Minimum wage: A safeguard for the low paid
This week The Living Wage Foundation announced that “the voluntary real living wage” is set to rise by 10% to support people in low-paid jobs during a time of high inflation.
Almost half a million workers in the UK (460,000) whose employers voluntarily pay the real living wage will see their hourly pay increasing at least £12 an hour, while if they work in London they will get paid an enhanced rate of £13.15 an hour to deal with the extra costs of living in the capital.
Earlier in the month the Chancellor also announced that he will follow the recommendations from the Low Pay Commission to increase the National Living Wage (NLW) to over £11 an hour from April 2024.
Coverage of Minimum Wage
The NLW is the minimum pay that a worker can be paid in the UK if they are aged 23 and over, while workers under 23 are paid the National Minimum Wage (NMW) which is slightly lower per hour. Both of them were set up by the government following recommendations from the independent Low Pay Commision.
In addition, some employers have volunteered to pay a higher rate called “The Real Living Wage” which is set by the Living Wage Foundation. But all of them are aiming to support low paid workers, especially in an era of high inflation as we are living at the moment.
The chart below shows the coverage of the NLW/NMW since 1999 when the government introduced the policy. It is interesting that between 2019 and 2022 we notice a significant decrease in the coverage of the NLW/NMW i.e. the number of people whose jobs are 'covered' by the NLW/NMW , by about 400,000; one driver is the shortages of the workers in the low pay occupations during that period which have caused employers to increase salaries to be more appealing. Such a decrease of the coverage has not previously been seen in the more than 20-year history of the policy!
However, the number of workers paid the NLW/NMW is expected to rise again in 2023 based on the projections from LCP, as in years with high increases of the NMW/NLW they notice increase in the numbers of jobs under the policy.
NLW/NMW’s impact on household income
The NLW/MNW policy seems to be one of the most successful ones that support the low paid workers and reduce wage inequality and that is despite the low productivity and the weak wage growth after the financial crisis. Although, we need to bear in mind that the impact of NLW/MNW on household income depends on the tax and benefit system.
We notice this in the following chart, where we compare the NLW increase with the ‘after tax and benefits’ income of two different types of households:
one household with a single working person working full-time at the NLW, and
a second household with two adults, one of whom works full-time at the NLW, and two children.
Prior to 2017, the after-tax/benefit increase in the NLW was lower than the pre-tax/benefit increase in the NLW for both household types. It is worth noting that, out of the two scenarios shown here, single people benefited more from the increase in NLW. This is because the couple with two children got a higher proportion of their income from benefits, which rose at a lower rate than the NLW.
But that changed in the last 2 years, with the couple with two children seeing their after tax-benefit income increasing at a similar rate to the pre-tax increases in the NLW. And that is because of policy changes in the benefit system:
In 2022 this was due to changes to the Universal Credit taper rate and work allowance, which allowed working households to keep more benefit income for a given wage rate.
In 2023, the Government decided to increase benefits by 10.1 per cent (faster than the 9.7 per cent increase in the NLW).
However these policy changes didn’t affect the single person household to the same extent, as their income was not as reliant on benefits.
Underpayment
Despite the positive impact of NMW/NLW policy, there are still challenges for the most vulnerable groups. Unfortunately, illegal underpayment of workers has persisted. In 2022, The data indicated that more than one in five workers who should be covered by the NMW were actually paid less than this rate. If we bear in mind that the employers increased wages during that period, seeing such a high rate of underpayment is appalling.
The charts below show what happens to underpaid workers from year to year. It shows whether underpaid workers have moved at, above or below the NMW in their next year of employment. Around half of the workers underpaid went on to be paid above the minimum wage the next year. Another 15-20 percent of these workers tended to be paid at the NMW rate. The remaining one-third, however, were underpaid in both years; they had not managed to escape underpayment.
And the question is why are employees not leaving bad paid jobs?
According to research from the LPC
Workers mentioned that it takes time to build job security; employment rights such as parental leave are only available after 26 weeks in a job, protection against unfair dismissal comes only after two years, and if you are working shift patterns it takes time to build new relationships to secure a stable timetable to meet your own and your family’s needs.
Many low paid jobs are related to zero-hour contracts, so the hours a worker may work depend on the relationship with their manager or other factors outside their control.
Individuals in low paid work also often depend heavily on local transport, a new job needs to have available transport links and/or shifts at hours they can manage traveling with local transport .
Last but not least, any changes in the income of individuals because of a new job may affect the amount of benefits they receive.
A phenomenon that should make us consider policies that give people a bit more security and employment rights as they may lead to more flexibility in the labour market, while at the same time supporting those in need.