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UK should be cautious about further minimum wage rises, says think tank

Christian Fernsby |
Britain has long had a low pay problem.

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For most of the last two decades around one in five workers has been in low-paid work earning less than two-thirds of the typical hourly pay at any given time.

This is a massive problem given how hard it can be to escape low pay.

Our research has found that over a 10-year period, just one in six low-paid workers were able to permanently escape into higher-paying jobs, economic analyst Nye Cominetti writes for Resolution Foundation.

But Britain’s low pay landscape has been changing in recent years – by getting smaller.

Last year there were almost a million fewer workers in low-paid jobs compared to 2015.

This welcome change has been driven by the introduction of the National Living Wage – the legal minimum wage for workers aged 25 and over, that was recently increased to £8.21 an hour.

This driving up of the minimum wage, and the driving down of low pay, has been particularly welcome as it has delivered pay rises for low earners without harming people job prospects, which has long been the main concern about raising it too far.

Both the minimum wage and employment levels are at record highs.

The ramping up of the National Living Wage is due to end next April.

But the story won’t end there as both the Chancellor and Shadow Chancellor have plans to raise it even higher.

Phil Hammond wants to raise the National Living Wage to a level that would end low pay altogether, while John McDonnell wants a ‘real Living Wage’ of about £10 an hour.

It’s not hard to why cross party consensus has broken out over raising the minimum wage even higher – it has been a whopping big policy success over the last 20 years.

And further increases will drive Britain’s wage floor closer to its optimum rate – delivering the biggest possible wage boost without hurting jobs.

But there’s a catch – we don’t what this optimum rate is.

The big risk for the future is that we overshoot on how high the minimum wage can go – which would put people’s job prospects at risk, and damage the hard-fought reputation of the minimum wage across Britain.

To overcome this risk we need to combine the boldness of plans to raise the minimum wage with caution over what the evidence tells us about its impact.

On boldness, we need to be clear about what a higher minimum wage would mean for the economy.

Setting it at the low-pay threshold could more than double the number of people who are currently earning the legal minimum.

This would include more than one in three part-time workers and more than one-in-five workers across Wales, the Midlands and the North of England.

So, as well as raising the minimum wage, we need to put as much effort into helping people escape low pay altogether, via better training and more job moves across firms.

On caution, we need to monitor for any signs of effects on reduced employment or hours.

We should also provide the clarity and time to adjust that businesses need.

And we need to be prepared to shift course if the economic conditions change.

The government should have the flexibility to ease off the pedal when it comes to raising the minimum wage in the midst of a downturn.

This combination of a bold vision for a policy, coupled with lots of listening and learning from the experts, may seem out of sync with modern politics in Britain.

But it is an approach that has served the minimum wage well over the last 20 years, and should continue to do so in the future.


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