The quiet success of the higher minimum wage

Effective and popular, now’s the time to build on the wage with a full low pay strategy

May 23, 2018
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Bad policies get the most attention. Whole books have been written on government interventions that achieved the exact opposite of what they intended, or eventually delivered at miles over budget. That’s why the UK’s minimum wage—effective, popular and cheap—feels like such a rare thing.

The latest evidence confirms the minimum wage’s continued success. Since 2016, the National Living Wage (NLW)—the higher minimum wage for those aged 25 and over—has brought the legal wage floor from £6.70 to £7.83. Thanks to this, the hourly pay growth of low earners has far outstripped that of workers further up the pay scale.

The perennial concern with the minimum wage is that if its value rises too high, employers cannot afford it, the lowest earners are let go, and end up worse off than before. Reassuringly, the evidence to date suggests no such harm has been done by the NLW, with employment continuing to reach record highs. While no single reaction from companies seems to have dominated, there is some evidence that firms in two of the most affected sectors—restaurants and hotels—have passed some of the increased wage bill onto consumers in the form of price rises. The ideal response from a policymaker’s point of view would be if firms responded by enhancing their skills or equipping workers with output-boosting technology, thereby becoming more productive. While it is early days, there’s little to suggest the NLW has provided this spark in the UK’s low-paying sectors.

It is for the most part good news so far. But all policies have their limit. On current projections, even when the NLW is fully rolled out in 2020, approximately four million employees will still be in low pay. Going higher with the NLW would be both a risk—at some point a high minimum wage will damage employment—and overlook the issues that affect many low-paid workers beyond their hourly wage. A minimum wage can’t be the entirety of a low pay strategy.

What else should policymakers be thinking about? First, the number of hours worked is key. A higher hourly rate won’t translate into higher living standards if low-paid employees are working fewer hours. Although this can take many forms, atypical contracts like zero-hours contracts and agency working can mean workers don’t know how much they’ll be bringing home from week to week. The government is consulting on the Taylor Review’s recommendations on boosting job quality, but a right to guaranteed hours and greater notice of shifts would act as a welcome complement to a higher minimum wage.

Second is the kinds of jobs that are available in low-paying sectors. The chance to progress isn’t just a middle-class concern. Our focus groups with low earners have repeatedly highlighted the importance of opportunities to develop and learn. This is proving difficult for many low earners. Even in retail, where “shop floor to top floor” stories are common, just 4 per cent of sales assistants move into supervisory or managerial positions in retail within five years. More needs to be done to encourage progression, especially for women, with a greater focus on job design and the mainstreaming of senior positions offered on a part-time or flexible basis.

Third, there’s the question of firms. The dominance of a few big firms is cause for concern from the consumer’s point of view, and fears of companies in the supply chain are raised any time a merger is mooted. But what it means for employees is rarely dwelt on. Low-paid workers are more likely than higher earners to be concentrated in just a handful of firms. This dominance tilts power over pay and terms and conditions further towards employers, who know that for a low-skilled employee in an area with few other hiring businesses, there is little other choice.

On current form, the UK’s minimum wage seems unlikely to feature in a rogues’ gallery of policy disasters. But without a proper low pay strategy with tools that go beyond a wage floor, policymakers are unlikely to deliver the change that low-paid workers badly need.