National Living Wage could the British people be worse Off?

national living wage increase are you really better off blog banner

George Osbourne announced the plan for a ‘national living wage’ in the UK during his Budget speech in July 2015.  An hourly minimum wage of £9 will be enforced by 2020.

As of next April, firms will have to pay employees a minimum of £7.20 an hour, rising by 6% a year on average, to reach the target of £9 by the end of the 56th Parliament.

The policy has been criticised and praised from varying sides of the ideological spectrum. The conservatives argue that the increased national minimum wage will improve living standards for the poorest in society. In contrast, many Labour supporters argue that the policy is a cover-up aimed to divert the public eye away from the drastic cuts to tax credits which could, in turn, lower living standards. Sceptics of the policy have also voiced concerns over the possible increase in unemployment, believing firms will be unable/unwilling to pay the more expensive workforce. An increase in unemployment, currently at 5.4%, would most certainly lead to a fall in living standards.

At first glance it seems logical that if someone is paid more, their standard of living will increase. Their increased income will allow them to purchase more goods, which in turn facilitates the bettering of their living conditions. For example; someone doing 35 hour weeks on minimum wage, at £6.50 an hour, will currently receive an annual salary of roughly £11,830 (before tax). The increase of the NMW to £7.20, planned for April 2016, will see that person’s annual salary rise to roughly £13,104. This increase of roughly £1275 per annum, all things being equal, should boost individual’s living standards.

However, many of those in minimum wage jobs rely on the government for financial aid in the form of tax credits. The government’s cuts to tax credits, despite a rising minimum wage, may make many people worse off. An example from the Social Market Foundation is a couple with two children, and one full time earner on minimum wage: Before the changes the gross income of the household would be the same as the previous example, at around £11,830, they would pay £706.14 in income tax and national insurance but from the government they would be eligible for £6,643.58 in Tax credits and £1,793.71 in child benefits. This leaves the example family with £19,601.15. After the increase in NMW and reduction in tax credits the family would, in the 2016/17 fiscal year: have a gross income of roughly £13,104(an increase), would pay around £428 in income tax, £607 in national insurance and would be eligible to roughly £4,415 in tax credits and £1,793 in child benefits. This leaves the family with roughly £18,314. For this family, it is a loss of over £1,270 and undoubtedly this would result in a reduction in living standards.

Even worse than a fall of £1270, what happens if an individual loses their job? Critics of the policy believe that the financial strain on firms, who now need to pay workers an increased salary, will result in greater unemployment. Said increase in unemployment will inevitably lead to a fall in living conditions for the families and individuals who are now without a job. But is this the case?

Dr Wadsworth, professor at the London School of Economics and Political Science, argues in his 2009 paper ‘Did the National Minimum Wage Affect UK prices?’ that increasing the NMW would not result in a drastic fall in employment. Dr Wadsworth commented that there is “a growing body of evidence in the UK suggesting that the simple notion that higher minimum wages mean job losses need not hold”.

He argued that firms are more likely to pass on higher prices to consumers than fire employees. Dr Wadsworth added “firms can, and do, adjust [to an increasing minimum wage] by raising prices”

For many, the increased minimum wage seemed a blessing. However, there is a growing uncertainty as to whether the British people will truly be better off.