The statutory National Living Wage increases
by 6.2% tomorrow, rising to £8.72 an hour for employees aged 25 and over,
benefiting around 2 million people. The lower National Minimum Wage rates for
younger people go up 6.5% for 21 to 24 year olds and by 4.6% for the under 21s.
That’s right, tomorrow, in the midst of a national economic crisis. A brave
move, demonstrating how even Conservative governments have been fully converted
to the merit of minimum wage regulation, or foolhardy at a time when many
businesses are struggling to survive and millions of people are worried about
their jobs?
As in any
crisis there will be winners as well as losers over the coming weeks and
months. People working in essential services, public and private, may well see
their workloads increase and receive higher reward for additional hours if not
bigger pay awards. But at least as many private sector or charitable sector
organisations will be badly affected by the Covid-19 lockdown. These will be making
immediate pay cuts (including those who participate in the Government’s Job Retention
Scheme but don't top up the 80% wage subsidy on offer), introducing pay freezes
and/or cutting hours. Unemployment will also be rising as some businesses cut
jobs which will depress wage pressure in the economy overall.
Millions
of employees will feel the pinch which will slow average weekly earnings growth
considerably. Without the Living Wage/Minimum Wage increases we would probably
be looking at growth in regular average weekly earnings slowing from around 3%
to around 1.5% in a matter of a few months and then slowing further the longer
the crisis lasts. If so, real wage growth will fall close to if not below zero
(depending on what happens to price inflation). This is bad news because we’ve
only recently seen the average real weekly wage rise above the pre-Great
Recession level.
In view
of this tomorrow’s Living Wage hike might be seen as a good move, offsetting the
depressing economic effect of Covid-19 by putting more money in the pockets of
the working poor. However, the Living Wage/Minimum wage increase is likely to
prove only a partial palliative. A lot of recipients of the hike will be
employed in exactly the kinds of sectors hardest hit by the crisis and
employers may well respond by making even bigger cuts in hours or jobs than
would otherwise be the case.
The overall
effect on nominal average weekly earnings growth is difficult to judge since we don't yet know how businesses will respond. Optimists can point to well
researched evidence of the benign effect of the minimum wage over the past 20
years, though whether this is guide to what might happen now is questionable.
What one
can say is that in current circumstances the faster the rate of growth of
nominal average weekly earnings the smaller the squeeze on real wage growth and
the greater the risk of a bigger than necessary rise in unemployment.
While a
rise in the Living Wage/Minimum wage is highly desirable in normal times these
are very far from normal times and a 6+% wage rise looks like Alice in
Wonderland economics. Lewis Carroll himself might marvel at the Government
hiking the pay of employees it was at the same time subsidising to keep in work.
There is
of course nothing to stop ministers from exhorting employers who are able to
afford it to voluntarily match the planned increase, perhaps targeting the
supermarkets who might make a goodwill gesture to hardworking staff at this
time. But it would be advisable to either limit the statutory increase or, and
preferably, postpone it, with maybe October 1st rather than April
Fools Day a better choice.
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