What Are the Implications of the Rising National Minimum Wage and National Living Wage Rates?

What are the upcoming changes to the National Minimum Wage and the National Living Wage rates?

The Low Pay Commission (LPC) is an independent public body that annually reviews evidence on the state of the UK labour market and economy to advise the Government on the increases to the rates of the National Minimum Wage (NMW) and the National Living Wage (NLW) – the lowest required pay for those aged 21 and over. The purpose of the annual reviews of the NMW/NLW rates is to ensure sufficient pay in the lowest paying jobs, while also protecting employment prospects in those low-paid sectors.

From April 2024, the NLW and the NMW rates are set to increase to the following rates, which is fully in line with the LPC’s recommendations and NIESR’s research that helped to shape them:

Drawing on data on pay and forecasts for wage growth, the LPC expect this recommendation for the NLW rate to meet the Government’s target of two-thirds of median hourly pay for those aged 21 and over by 2024.

Another key change this year is that the NLW eligibility has been extended to workers aged 21-22, as it previously only applied to those aged above 23. This fulfils the recommendation that the LPC has been making since 2019, which is to extend the NLW to these younger groups of workers.

What are the likely impacts of those changes?

Most importantly, the increases in the NMW and the NLW provide some protection to lowest paid workers from real-term cuts in their wages. This is particularly important in the wake of two years of sharply rising inflation, as even the historically large increase in the NLW in April 2023 did not keep pace with the costs of living and for many families was not enough to avoid greater hardship. Previous NIESR research showed that strong increases in the NMW/NLW have positive effects on lower-income households’ ability to move into work.

The LPC also carefully reviews evidence on employer perspectives before making their recommendations on the NMW/NLW increases to safeguard jobs and employment prospects. NIESR’s recent research on pay-setting among employers in the agriculture, cleaning, hospitality and retail sectors has formed part of this evidence.  Our research involved interviewing 41 employers to gain in-depth perspectives on their pay-setting decisions, underlying rationale, and their perspectives on the NMW/NLW increases. This research particularly highlights the perspectives of small employers, who are often absent from research of this kind.

Overall, many employers reported positive attitudes towards the increases in the NMW/NLW rates, for reasons including fair pay for their workers, and transparency of the annual increases. Moreover, some employers reported paying their employees above the NLW rates. The key reasons cited for this were improved staff recruitment and retention, and a desire to make employees feel valued.

“Fair pay within businesses can only be a good thing.” – Large Employer, Agriculture

Despite an overall positive attitude towards NMW/NLW increases, some employers also raised warnings. Small- and medium-sized employers reported finding it harder to absorb the annual increases in the NMW/NLW rates. Smaller employers were more likely to describe short-term and unsustainable strategies for absorbing the increases in costs, such as using their own time or money to cover the gaps or getting support from family members to sustain business operations with increasing labour costs. This can lead to risks of small business owners taking on unsustainable debt or paying themselves below the NLW. Some also reported concerns over the safety of operations due to working longer hours or with fewer people working on sites.

Concerns over competitors’ behaviours have also been raised. For example, one employer told us about their competitors breaking the law by paying below the NMW.

“I know of things that happen where people have not even been paid the minimum wage. […] And you know it’s detrimental to my business in the long term because I know we are a quality operation, but cleaning is still cleaning. And if you are exploiting people on a much lower wage than you should be … a lot of people that I want as customers are paying cash in hand everywhere. They pay cash in hand, they don’t worry about the wage, they just do a deal with a person, […] there is nobody out there checking on that, on their safety or anything at all. [..] that’s the area that I think is very neglected.” – Medium-sized Employer, Cleaning

What can be done to mitigate against these risks?

The NLW/NMW increases should be accompanied by support, advice and guidance to employers, particularly small business owners, on how to avoid risks of debt, overworking, unsafe working conditions and unsustainable operations. Advice on long-term strategies for absorbing the rising costs, such as ways to improve efficiency of operations, is particularly valuable, given that the NMW/NLW increases are annual.

For the advice that is currently available, from the Government, Business Representative Organisations or membership organisations such as the Federation of Small Businesses, effective signposting is also key to make sure that struggling employers know where to look for information.

Finally, monitoring and reporting any instances of employers paying below the NMW is key for protecting workers from exploitation as well as diligent employers from unfair competition. HM Revenue and Customs (HMRC) have the right to carry out minimum wage compliance checks and can do so by inspecting records, visiting business premises or speaking directly with employees. However, it can often depend on employees themselves to recognise non-compliance and, if necessary, report their employer for non-compliance with the law. To avoid being exploited, it is essential that workers in low-paid sectors have access to information about their rights and the procedures for employers to meet those rights.