Why are 1.8 million people getting a pay rise?

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The UK’s lowest-paid workers are about to get a pay rise – the result of an increase in the minimum wage on Monday.

Since it was introduced in 1999, the minimum wage has risen much faster than average pay. The government is considering what to do after 2020 and further rises are possible.

What happens affects everyone from bar staff to waiters to nursery nurses and sales assistants.

So, is there a limit to how much they could be paid? And what are the benefits and risks of paying more?

How high is the minimum wage?

The UK has one of the world’s highest minimum wages.

For workers aged 25 and over, it is now known as the National Living Wage and rises to £8.21 an hour when they return to work on 1 April.

This is 59% of the hourly rate of £14 per hour earned by those on the median (middle) wage.

The minimum wage has increased by 50% over the past 20 years, after adjusting for inflation, compared with 15% for those on an average wage.

It is now paid to 1.6 million people aged 25 and over, up from only 700,000 in 1999. This is because the minimum wage is now a greater proportion of average pay.

Lower minimum wage rates for about 230,000 under-25s range from £4.35 to £7.70 and have not risen as fast.

Only four industrialised countries – France, Portugal, New Zealand and Australia – had a higher minimum hourly wage (as a proportion of average salaries) than the UK in 2017, the last year for which figures are available.

Some wealthy countries have much lower minimum wages, including the US, Spain and Japan.

However, many countries – including Italy and Sweden – are not included because they do not have a minimum wage.

Who benefits from a higher minimum wage?

The obvious reason for having a higher minimum wage is to boost the pay of those with low hourly pay.

In the UK, this often includes cleaners, hairdressers, carers and kitchen assistants.

More than six out of 10 people on the minimum wage work part-time. A similar number are women, and almost nine out of 10 work in the private sector.

Boosting their wages may also help those on slightly more pay: employers often have to maintain different wages between different jobs.

However, while raising the minimum wage is often seen as a way to reduce poverty, it is not that simple.

Only one in five of those on the lowest wages lives in the UK’s poorest households.

This may be because many people on low incomes have a partner who earns more – raising their household income to a higher level.

Many of the very poorest people are not affected by the minimum wage. This may be because they are out of work, or because they are self-employed.

And on its own, a higher minimum wage will not necessarily lift many people out of poverty. This is particularly true if they have a high cost of living, for example because of having children or high housing costs.

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What are the risks of a higher minimum wage?

Given that minimum wages benefit low-paid workers, why not keep on raising them?

First, unless higher wages make workers more productive, they come at a cost.

That could mean increasing prices paid by consumers, cutting profits for companies, or cutting wages for other workers.

Second, there is a risk that higher minimum wages might lead employers to give fewer people jobs, or to cut hours.

But, so far, there is little evidence that higher minimum wages have reduced employment levels.

This might be because for many firms it is still profitable to hire these workers, despite paying higher salaries.

Minimum wage rates from 1 April

  • National Living Wage – for 25-year-olds and over: £8.21 an hour
  • Minimum wage – 21 to 24-year-olds: £7.70 an hour
  • Minimum wage – 18 to 20-year-olds: £6.15 an hour
  • Minimum wage – 16 to 17-year-olds: £4.35 an hour
  • Apprentice rate: £3.90 an hour
  • The charity the Living Wage Foundation says the wage level needed to “meet the costs of living” is £9 across the UK and £10.55 in London

However, at some point, if raised high enough, firms would lose money by employing someone on a high minimum wage.

The trouble is that we do not know exactly how high these salaries can go before they lead to a reduction in the number of jobs available.

And, with few countries offering higher minimum wages than the UK, it is difficult to look for the answer overseas.

For governments wanting to increase wages for those on the lowest pay, the best approach may be to do things bit by bit.

Monitoring what happens will be essential to avoid unwanted consequences.

About this piece

This analysis piece was commissioned by the BBC from an expert working for an outside organisation.

Jonathan Cribb is a senior research economist at the Institute for Fiscal Studies, which describes itself as an independent research institute that aims to inform public debate on economics.

More details about its work can be found here and on Twitter.

Edited by Duncan Walker

Read more: https://www.bbc.co.uk/news/business-47699571

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