New year, new challenges for Britain’s cities when it comes to low pay

by

In three months’ time a decent chunk of working Britain will get a pay rise when the National Living Wage is introduced at the start of April.  This higher minimum wage for the over-24s is a good thing given our far too high levels of low pay. It is also one of the biggest changes to Britain’s labour market for over a decade. So we need to make a success of it – particularly in the areas of the country where it will have most impact like some of our big cities.

The National Living Wage (NLW) will be set at £7.20 – 50p more than the current minimum wage. And it is set to rise to over £9 by 2020. That will put Britain towards the top of international minimum wage league tables so this is a bold policy – and like almost anything worth doing it brings with it big challenges as well.

Britain as a whole has the dubious honour of being 5th out of over 20 OECD countries in the low pay league table. But the extent of the problem varies significantly across the country. 25 per cent of workers are low paid in Birmingham, Nottingham and Sheffield. That figure is just 12 per cent in London, although high housing costs there should remind us that pay is only one part of the living standards equation.

4.5 million people are set to get a pay rise this April from the NLW, and that figure rises to 6 million by 2020 when the average wage increase will be £750. Unsurprisingly, differences in low pay mean the benefits of the higher minimum wage will also be spread unequally across the country. In Sheffield twice the proportion of people are set to benefit (28 per cent) compared to London (14 per cent). Here’s the full table:

1

Looking below the big cities we see even more variation – in Norwich 1 in 3 workers will get a pay rise, but in Oxford it will be only 1 in 8. Here’s that longer list:

2

But just as the benefit varies so does the challenge of implementation. Two issues stand out – ensuring that any negative impact on jobs is kept to a minimum and that large groups of workers do not get stuck earning only the legal minimum.

In areas where large numbers of people are getting a pay rise the impact on businesses will be higher – that wage boost has to come from somewhere. In Birmingham, Sheffield, Nottingham and Cardiff, total wage bills might increase by around 0.8 per cent, while in Bristol and London the figures are 0.5 and 0.3 per cent respectively.

What matters is how businesses respond to those costs. Despite the warnings, the experience of the minimum wage was not that it led to job losses. We did see profits being squeezed and some price rises – but crucially we also saw higher productivity in low paying sectors. That is what we need to see again. Supporting that higher productivity should be a priority for the cities most affected.

The good news is they have five years to respond as the NLW ramps up to 2020. That time should be used to:

  • Show leadership: explicitly making this the focus of new devolved economic leadership. This process should not wait for new mayors to be elected in 2017, but should receive a boost at that point. It should also benefit from the involvement of local businesses through LEPs at the city level.
  • Raise awareness: surveys of employers show mixed awareness of different minimum wages and the timetable for rises. More importantly most firms have yet to decide how to deal with those rises.
  • Focus on productivity: city leaders should be using existing and new devolved powers to encourage firms to change how they do things rather than just coping with higher wage bills. That means supporting firms to invest in new equipment, training and ways of working. This will also be crucial for maintaining progression routes within firms to avoid large numbers of people being stuck on the minimum wage – otherwise we risk seeing more than twice the current 5 per cent of employees on or just above the wage floor by 2020.
  • Feedback to the centre: the Low Pay Commission is the right body to monitor the overall implementation of the NLW. City regions should be in regular touch with it and the government could usefully give it a more explicit remit to monitor both regional and sectoral pinch points as the NLW rises over the parliament.

Cities obviously cannot do everything, but they are key economic leaders. With a few exceptions the city devolution that is taking place is focused on greater economic powers, including on transport, skills, infrastructure and housing (healthcare in Manchester stands out as the exception). The city region is the labour market as far as many people live it and crucially the exact policy responses will vary between cities because they have different industries and jobs. Merseyside for example has more health and social care jobs, while Sheffield has a large number of retail roles.

The government has been bolder in both devolving economic powers and raising wages at the bottom than many expected. Those two issues are now coming together. For those of us that support stronger city economic leadership implementing the new wage floor will be the first big test.