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IFS - Parties’ minimum wage plans would double or treble number of private sector employees whose wages are directly set from Whitehall

The share of employees directly affected by the minimum wage would double under Conservatives’ plans and treble under Labour’s according to new research published by IFS.

Conservative plans to raise the National Living Wage to two thirds of the median by 2024, and extend it to 21- to 24-year-olds, would bring one in six employees within scope, increasing the numbers affected by 2½ million (from 1.9 million today).

Labour plans to introduce a £10 minimum for all aged 16 and over would mean more than a quarter of all employees’ wages being directly set by the minimum, with an additional 4.6 million employees aged 21 and over directly affected, taking the total to 6½ million.

Because the lowest wages tend to be found in the private sector, the impact here will be even greater. Labour’s policy would mean nearly 30% of private sector employees’ wages would be set directly from Whitehall, while Conservative policy would set 20% of private sector wages.

Low-wage regions would also be more affected. Around 30% of employees in the North East, North West, Yorkshire and the Humber, East and West Midlands, and Wales would be on the minimum wage under Labour’s plans.

The National Living Wage (NLW) currently applies to employees aged 25 and over and stands at £8.21 an hour. It's set to rise to around £8.53 in 2020 and £9.68 in 2024 under current policy. The Conservatives have pledged to extend the NLW to 21- to 24-year-olds and raise it to two thirds of median hourly wages, to around £10.39, by 2024. Labour plans to introduce a £10 minimum wage in 2020 for all employees aged 16 and over.

Other findings include:

  • Both parties’ plans would take the minimum wage to a historical high and give the UK one of the highest minimum wages among developed countries.
  • Among employees aged 21 and over, Labour’s plans would mean minimum wages would directly affect one third of women, nearly half of part-time employees and two-thirds of those working in hospitality.
  • The Conservatives’ plans would see the share of 21- to 24-year-old employees affected by the minimum wage rise from 9% today to 36% by 2024.
  • Under Labour policy, 49% of employees aged 21–24, 82% of those aged 18–20 and 94% of those aged 16–17 would be affected by the minimum wage. There are particular risks to having very high minimum wages for young employees, many of whom may struggle to find employment at those wages.
  • The direct benefits from minimum wage increases would mostly go to middle-income households. Only 17% of minimum-wage workers today live in the poorest fifth of households and only 19% are in households in relative income poverty, partly because low-paid workers often live with higher earners. Many of those who do live in low-income households would see part of their gains clawed back through reduced benefit entitlements.

The evidence suggests that minimum wage rises so far have been a success in that they have substantially boosted earnings without harming employment. There may therefore be a case for further rises as part of a strategy to tackle low pay. But a careful process is required for implementing those rises. There will be some level beyond which a higher minimum wage will harm the employment prospects of the low-paid. Previous evidence suggests we have not got there yet, but it does not tell us where the tipping point is. The risk of sudden large jumps in the minimum wage is that the tipping point is passed before the evidence comes in, leaving policymakers unable to respond in time to limit the damage.

Xiaowei Xu, a Research Economist at IFS and an author of the report, said:

"Recent minimum wage rises have boosted earnings and there is little evidence that they have damaged employment, so there may well be scope for further increases. But both the Conservatives’ and Labour’s plans would take us into uncharted waters. That calls for a careful and incremental process to ensure that, if the employment prospects of the low-paid do start to be impacted, policymakers can change course before it is too late.

"We should not be setting minimum wages via a political bidding war. If due consideration is not given to the balancing act involved, the risks to the very people the policy is intended to help may be quite severe."

The future path of minimum wages

Original article link: https://www.ifs.org.uk/publications/14573

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