National living wage delivers pay rise for quarter of workers over 25

A quarter of all UK employees aged 25 or older had a pay boost in 2016 because of the national living wage as the policy’s impact rippled far beyond those directly affected.

The national living wage, a new minimum wage of £7.20 an hour for those over 25, is the biggest government intervention in the labour market since the 1990s. Introduced on April 1, it has already had a significant effect, according to analysis by the Low Pay Commission, the body monitoring its effects.

The law that brought in the living wage forced companies to raise pay for the 1.6m workers at the bottom of the ladder, or 6.7 per cent of all employees over 25. However, many employers appear to have increased the salaries of those on the next rungs, too, to maintain pay differentials between roles.

As a result, the entire bottom quarter of employees aged 25 and over, everyone on less than £9 an hour, received an above-average hourly wage increase in 2016. Some under-25s also benefited, the LPC found.

The commission has not proven a direct causal link between the national living wage and the increase in pay across the bottom quarter of the workforce. But Simon Blake, secretary to the LPC, said it was “hard to imagine another cause”. The data also fit with anecdotal evidence from employers.

The decision to adopt a sharply higher minimum wage was taken by George Osborne, former chancellor, who believed it would break the economy out of its “low-pay, low-productivity trap”. He promised to increase the rate until it reached 60 per cent of median earnings by 2020. On a like-for-like basis, this would give the UK one of the highest minimum wages in the world.

Early indications suggest employers coped with the increase from £6.70 to £7.20 an hour through lower profits and passing on some of the cost to customers. The LPC studied the inflation rates for “minimum wage goods” such as haircuts, cleaning services and menu prices in cafés and found these goods had seen bigger rises than average.

Some economists had warned that the national living wage would cost jobs by making staff too expensive to hire, but there is no sign yet of any widespread damage. Employment growth has flattened recently but some attribute this to the Brexit vote. The jobless rate is at an 11-year low of 4.8 per cent.

The LPC found employment and hours had fallen in some low-paying sectors such as cleaning and social care, but increased strongly in others including textiles and employment agencies. However, it warned that it was still too soon to draw firm conclusions about the impact on employment.

Many employers say they coped this year but worry about how to manage the increases pencilled in between now and 2020. Low-pay sectors such as hospitality and agriculture rely heavily on EU migrant workers and fear they will lose access to this pool of labour after Brexit.