The National Living Wage is welcome, but it won’t solve in work poverty alone

31st Mar 2016

The National Living Wage (NLW) is an important step towards a high wage, low welfare economy. Investing in the skills of low paid workers and encouraging the creation of more productive jobs would help us to reach this goal faster, says JRF’s Helen Barnard.

This Friday the National Living Wage comes into force at £7.20 per hour (50p above the standard minimum wage). By April 2020 it will rise to about £9.30 (compared to £8 per hour if the minimum wage just rose with inflation). This is a big change to the UK’s labour market. We believe that poverty in the UK can only be solved through a partnership between communities, employers and the State – the National Living Wage will help employers to play their part.

However, on its own it won’t do a great deal for poverty. The Institute for Fiscal Studies has found that the National Living Wage will raise household incomes by less than 1% on average, even for poorer households. It will reduce poverty very slightly - not enough to show up in official figures. That’s partly because many workers with low hourly pay live in households with quite high overall incomes.

So what else is needed to make work a real route out of poverty? Raising productivity should be at the centre of this mission. The UK’s productivity lags behind that of other rich countries and forecasts were downgraded in the Budget. Productivity in our low wage sectors is particularly low compared to other countries.  The UK’s low-wage sectors account for a quarter of the workforce, but a third of our productivity gap – raising productivity in these sectors would have a significant impact on the UK’s overall productivity problem.

Eight million people work in low-wage sectors in the UK - more than 1 in 4 UK jobs. Workers in low wage sectors such as hospitality, catering, retail and residential care are the most likely to be in working poverty and account for almost half of spending on tax credits.

Improving productivity is the most common way employers are planning to cope with higher costs arising from the National Living Wage and is firmly on the agenda of sector bodies such as the British Retail Consortium. This is also important as the NLW is predicted to cause some job loss (around 60 000 jobs) and improved productivity will limit this impact. The big question is how. In September we at JRF will be publishing a comprehensive strategy to end poverty in the UK, with evidence based ideas to raise productivity and enable workers to get jobs which will take them out of poverty. Two main recommendations are:

  1. Industrial strategies for low pay sectors. Industrial strategies should not only be for sectors such as advanced manufacturing or high skilled engineering. The Government should work with business and employers in the retail, hospitality and care sectors to develop industrial strategies for them. It should also give powers to Local Enterprise Partnerships, combined authorities and City Deals to develop strategies locally.  Low pay sector industrial strategies were a key recommendation from the Women and Equalities Select Committee to tackle the low pay among women. The strategies should be particularly focused on management, workforce development, workforce organisation and incremental innovation; areas where the UK falls behind and big factors in higher productivity elsewhere.
  2. Career ladder programmes. Evidence from other OECD countries, particularly the USA, shows that business performance, workforce development and progression for employees can be linked through career ladder programmes.  These are led by independent intermediaries that broker relationships with employers, training providers and welfare to work providers. They offer services both to businesses and out of work and low paid individuals. They focus on progression opportunities as much as on job entries and they often identify businesses’ challenges which can be used as a lever for getting employers involved – for example particular skills shortages or high staff turnover.

The National Living Wage is a good first step in creating a low wage, low welfare economy – now we need to build on it to really deliver the necessary economic and social gains.