HR & Management

Published

The impact of a pay rise for 1.4m of Britain’s lowest-paid workers

6 Mins

Since the introduction of the National Minimum Wage (NMW) in 1999, the adult NMW has increased by more than 80 per cent – a far greater rate than average earnings growth or price inflation over the same period.

Last month the Low Pay Commission (LPC), an independent body which monitors, evaluates and reviews the NMW rates and make recommendations on the levels that should apply, recommended an increased adult rate of £6.70 to take effect from October 2015. 

The LPC’s proposal

The government has stated that “its aim is to have NMW rates that help as many low paid workers as possible, whilst making sure that we do not damage their employment prospects”.

The LPC, in its proposal to ministers last month, recommended that from October 2015 the NMW for adults (anyone aged 21 or over) should rise by 20p to £6.70 per hour. It also recommended an increase in the hourly rate for the development rate (18-20 year olds) by 27p to £5.30; the youth rate (16-17 year olds) by 8p to £3.87; and the apprentice rate by 7p to £2.80. 

In advance of this year’s Budget, the government announced on 17 March 2015 that it would implement the LPC’s recommendation and increase the adult hourly NMW by 20p to £6.70 from 1 October 2015. This increase is the largest real-term increase in the NMW for seven years and means that the NMW will have increased by more than 6 per cent over the previous two years. The LPC’s recommended increases in the NMW for 16-17 year olds and 18-20 year olds have also been accepted by the government, but it has gone even further then the LPC suggested in relation to the apprentice rate, as this will rise by 20 per cent (or 57p) to £3.30 per hour.

In the Budget delivered on 18 March 2015, chancellor George Osborne confirmed that the adult NMW was on course to be over £8 by the end of the decade. Osborne also stated: “It’s the oldest rule of economic policy. It’s the lowest paid who suffer most when the economy fails and it’s the lowest paid who benefit when you turn that economy around.”

Who will this affect?

According to the LPC, in April 2014 there were 1.4m minimum wage jobs in the UK. In other words, 5.3 per cent of the workforce in the UK in April 2014 was paid below or within 5p of the NMW. Micro and small firms accounted for a fifth (21 per cent) of the total workforce but two fifths (37 per cent) of all NMW jobs. Large firms account for two thirds (65 per cent) of the total workforce but under half of the NMW jobs (48 per cent). 

Those working in the hospitality, retail and cleaning industries account for 52 per cent of all NMW jobs, with women, migrants, ethnic minorities and those with disabilities also being disproportionately represented in terms of the number of NMW workers.   

Vince Cable, the business secretary, has said of the proposed increase to the adult rate that “this would represent an annual pay rise of £416 for a full-time worker on the minimum wage”.

Read the the other employment law features in our series:

What cost to businesses?

Since 1999 the LPC has commissioned around 140 research projects focusing on the impact of the NMW on jobs and the economy. The LPC, through their research projects, has found that increases to NMW has had little negative impact on overall employment or the economy. Firms appeared to have responded by: adjusting pay structures; reducing non-wage costs; making small reductions in hours; increasing productivity; increasing some prices; and some squeezing profits (although insufficient to lead to an increase in business failure). 

That said, clearly any increase in pay represents an additional cost to a business with increased costs more likely to impact adversely on small businesses. When businesses plan their approach to the NMW (and any other pay increases for that matter), each will need to factor in the knock-on additional employer tax, national insurance and pension contributions that will follow. 

A further, unexpected, consequence of having to increase the salary of those earning below the NMW might be the expectation of colleagues earning slightly more than the NMW to also receive some form of pay rise. It is estimated that 30 per cent of employers use the NMW as a reference point in wage setting and negotiating pay settlements.

Finally, it is imperative that businesses maintain all the right records as employers which are found to be paying workers below the NMW now face increased financial penalties and the prospect of being publicly named and shamed, as some employers have already found out.

Ian Wasserman is an associate at Bircham Dyson Bell.

Share this story

5 things UK startups can learn from SXSW
Budget 2015 confirms that British SMEs are a step ahead of the game
Send this to a friend