National Living Wage: are rising wages a poisoned chalice for low paid workers?

Written by
Tom Ritchie

28 Sep 2016

28 Sep 2016 • by Tom Ritchie

On the 1st of October, a new minimum wage will be introduced for all pay scales under the age of 24. Earlier this year, the National Living Wage (NLW) was introduced, meaning anyone aged over the age of 25 is entitled to earn at least £7.20 an hour.

The national living wage is expected to rise to £9.16 by 2020. Considering that since February 2014, the government has “named and shamed” 700 employers (although they have only prosecuted three companies) for underpaying more than 13,000 workers by £3.5m, the rising NLW is causing headaches for businesses across the country.

Peter Urwin, professor of applied economics at Westminster Business School and director of the centre of research, also thinks that while the NLW will ostensibly benefit UK workers, it could lead to many being squeezed out of the job market for cheaper production: “If your employer has the option of getting the same job done in another country, you are directly competing with (usually cheaper) workers outside the UK.

“But this squeeze is all about technology – automation either allows employers to replace workers or move the whole operation elsewhere.”

So if the new pay scale is too high, low paid workers could lose their jobs. If there is no real wage increase, no benefit will be felt. Currently, the NLW is being calculated as 60% of the UK’s median pay. Is this the ideal calculation? According to Urwin, it depends on the sector: “Whether this [£9 an hour] is too high or too low depends on what you do and your job sector.”

“The Low Pay Commission suggest that by 2020 the NLW may be at a level that is 90% of the median for workers in retail, and actually at the median for those in cleaning and hospitality. By 2020 an extra 1.5m workers will be impacted and nearly one fifth of private sector jobs could be paid at the minimum.”

As pay scales become homogenous across industries and the value of certain roles loses context in light of the NLW, the future could look bleak for some lower paid workers. Global competition and technological development increases the risk of offshoring.

Urwin is particularly pessimistic about the implications: “As low skilled, low earners continue to bear the brunt of globalisation and the technological revolution, one thing remains clear; raising minimum wages is not the answer.”