The latest on low pay

Published on Jobs, Skills and Pay

To paraphrase the great Yogi Berra, making predictions is hard. That’s especially true of the future of the UK’s labour market. After all, the current combination of record high employment and falling real wages is not a forecast many economists would’ve made even a couple of years ago. But new Annual Survey of Hours and Earnings data from the ONS provides some more clues as to just how the sizeable increases in the wage floor associated with the National Living Wage (NLW) are playing out – and what this might mean for the future.

Without rehearsing all the arguments, economic theory suggests that at some point a minimum wage can rise too high and jeopardise the employment prospects of the very people it’s trying to help. We’ll have to wait a while before evaluating the OBR’s estimate that by 2020 the NLW would mean roughly 60,000 fewer people would be in work, though there’s little evidence of a major negative impact on low earners so far.

But one question we can already address is the NLW’s impact on wage returns. The NLW rose by 4.2 per cent this year in nominal terms, significantly higher than the 2.9 per cent increase in median pay. As the chart below shows, this fed through into another year of progressive wage growth. After inflation, hourly pay for those among the bottom 10 per cent of earners rose by 2 per cent in the year to April 2017, easily outstripping the flat or falling pay for those halfway up the pay ladder.

The bad news in this morning’s release is that the pace of earnings growth fell in 2017 across the distribution – with the ONS’s headline median weekly pay among full-time workers actually falling by 0.4 per cent (confirming the return of the pay squeeze that has been clear for some time in the monthly Average Weekly Earnings data). But as the chart shows, the shape of the change in 2017 is broadly in line with the one recorded in 2016. In short, lower-paid workers again fared better than average.

The progressive nature of earnings growth in the last two years has of course had an impact on the proportion of employees considered to be ‘low paid’. As we detailed in our recently-published Low Pay Britain report, the introduction of the NLW in 2016 led to a record-breaking drop in low pay.

This good news for low earners continues in today’s data. The ONS uses a slightly different definition of low pay – focusing on full-time employees rather than full-time and part-time ones together – but the direction of travel is the same. As the next chart shows, the proportion of full-time employees classed as low paid fell to its lowest level in two decades (18.4 per cent). One prediction we can be confident about is that this figure is likely to fall again next year. That’s because the NLW’s trajectory means it should keep on rising faster than pay at the median until 2020.

While we know that employers are legally obliged to pay everyone aged 25 and over at least the NLW, much tougher to predict is their treatment of those paid a little above the wage floor. Do they give NLW-sized raises to those paid just above the legal minimum or do they opt for smaller increases and a subsequent narrowing of the differential between entry-level staff and those a little bit above?

How this plays out matters. We already know that progression out of low pay is rare, with just one in six low earners moving onto consistently higher wages a decade later. If the gaps between the lower rungs of the pay ladder shrink, it means any increase in responsibility, stress and the risk that comes with taking a new position is likely to be associated with a smaller scale of pay rise. That’s hardly a recipe for boosting progression. And this effect comes with significant firm-level, sectoral and geographical variation. Consider for instance that one in four employees earn £8 or less per hour in 14 local authorities across the country.

Back in 2015, 10 per cent of all those aged 21 and over were within 50p of the wage floor at the time (£6.50). Today’s figures above aren’t directly comparable because they cover the 25+ population, but the introduction of the NLW in 2016 is likely to have been associated with at least some increase in this proportion. However, what the new figures show is that 2017 NLW increase hasn’t led to any tightening of this bunching at the bottom. As the final chart shows, a similar proportion of employees aged 25 and over were paid at or just above the NLW in 2016 and in 2017.

Of course, this doesn’t mean that future NLW upratings won’t have a bigger effect; the increase in 2017 is smaller than those the OBR has projected for the coming years. For now though, it seems that employers are holding differentials steady at the bottom.

What lies ahead for the lower end of the UK’s labour market is far from certain, especially with the question marks around Brexit and migration rules. Whatever happens next though, it’s clear that the NLW this year has provided a welcome shield against falling wages for the UK’s lowest earners.