For many people, the big news out of November’s Budget – a massive downgrade in the outlook for productivity growth – will sound a bit abstract. The productivity downgrade has made the Chancellor’s task of balancing the books harder. But its impact on pay – with average annual earnings lowered by £1,000 – mean it’s even more daunting for families in terms of balancing household budgets. And that’s especially true for Britain’s lowest earners.
For workers on the minimum wage, the past two years have brought strong real-terms wage growth. The National Living Wage (NLW) – the higher minimum wage for those aged 25+ – has taken the wage floor from £6.50 an hour in April 2015 to £7.50 today. The Chancellor today announced it would increase next year to £7.83 – a healthy 4.4 per cent wage rise.
But ongoing weakness in overall pay is dampening the good news for those on the minimum wage. Two years ago, the NLW was expected to be £8.20 in April 2018 – 37p higher than the figure announced today.
Looking further ahead, George Osborne’s expectation of a £9 minimum wage by 2020 looks set to be delayed by two years, with the NLW only reaching that level in 2022. Incredibly, the NLW in 2020 is course to be 74p an hour lower than forecast two years ago – and that’s before you account for higher inflation eroding its value even further.
So what explains this fall? Unlike the minimum wage – which was set every year based on negotiations among representatives from employers, employees and academia on Low Pay Commission – the NLW employs a far more mechanistic approach.
The NLW is set on a trajectory to reach 60 per cent of what the typical employee aged 25+ earns an hour by 2020, with some tolerance of fewer people being in work. And that’s where Britain’s terrible productivity record comes in. Productivity isn’t the only determinant of pay growth. But it is a key one. In the OBR’s model, there’s a direct feed-through from today’s grimmer picture to pay. And if typical wages are rising more slowly than previously forecast, then so too will the NLW.
Putting those figures into pounds and pence, our analysis using today’s figures show that the pre-tax pay of a NLW earner working full-time will be over £1,400 a year lower in 2020 than originally forecast when it was announced in 2015.
Some might argue that the Chancellor should plough on with the £9 target regardless. But that would be a huge gamble considering the NLW is already a serious ratcheting up of ambition for the UK’s wage floor. So far the National Living Wage has been a huge success, dispelling a lot of the warnings about job losses that greeted its announcement. But a minimum wage can go too high and start to hurt the very people it aims to help.
For those on the NLW, the Budget’s news may be disappointing but they’re still set for a bumper few years of pay growth. And if we can finally crack our chronic productivity problem, those pay rises could get rosier still.
Conor D’Arcy is senior policy analyst at the Resolution Foundation.