The newly formed government has announced two significant changes to the process of determining the minimum wage in the United Kingdom. Jonathan Reynolds, the new Secretary of State for Business, has issued a directive to the Low Pay Commission (LPC) to revise their approach and consider the cost of living when setting the minimum wage and national living wage rates.
This move is likely to blur the distinction between the two rates, which has long been a source of dissatisfaction within the labor movement. The minimum wage, introduced by the previous Labour government in 1999, is legally enforceable. On the other hand, the national living wage, introduced by the Conservatives in 2016, is determined based on the basic cost of living and is not legally enforceable. Employers have the discretion to decide whether or not to pay it.
The second change announced by the government today is that the LPC has been directed to reduce the gap between the minimum wage for 18 to 20-year-olds and the national living wage. The ultimate goal is for 18 to 20-year-olds, who currently receive the national minimum wage of £8.60 per hour, to eventually receive the national living wage, which is currently set at £11.44 per hour.
These measures have been met with approval from unions, including the Trades Union Congress (TUC). General Secretary Paul Nowak stated, “Hard work should be rewarded for all. These are significant initial steps towards making the minimum wage a true living wage and will positively impact millions of workers.” He also noted that a recent poll showed that seven in ten voters from all political parties support the removal of lower rates for young workers.
However, there are potential risks associated with these changes, which the government appears to have acknowledged. Notably, the LPC has been instructed to gradually reduce the age bands rather than abolish them immediately. This may be a precautionary measure to avoid a sudden increase in costs for businesses, particularly in industries such as retail and hospitality where a large portion of employees earn the minimum wage. This was exemplified today when Greggs, the UK’s largest bakery chain, announced that it had recently raised the prices of some of its popular items in response to higher wage costs. The company, which employs 32,000 people, currently pays all of its workers above the national living wage.
Roisin Currie, CEO of Greggs, stated, “The most significant cost inflation right now is the increase in the national living wage, and we want to ensure that our employees receive appropriate wage increases. This puts pressure on the cost increases within our business.” Similarly, Kate Nicholls, CEO of UK Hospitality, warned of the potential consequences of equalizing pay rates for younger and older workers in an opinion piece for business publisher and data provider William Reed. She stated, “The biggest concern with changes to employment is affordability, particularly when it comes to wage costs and proposals to eliminate age bands. The increases in minimum wage rates this year have been extremely challenging for businesses to absorb, on top of other cost increases in various areas of operation.”
There is also a risk that if the gap between pay rates for 18 to 20-year-olds and older workers is reduced too rapidly, younger workers could be negatively affected. The rationale for having a lower minimum wage for younger workers has been to prevent employers from being deterred from hiring less experienced individuals compared to their older counterparts. If given the choice between an 18 to 20-year-old with limited experience and an older worker with several years of relevant experience, most employers would likely opt for the latter if both were to be paid the national living wage.
In March of this year, the LPC itself recommended reducing the gap between youth and adult rates of the national living wage, citing an increase in the disparity in recent years. The TUC has also published research highlighting that in countries like Australia, Belgium, and Ireland, 18-20-year-olds earn 83%, 85%, and 90% respectively of the adult minimum wage, whereas in Germany, New Zealand, and France, they receive the same rate as older workers.
The Bank of England’s Monetary Policy Committee will be closely monitoring these developments. In their last meeting on June 19th, they noted that the Bank’s network of regional agents had observed the impact of the nearly 10% rise in the main rate of the national living wage in April. They stated, “Business contacts in consumer-facing sectors that were most affected by the national living wage generally reported higher settlements.” Therefore, the gradual elimination of age bands is likely an effort to mitigate the risk of a sudden increase in inflation.
However, unions are likely to hold the government accountable for progress on this issue if they feel that it is not being addressed.
