A competition among political parties to promise a more attractive minimum or “living” wage is new to British elections. The National Minimum Wage (NMW) is now nearly 20 years old, but Labour in power was always cautious about its level. The Conservatives, meanwhile, initially opposed it.
But a burgeoning living wage movement and a perceived “living standards crisis” help explain a new bidding war. In the 2015 election, Labour promised to raise the NMW to £8 an hour by 2020; trumped by the Conservatives’ £9 in the subsequent budget, and now Labour’s £10 manifesto pledge.
Since the minimum wage was £6.50 just two years ago, all these promises, if followed through, will have a substantial impact in changing Britain’s low pay culture. But what is the difference between the two main party promises now on offer? And as policies, are they sustainable or reckless?
The most obvious difference in the manifesto pledges is that Labour promises £10 by 2020 (a 33% increase from 2017) and the Conservatives promise 60% of median pay which is projected to be £8.75 by 2020. This is a 17% increase, and less than the £9 pledged in 2015, because median pay is forecast to grow more slowly than previously expected.
But two crucial factors beyond the crude rate promised will influence how the “living wage” debate plays out in the next few years: the basis for setting and raising it, and the ages of workers to whom it applies.
How it’s set
In setting the rate, the Conservatives have opted to peg the National Living Wage (NLW – a rebranded NMW for over-25s) to average pay. On the one hand, this belies its branding as a “living” wage. Unlike the voluntary, accredited Living Wage which is derived from our research at Loughborough University and based on what people actually need for a minimum living standard, the Conservatives’ NLW has no reference to living costs.
But the commitment to raise the minimum from 52% to 60% of median pay – and to keep it there – does mark a bold departure in sharing the fruits of future growth. Indeed, pegging incomes (such as pensions or benefits) to rising earnings has often been a more favourable formula than pegging them to living costs, since earnings rose steadily in real terms.
However, times have changed. In the past few years, living costs have sometimes risen faster than earnings, making an earnings link less beneficial than it once was. Moreover, the “real” living wage espoused by Labour can also rise if the government cuts the help it gives working families, for example through tax credits. This is what George Osborne did when announcing the Conservative Party’s NLW in its 2015 budget, which would have caused families a net loss. So a real living wage requires employers to make good on any cuts in state support.
But what will be the effect of much higher minimum wages on employment? In my new book with Laura Valadez on the living wage, I show that evidence from the UK and US overwhelmingly contradicts the economic prediction that higher minimum wages automatically mean fewer jobs. Yet we also point out that both countries have been highly cautious in setting the minimum wage, and are about to become much less so – New York and California are planning phased increases to US$15, over twice the federal minimum. In the UK, a statutory minimum of £9 or £10 will have a vastly different impact on labour markets from the voluntary adoption of a real living wage by the 3,000 employers who have so far felt able to do so.
Whether it’s tied to age
The most radical aspect of the Labour version, and potentially the most risky in terms of employment, is that it would apply from age 18, unlike the Conservatives’ from age 25. Someone who is 20, who in 2017 can be paid £5.60 per hour, would be guaranteed £10 three years later – if they were still being offered jobs.
Our book shows how in Portugal, ending minimum wage youth rates was followed by a substantial “displacement” effect, with fewer jobs going to less experienced workers. This effect is also predicted in the UK. On the other hand, under Conservative plans, a growing gap between the minimum for 24- and 25-year-olds could damage job prospects for the latter, as employers in casual industries such as restaurants and hospitality dump low-paid workers on their 25th birthdays. (Early evidence shows some employers already favouring younger workers.)
In adopting greater ambitions for tackling low pay in Britain, therefore, politicians should not throw all their former caution to the winds, but look carefully at how their policies are affecting the labour market as they unfold.
Producing a formula that can contribute to higher living standards without destroying people’s job prospects requires a delicate balance. After the election, the simplicity of the manifesto promise will have to be followed by careful, evidence-based delivery if a living wage is to be sustainable.