The din of political parties outbidding each other on promises to spend more on the NHS, education, transport infrastructure and housing has echoes of pre-austerity and even pre-Thatcher times. In a less familiar but no less noisy competition, both main parties are trying to persuade voters that they are committed to raising living standards by promising a significant rise to the minimum wage. We could well see a transformative assault on low pay in the UK.
As recently as 2015, the hourly national minimum wage was just £6.50. Today, for over-25s, it is £8.21. Promising to raise and extend this national living wage, as it’s now called, the Tories have a target of £10.50 an hour, paid to all over-21s, by 2024. Labour pledges £10 for all over-16s next year. These promised increases – to up to 40% in real terms above the 2015 level – represent a striking new feature of UK politics.
The UK came late to minimum wages, with the first national minimum wage introduced only in 1999. That was 30 years after France, 65 years after the US, and around a century after Australia and New Zealand.
Labour and the unions had feared a national minimum would undermine the collective bargaining system whereby pay deals were negotiated in individual occupations and sectors. Free-market Conservatives criticised public interference in the labour market and opposed the minimum wage at its inception. Yet 20 years later, their rhetoric promises nothing less than to “end low pay altogether”.
In trying to understand this phenomenon, it is worth asking where this new politics of pay is coming from, what exactly the present promises mean, and where it is all going.
The switch to a ‘living’ wage
The national minimum wage introduced in 1999 was set at a low level designed only to tackle extreme low pay. Over the next 15 years, policies to raise this level were predominantly cautious, guided by a desire not to make hiring people unaffordable and thus reduce the number of jobs. Any increase was subject to Low Pay Commission advice on what increases were safe in these terms.
But falling real pay in the early 2010s became associated with a crisis in living standards. So the campaign for a Living Wage at a higher level than the statutory minimum started gaining political traction.
This was supported by our research at Loughborough University, which shows clearly that the national minimum wage is not enough to provide a minimum living standard that’s considered acceptable by the general public. The “real living wage” now paid voluntarily by over 5,000 accredited employers, is based on this research. Its new levels, just announced, are £10.75 in London and £9.30 outside.
After the 2015 election, the then chancellor, George Osborne, transformed the politics of minimum wages by announcing the national living wage. It brought a substantial increase in the compulsory minimum for over-25s, which moves the UK from paying an internationally below-average minimum rate to one of the world’s highest, relative to average pay.
This reversal for the Conservatives was driven by a desire to address living standards, while actually cutting public spending. The latter was proposed through cuts to tax credits paid to low-income workers, arguing that they would need these less if pay improved. These sums did not add up, and fierce criticism of tax credit cuts caused some of them to be reversed. Nonetheless, the pledge to raise minimum pay for over-25s, from about 52% of median pay in 2015 to 60% in 2020, is being kept.
Even without cuts, the policy is projected to save the Treasury money overall. Paying people more brings a boost to tax receipts and reduces tax credits through the means test. Such savings would be limited if an increased minimum were adequately followed through in more public funds for low-paid sectors such as social care (which has not happened). Nevertheless, it’s politically attractive to have a policy that makes people better off without having to raise more public money.
Be careful of politics
Of the present commitments, Labour’s £10 in 2020 pledge bears a closer resemblance to a true living wage, since it is in principle linked to our “real living wage” calculation based on living costs. The Conservatives’ targets are linked to median pay rather than living costs, rising from 60% to two thirds of the median in the coming parliament. Both versions involve bold ambitions that could bring the minimum wage at least to the level of the “real living wage” outside London.
This new willingness to raise people’s living standards, largely at the expense of employers, rests on dropping qualms about the potentially damaging effects on employment rates. Two decades of research for the Low Pay Commission, which advises the government on the minimum wage, backs this up. It shows largely negligible effects so far of the minimum wage on the number of jobs available.
The economist who reviewed this issue for the government, Arindrajit Dube, is cautiously optimistic that raising it further will not have adverse effects on jobs. But he also warns that it must be monitored in case there are.
Whichever policy is introduced involves a crucial competition between political commitment and economic realism. The louder the political promises, the harder it will become to show caution where needed. Significantly, Conservative chancellor, Sajid Javid set his £10.50 target at the latest party conference, a month before Dube’s review gave it the amber light. Shadow chancellor, John McDonnell first called for a compulsory minimum based on a “real living wage” three years ago, and has been highlighting this policy ever since.
You may expect that, as the person who leads the work used to calculate the real living wage, I would welcome unreservedly a commitment to make it compulsory. Yet just as Dube is cautious about unconditional targets from an economic perspective, I am cautious from the point of view of politics and policy.
The living wage movement has made extraordinary strides. But the biggest thing that could set it back, or even kill it, would be clear-cut evidence that it is destroying jobs. So whichever party wins the election, preventing the new national living wage from rising to damaging levels may be the single most important ingredient in permanently ending low pay in the UK.