Living Wage
Economy and public finances
Political parties and elections

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The centrepiece of John McDonnell’s conference speech in Liverpool today was a pledge to “write a real Living Wage into law”, creating clear (if still lyrically confusing) water between Labour and the government’s national living wage (NLW) policy. The apparent consensus around the benefits of a higher wage floor is a long way removed from the debates surrounding the introduction of the original National Minimum Wage two decades ago. But making the most of this very welcome emphasis means moving at the right pace – neither reining back on existing ambitions nor pushing the policy too hard. As ever then, the devil will be in the detail.

The two key questions to consider are how a wage floor is set and what impact a chosen level will have on both living standards and employment. On both, it’s important to understand the differences between the two ‘living wage’ approaches.

The Shadow Chancellor didn’t go into detail today, but it seems likely that his ‘real’ living wage is based on the (as yet) voluntary living wage that is designed to provide workers with a minimum acceptable standard of living. This wage is calculated each year by researchers at Loughborough University based on detailed discussions with members of the public. In contrast, the government’s NLW has no direct connection to an individual’s needs. Instead it is a higher minimum wage for employees aged 25 and over, with its level set in relation to prevailing wage trends. Specifically, it is set to reach a ‘bite’ of 60 per cent of the median pay level among those aged over 24 by 2020.

Both methods could realistically produce wage floors of £10 an hour – the figure quoted by the Shadow Chancellor today. But they would reach it for different reasons: the former would depend on changes in the cost of living, while the latter would be determined by the pace of wage growth across the wider economy.

Herein lies the crucial difference in terms of implications. When first announced, the NLW was expected to reach a rate of roughly £9 by 2020. But subsequent downward revisions to wage growth projections – particularly since the EU referendum result – mean that it is now projected reach the end of the decade in the region of £8.60-£8.70.

In this context a £10 rate looks extremely ambitious – equivalent to almost 70 per cent of what a typical person earns, compared to the government’s 60 per cent target. As a very rough approximation, a minimum of £10 in 2020 would roughly the double the proportion of employees on the wage floor relative to our previous estimate of one-in-eight under the NLW. And of course, the number would be higher still in low paying parts of the country.

The lesson of 17 years of the National Minimum Wage is that wage floors don’t automatically reduce employment. But both the government’s NLW and Labour’s proposal take us into new territory for the UK. In this light, it is important that any statutory wage floor policy remains sensitive to prevailing economic conditions. Tackling low pay is a key part of improving equity, but higher unemployment tends to hit poorer members of society hardest of all.

Despite the confusing terminologies, the National Living Wage and the voluntary Living Wage are two very different beasts serving different purposes. Keeping it that way is crucial to the success of both. Specifically, with so much economic uncertainty over the coming years the flexibility provided by the NLW’s peg to typical pay is vital for avoiding any negative effects.

Of course everyone wants to see a £10 minimum wage – and we will get there eventually. But just because a higher minimum wage is the right thing to do, it doesn’t mean it’s risk free. Some business organisations have called for the existing policy to be watered down. But with the NLW in motion and showing little early signs of significant negative effects, now isn’t the time to either backtrack or gamble with the policy. Instead, the focus should be turned to the job of implementing the higher rate, improving progression off the wage floor and raising productivity more generally.