It’s good to be flexible

This blog was originally published on the Resolution Foundation’s Substack. 

Yesterday the Chancellor told us what the minimum wage rates will be from April 2027 (well, strictly speaking he told the Times on Tuesday…). All rates – both adult and youth – will go up by 3.9 per cent. The adult rate goes to £13.21, a 50p increase, worth £1,040 a year for someone working 40 hours a week. The Office for Budget Responsibility (OBR) expects inflation in Q2 next year to be 3.6 per cent; if this comes to pass, then minimum wage earners will see their pay go up slightly in real terms.

The increases could have been bigger

There was some chatter online in the form of “oh look, another chunky minimum wage increase”. But in fact, the Low Pay Commission (LPC) was conservative in its recommendations this year, making full use of its new freedom to be flexible in the face of labour market conditions. Some people doubted it would, because it’s not in the LPC’s recent institutional memory to do so: since 2015 the adult minimum wage has been set by following government-set targets for increases, rather than trading off pay gains for workers against employment risks. But it did, and, in my view, came to a sensible decision.

Calling the increases ‘conservative’ might sound peculiar, given that the 3.9 per cent increase in the adult rate is bigger than the 3.7 per cent increase the LPC estimated would be needed back in April for an ‘on-course rate’ (i.e. to stick to the two-thirds of median hourly wages bit of its remit). But it’s true, because new data published last week1 showed median hourly pay growth of 5.9 per cent in the year to April 2026 (see the chart below). Had it stuck doggedly to that part of its remit, this would have led to a 5.7 per cent National Living Wage (NLW) increase. As you can see in the chart, such a figure would have been way ahead of current average earnings growth (3.7 per cent in the three months to August 20262) and even further ahead of where pay growth is expected to be next year (the median forecast for 2027 among external forecasters is 3.3 per cent).

Surely, you might say, the LPC would have been mad to have done that? Maybe. But it’s more or less what happened back in 2025. The 2024 pay data came in stronger than expected (because the Office for National Statistics (ONS) had introduced a new methodology that meant more high earners in its Annual Survey of Hours and Earnings sample), and the LPC’s rigid remit meant this fed straight into the 2025 NLW uprating in a mechanical way. (It was doubly unfortunate that this accidentally big uprating came alongside the hike to employer National Insurance contributions …). The Government learned from that episode and relaxed the LPC’s remit: the ‘two-thirds of median pay’ benchmark for bite of the NLW is now a “key reference point”, not an unbending requirement[MB1] .

No youth-adult convergence this year

There’s a similar story of newfound flexibility on the youth rates. The Government’s policy is that the higher youth rate (which currently applies to 18-20-year-olds) should converge with the adult rate. The LPC had initially interpreted the Government as wanting convergence to happen within the Parliament (i.e. by 2029), which meant closing a 25 per cent gap in five years. This led to bumper increases in the youth rate, seen pretty clearly in the chart below.

If the LPC had done something similar this year – continued closing the gap to the adult rate, with a target of 2029 – then the 18-20-year-old rate would have increased by roughly 10 per cent. But the Government has responded to flashing alarm bells in the youth labour market by relaxing (or clarifying) this part of the LPC’s remit too. The LPC was told explicitly it could choose the pace of the youth-adult convergence (i.e. ‘don’t fixate on 2029’) and that it should prioritise young people’s employment prospects.

I thought this might lead to some convergence, albeit less than in recent years, resulting in a youth uprating just above the adult uprating. But the LPC paused convergence altogether. I think this was a good call. As I set out last week, we can’t say for sure that minimum wage increases are to blame for a deteriorating youth labour market, but we also can’t say that they are not, and it’s not worth taking the risk.

So overall, the LPC and Government have both shown a new flexibility when it comes to minimum wage setting, and that’s to be applauded. If labour market conditions improve, there may be scope for bigger upratings in 2028. At our recent event, Arin Dube said he thought a bite of 70 per cent or higher might be possible. Equally, if the labour market continues to struggle, caution would be the right approach again.