is little evidence of negative effects on jobs, according to the Low Pay Commission, which advises government on the pace at which it can rise without adverse effect on the economy. The scare stories of job losses have not come true although some low-pay work may have been pushed underground.

The NLW has led to higher wages for the lowest paid, but companies have not reduced jobs or hours. Instead, they have reduced pay disparities between junior and senior workers, reduced staff perks, increased prices for customers or accepted lower margins.

A higher minimum wage in the UK has promoted some automation but so far, substitution of capital for labour has been limited. Its supporters argue that a higher wage floor could prompt British companies to invest in new technology and help lift the country’s poor productivity growth. Low wages incentivise companies to adopt inefficient production techniques and hold off on investing in new machinery or training workers.

HMRC Minimum Wage is in charge of enforcing pay regulations. The sectors which are the biggest offenders are agriculture, shellfish production, nail bars, car washes, some areas of construction, social care and the hotel and hospitality industries. Trade unions and campaigners have warned that labour regulation enforcement is lax and under resourced. This means that there is a relatively low risk of being caught.

The Chancellor’s recent Spring Statement outlined targets that would make Britain’s minimum wage the highest, in relative terms, in the developed world. Chancellor Hammond’s stated aim of “ending low pay” would, on OECD definitions, require a new minimum goal from 2020 of reaching 66 per cent of the median although boosting minimum wages alone is inadequate to achieve acceptable living standards for all, not least because of the cuts to in-work benefits.

The Chancellor has asked Arindrajit Dube, a US economist specialising in low pay, to conduct a review of the international experience. Prof Dube has researched the experience of San Francisco, Seattle and other US cities that have introduced local minimum wages. This might address a UK concern that there is a gap between cities, where employers seem to be coping with higher wage bills, and rural areas where employers struggle.

The Living Wage Foundation, a charity, has urged employers to pay a “living wage” of £10.55 an hour in London and £9 elsewhere in the UK but reservations have been expressed by trade unions who fear that regional wages might make regional inequality (and hence geographical immobility) worse.

Possible discussion points

• Why might some low-pay work have been pushed underground?
• Why might a higher minimum wage encourage firms to replace workers with machines?
• Should the national living wage be higher in London than it is in Manchester?


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