Skip to content

The National Living Wage - some good news, some big questions

The announcement of a new National Living Wage was one of the biggest headlines in the July Budget – and it’s rarely been out of the news since. From apocalyptic predictions of mass job losses to cautious welcomes, the comments have come thick and fast.

At Nesta, we’ve supported the idea of a living wage for several years, as part of our wider work on inclusive economic growth. We’re proud to have become an accredited Living Wage employer in February this year.

The National Living Wage, which will be introduced in April 2016, differs from the existing Living Wage in several important ways (see below). In fact, it might be more accurate to describe the new measure as an increased minimum wage, rather than a living wage.

The National Living Wage is compulsory, nationwide, for over 24s, and based on earnings rather than the cost of living. It might be more accurate to describe it as an increased minimum wage.

Quite good news for low paid workers, especially women and younger workers

And this increase is good news for low paid workers, albeit in a fairly limited way. Recent research by the Resolution Foundation suggests that around 6 million workers will get a pay rise as a result of the National Living Wage – especially as higher rates kick in towards the end of the decade. This won’t be huge – even for the biggest winners, people currently working full-time for minimum wage, individual take-home pay will go up by less than £20 a week.

Most of the people who gain directly will actually work part-time, as they're more likely to be earning the minimum wage. Since women workers are more likely to work part-time and on low pay, they're also more likely to gain from the National Living Wage. The same is true for workers between 25 and 30 (remember the minimum wage still applies to under 25s). On the other hand, because they work fewer hours, they’ll gain less. And since lower paid workers will lose 65p of Universal Credit for every additional £1 they earn, their net gain is even less – around £8 a week on average by 2020. Still, every little helps.

An uncertain picture for the wider economy

These figures also help to put some of the more extreme claims about the wider economic impact of the National Living Wage into perspective. Similar fears about unemployment greeted the introduction of the National Minimum Wage in 1999 – and in fact, research has consistently found that it had a positive impact on household incomes, with no evidence of negative effects on businesses.

The National Living Wage will be higher than the National Minimum Wage – but not by much (the NMW was projected to rise to £7 in 2016). The Office for Budget Responsibility (OBR) has estimated that this may lead to the loss of around 60,000 jobs (equivalent to a 0.2% increase in the unemployment rate). This figure assumes that firms will manage increased costs by cutting jobs, increasing prices and reducing profits, in that order.

On the other hand, the Chancellor seems to be betting that increased wages will force firms to increase productivity – the amount produced per worker. If employers have to pay higher wages, the logic goes, then they’ll have to make sure they’re getting their money’s worth. Unfortunately, in Nesta's research into the UK's productivity gap, we haven’t found evidence of this kind of link between pay and productivity.

As the OBR assessment concludes, “these results are subject to considerable uncertainty” – economist-speak for “wait and see”.

Three big challenges - care, progression and poorer regions

Our work at Nesta suggests that the National Living Wage poses particular challenges in three important areas.

Nesta is supporting a significant body of innovations in care – for older people and people living with long-term health conditions through our Health Lab, and on innovation in childcare. Across the care sector, individual wages are low, but the wage bill represents a very high proportion of total costs – so the National Living Wage will have a significant impact on employers. Unlike the firms in the OBR’s model, care providers have limited room to cut jobs, because the work is relatively ‘high-touch’ and time-intensive – fewer staff means fewer clients, which means less income. They also have limited room to increase prices, as much of their income comes from the government. Little wonder that industry bodies from the UK Homecare Association to the National Day Nurseries Association are queuing up to warn of impending crisis. While Nesta has called for the government to fund universal childcare, we recognise that more money is unlikely to be enough on its own. We urgently need new models of care – from cradle to grave – that can face this perfect storm of increasing demand and increasing costs.

Most of Nesta’s work on innovation in jobs has focused on the key group who don’t benefit from increased wages - people who haven’t got a job at all. As we’ve seen, the impact of the National Living Wage on jobseekers and entry-level vacancies isn’t at all clear. However, it does raise sharper questions about the next step - progression out of low pay. The UK already has a problem here, with 80% of people who got minimum wage jobs in the 2000s still on low pay a decade later. Pay rates tend to cluster around the bottom, and this is likely to get worse if the wage floor is raised - more occupations will become National Living Wage only.

Research by the Joseph Rowntree Foundation suggests that the National Living Wage will help move single workers on low pay towards the (cost-of-living based) Living Wage over the next 5 years. However, for low paid parents, cuts to child benefit and tax credits also announced in the Budget outweigh these gains, and they will actually be net losers. Again, this underlines the need for new approaches to care and flexible working that benefit poorer households. And if we really want to make a difference to our low pay economy, finding innovative ways to boost productivity at the bottom end of the labour market and help low-paid workers develop their careers are critical priorities, alongside a wage floor.

Nesta is also developing a body of work focused on cities and regions – and this geographic ‘place-based’ lens suggests another area to watch. Because low pay is concentrated in particular parts of the UK, the National Living Wage will have a much greater impact – for better or worse – in those areas. For example, the Resolution Foundation estimates that twice as many workers will see a pay rise in Yorkshire and the Humber (28%) as in London (14%). Whether this translates into sudden local booms as more money flows into these places, or the equally sudden collapse of cash-strapped small businesses, depends on the actions taken by government and bigger firms, both national and regional, to manage this change and promote local innovation.

Beyond wages?

Finally, our work on the collaborative economy has led us to think more about the emerging future of work – how people are paid for the work they do, and the extent to which they will have formal ‘jobs’ at all in the future. Whether through digital platforms that link people to small ‘tasks’ or ‘gigs’, sharing resources to reduce the cost of living, or operating in multiple digital currencies, these trends could all lead to people selling their skills and time in very different ways.

Some argue that this will lead to greater flexibility and autonomy while still enabling a decent standard of living. Others fear a future of precarious work, at the mercy of an algorithm dividing out ill-paid tasks. It may be that tomorrow’s workers, including those 18-24 year olds still on the minimum wage, will live in a world beyond wages altogether – living, minimum or otherwise.

The National Living Wage and the Living Wage - What's the difference?

  • It’s compulsory – the existing Living Wage is a voluntary initiative promoted by a coalition of charities and businesses

  • It’s lower – £7.20 an hour initially, against the current Living Wage of £7.85 an hour

  • It’s nationwide – recognising the additional costs of living in the capital, the Living Wage is set at £9.15 an hour in London

  • It’s only for people over 24 – the National Minimum Wage will continue to apply to workers aged 18-24

  • It’s based (informally) on earnings – the Living Wage is calculated according to the cost of living

photo credit: Pound Coins via Flickr, CC BY 2.0

Author

Dan Jones

Dan Jones

Dan Jones

Director, Innovation Lab

Dan was a Director in the Innovation Lab where he oversaw practical programme work on public and social innovation, with a particular focus on inclusion and mobilising citizen engage...

View profile