Policy effects of the National Living Wage on low pay

Author: Stephen Clarke and Conor D'Arcy
Institution: Resolution Foundation
Type of case study: Research

About the research

Resolution Foundation produced their sixth annual report on the prevalence of Low Pay in Britain, using the latest data available (2015) to map out the scale of low pay and the groups most affected. The report shows how pay has changed over recent decades and looks at what the coming years might hold, particularly given the result of the UK’s EU Referendum and the introduction of the National Living Wage (NLW). The NLW was introduced in April 2016 and is set to rise relative to typical pay through to 2020, which will boost the pay of millions of lower paid workers and represents the most significant step forward in the battle against low pay since introducing the National Minimum Wage (NMW) in 1999. However, the report concludes that any suggestions of a return to pre-crisis pay levels remains some way off. The EU referendum is set to have far-reaching consequences across the economy and adds a level of uncertainty to the future of the NMW. 

Resolution Foundation used a combination of data sources, including the Living Costs and Food Survey (LCF) and Annual Survey of Hours and Earnings (ASHE) in the Office for National Statistics (ONS) Secure Research Service (SRS) to model how low pay could evolve up to 2020. The report focuses on: the latest developments in the labour market; the relationship between the NLW and low pay; and the impact of the EU referendum on low pay. The report also provides descriptive statistics on key findings, trends and future models.

Overall, Resolution Foundation’s analysis of the most recent wage growth projections estimated the NLW would roughly reach around £8.60 by 2020, not quite reaching the £9 originally discussed by politicians. Despite this, the NLW will reduce the number of Britons who are low paid from the 2015 figure of 5.7 million to 4.9 million by 2020, which represents the first structural drop in low pay in decades. While this is clearly a major step forward, the NLW will not eliminate low pay entirely however, but will reduce the depth of low pay for those benefiting from the policy who do remain below the low pay threshold.

The findings in this report have gained a wide reach, with media coverage of the findings. The report was launched in Westminster with a keynote speech delivered by Margot James, Minister for Small Business, Consumers and Corporate Responsibility in the Department for Business, Energy and Industrial Strategy (BEIS), who has responsibility for the NLW, which was followed by a debate from a panel of experts, on the action required to take on Britain’s low pay challenge.

Methodology

Resolution Foundation used hourly data across full-time and part-time employees from three sources; Family Expenditure Survey (FES) 1968 to 1981 (now known as the Living Costs and Food Survey); New Earnings Survey Panel Data (NESPD) 1975 to 2013 from the UK Data Service; and the Annual Survey of Hours and Earnings (ASHE) 1997 to 2015. As the data supplied within the ASHE data source is the largest and provides the greatest level of accuracy, the FES and NESPD data was adjusted in line with these figures. The size gap between various sources was considered in the years in which they overlap and inflate or deflate over the remaining period accordingly. 

When calculating low pay, data cleaning was carried out that used an hourly pay variable that excludes overtime and shift premia. In addition, jobs with missing or zero hourly pay data, or jobs affected by absence, were excluded when calculating the prevalence of low pay. The resulting proportions were then applied to the total number of employees in order to report the number of low paid people, which was measured by ONS’s Labour Force Survey (LFS).

Employees earning up to 1% above their age-specific NMW/NLW was captured to calculate the number and proportion of employees ‘on’ NMW/NLW. A 1% buffer was applied to capture those employees who are paid a few pence above the NMW by their employers, so that their businesses are not considered ‘minimum wage businesses’. In practice, their wages are strongly determined by movement to the NMW and are likely guaranteed a pay increase due to the NMW growing at least 1% each year since 2001. Apprentices that are paid more than their legal minimum but less than the usual minimum for their age group are counted as ‘on’ NMW/NLW. 

Research Findings

Headline research findings were:

  • One in five employees (21% or 5.7 million individuals) were low paid in Great Britain in 2015. There has been little change in this proportion over the past 20 years.
  • More than one in five employees (23%, or 6.3 million individuals) were paid less than the voluntary Living Wage in 2015. This proportion remains unchanged since 2014.
  • One in twenty employees (6%, or 1.5 million individuals) were on the minimum wage. This proportion has been increasing steadily since the early 2000s.
  • Those most likely to be low paid include women, the young, part-time and temporary employees, those in lower-skilled occupations, and those employed in the hospitality, retail and care sectors. 

The model produced by The Resolution Foundation, finds that the NLW will reduce the prevalence of low pay from 21% in 2015 to 17% in 2020, which is its lowest level since 1980. However, the NLW is also likely to lead to a significant bunching of the pay distribution. In the years following the introduction of the minimum wage in 1999, the share of employees paid only their age-specific legal minimum was around 1 in 50. In 2014 this increases to around 1 in 20 and by 2020, with the introduction and growth of the NLW, it is expected that more than 1 in 7 will be paid at or only just above the legal minimum. This increases the need for employers and government to provide personal progression opportunities to get people beyond the wage floor. 

Broader living standards for those on low and middle incomes will be determined by a combination of real wage growth for all, employment levels, and changes in welfare support. In light of the slow pay growth projected as a result of the EU referendum, the NLW is no longer on track to reach £9 an hour in 2020 as had been projected at the 2016 Budget. Resolution Foundation estimate that the NLW will reach roughly £8.60 by 2020 (although this number will continue to shift as time moves on). The report recommends that sticking to an arbitrary target of £9 could be damaging if the underlying economic conditions cannot support this.

Impact of the research and findings for policy

Britain has one of the highest proportions of low paid workers in any advance developed economy, and this has barely changed in the past 20 years. The report concludes that the NLW will transform the countries’ low pay landscape and boost the pay of around six million workers and also brings huge challenges for employers. This report has reached a wide audience, with interest from government, local authorities, and various instances of media coverage.

At an event in Westminster to launch this report, Margot James, delivered a keynote speech outlining the new government’s strategy to help those on low pay earn more today and progress out of low pay. The Minister stated that “we want to build on the legacy of the minimum wage and make sure that people feel supported and paid for their hard work, and it’s with help from organisations like the Resolution Foundation that we understand our impact on people’s lives.” 

Read the Report

Low Pay Britain 2016: http://www.resolutionfoundation.org/publications/low-pay-britain-2016/

Publications and outputs

The Equality Trust, The National Shame of Low Pay: https://www.equalitytrust.org.uk/national-shame-low-pay

Resolution Foundation event, Pay Day? Tackling Britain’s longstanding low pay problem: http://www.resolutionfoundation.org/events/pay-day-tackling-britains-longstanding-low-pay-problems/

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