Chancellor signals potential further increase to national living wage

Government begins consultation to eradicate low pay, as think-tank report finds the number of low-paid workers is at lowest level in almost 40 years

The government is consulting on a further increase to the national living wage – potentially to two-thirds of median earnings – in a move experts have said would raise concerns about productivity and affordability for businesses.

Speaking to BBC Radio 4’s Today Programme, chancellor Philip Hammond said the national living wage had achieved its original goal of significantly reducing low pay, and the government would now consult on “where to go next” in relation to further increases.

“We are naturally attracted to look at whether it is possible to push up [the national living wage] to 66 per cent of median earnings over a sensible time period in a way that would allow us to eliminate low pay in the UK,” Hammond said.

“But we would only do that if we can be confident that we can do it without damaging the employment prospects of people with lower skills.”

The national living wage is expected to reach 60 per cent of median earnings when it is increased next year.

Hammond’s comments come off the back of a new report from think-tank The Resolution Foundation, which found the number of low-paid workers in the UK has fallen to its lowest level since 1980.

The number of low-paid workers dropped by 200,000 last year, and the foundation said the implementation of the national living wage in April 2016 had “significantly” reduced low pay.

Hammond said the economy had adapted to the statutory National Minimum Wage (NMW) since its introduction in 1999, and said the government was conducting a review of other countries’ experience of raising wages to such levels.

“We cannot automatically assume that, in getting to 60 per cent of median earnings, we haven’t run into problems,” he said. 

“We could get to the next step without running into problems in the future, and everybody I talk to – trade unions, business leaders – are all enthusiastic. But they are also very clear we need to do this in a measured, cautious and well-evidenced way to make sure that we don’t inadvertently damage employment prospects.”

Hammond added government would need to support businesses in increasing their productivity as their employees’ wages rise. “Then you get a virtuous spiral where the increase in [minimum wage] provokes or incentivises improvements in productivity which in turn allow employers to pay higher wages,” he said.

“That’s the kind of virtuous relationship that we need to develop if this [the national living wage increase] is going to be done sustainably.”

The national living wage – the statutory minimum wage for those over the age of 25 – was increased to £8.21 in April. It is forecast to increase to £8.62 next year, which would put it at 60 per cent of median earnings for people aged over 25.

People under the age of 25 receive the lower National Minimum Wage, which is currently £7.70 an hour for those aged 21 to 24, £6.15 for those between 18 to 20 and £4.35 for those under 18. Apprentices are entitled to a minimum wage of £3.90.

‘Low pay’ is commonly considered to be hourly pay below two-thirds (66 per cent) of the median average across the country, which is equivalent to £8.52 an hour.

In its report, the Resolution Foundation suggested low pay could be eliminated by the mid-2020s. It said the UK “still has a significant low pay problem, but it is a problem that is getting smaller after many years of stubbornly refusing to do so”. 

But, the foundation said by setting the national living wage at two-thirds of median earnings would represent a “huge change” to the labour market. 

Speaking to People Management, Charles Cotton, senior reward and performance adviser at the CIPD, said employers will only be able to increase pay and productivity sustainably through their people working smarter – not harder. 

“The HR profession has a great opportunity to lead the advance in smarter working by helping their employers to examine the design of the organisation, jobs and work to see how performance can be enhanced,” he said.  

He advised HR professionals review their people management policies and practices – such as training, reward, diversity and inclusion – to ensure they are contributing to high performance working.

Mike Cherry, national chair of the Federation of Small Businesses, said it was “essential” that increases in the national living wage are affordable for smaller businesses.

“For some small businesses – particularly those in sectors with lower levels of pay and tight margins such as social care – wage increases do take their toll,” Cherry said.

“Firms are having to cut profitability, hold back investment and put up prices to absorb them. This review must recognise that fact.”