As promised in their election manifesto, the Labour Government has now published a new remit for the Low Pay Commission. For the first time, this asks the LPC to take into account the cost of living when setting the National Living Wage and is the first concrete step the Government has taken to implement its ambitious plan to “make work pay” (see our earlier blog here for more details).
Since the National Minimum Wage was launched 25 years ago, the LPC has been asked to focus on labour market conditions when recommending the annual NMW rates. That said, a significant change of emphasis took place in 2016 with the launch of the National Living Wage, then a new top rate for workers aged 25 or over. This age threshold been progressively lowered and now stands at 21 years.
The launch of NLW – not to be confused with the voluntary “real” living wage which has always taken into the cost of living into account – reflected the previous Government’s aim for the top rate of the NMW to rise to 60% of median earnings by 2020. This top rate now stands at £11.44 per hour, equivalent to over 66% of median earnings. That is not far short of the real living wage for workers outside London, currently £12 per hour, though still considerably lower than the hourly London rate of £13.15.
It seems likely that the Government’s new remit will lead to a further narrowing of the gap between the NLW and the real living wage. But that doesn’t mean that labour market conditions will be ignored. The new approach is summarised in the Secretary of State’s written statement to Parliament as follows:
“We are ambitious in developing a path towards a genuine living wage, but we know that this path must be backed by evidence and consistent with delivering inclusive growth for workers and businesses.”
This brings us to the second major change in the Government’s new remit for the LPC: to continue to narrow the gap between the NLW and the NMW rate for 18 to 20 year olds, “taking steps year by year in order to achieve a single adult rate”. The Government plans to stay with the separate rates for youth workers and apprentices.
It is this further squeezing of the gap between the NLW and the current rate for 18 to 20 years olds (currently £8.60 and hour) which is likely to have the most immediate impact on employers who retain wage differentials between this group of workers and older staff. Longer term, labour market conditions permitting, all employers will need to adapt to a further rise in real terms of the minimum rates they are legally required to pay their workers.
As in previous years, the LPC will announce the proposed new rates in October. If the Government accepts them, they will take effect in April 2025.
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