The government has announced major changes to the Low Pay Commission’s (LPC) role. These adjustments include linking the minimum wage and national living wage to the cost of living and narrowing the pay gap between younger and older workers.
While these changes aim to address disparities, they come with potential risks, particularly for young workers and businesses.
Changes to the Low Pay Commission’s Remit
The new government has mandated two significant changes to the Low Pay Commission (LPC). Jonathan Reynolds, the new business secretary, announced that the LPC must now factor in the cost of living when setting the minimum wage and national living wage rates.
This adjustment aims to address longstanding grievances within the labour movement, potentially blurring the lines between the minimum wage and the national living wage.
History of Wage Regulations
The minimum wage, introduced by the Labour government in 1999, is legally enforceable. However, the national living wage, introduced by the Conservatives in 2016, is based on the basic cost of living and is not legally enforceable, leaving it up to employers to decide whether to pay it.
The second change announced today will narrow the gap between the minimum wage rate for 18 to 20-year-olds and the national living wage. Currently, the national minimum wage for this age group is £8.60 per hour, while the national living wage sits at £11.44 per hour.
Ministers ultimately aim for younger workers to receive the national living wage, a move that builds on previous reductions in age thresholds for eligibility.
Union Reactions and Public Opinion
Unions have responded positively to these changes. Paul Nowak, general secretary of the Trades Union Congress, stated that these measures are first steps towards making the minimum wage a real living wage.
Polling suggests a significant public support for removing lower rates for young workers. Seven in ten voters reportedly back this change, reflecting a consensus across different political affiliations.
Nowak added, “It is not right that young workers are paid less for doing the same job as older colleagues. The government is right to commit to ending discriminatory age bands for minimum wage workers.”
Business Concerns
Despite union support, businesses have raised concerns. Companies like Greggs have already increased prices to accommodate national living wage hikes, underlining the pressure on business costs.
Roisin Currie, chief executive of Greggs, highlighted that the rise in the national living wage is the biggest inflationary cost they face, emphasizing the strain it puts on their expenses.
Kate Nicholls, chief executive of UK Hospitality, warned that equalising pay rates could make employment changes unaffordable for many businesses. She noted, “The rises this year to minimum wage rates were incredibly challenging for businesses to absorb.”
The hospitality sector is particularly vulnerable, as it has many workers on the minimum wage. Nicholls argued that continuous cost increases are not a sustainable solution for the sector.
Potential Impact on Young Workers
There is a risk that narrowing the pay gap between younger and older workers too quickly could harm younger workers’ job prospects. Businesses might favour older, more experienced employees over younger ones if both are paid the same wage.
The LPC has not been asked to abolish age bands immediately but to narrow the gap gradually, likely to avoid a sudden spike in business costs.
In March, the LPC itself recommended reducing the gap between youth and adult rates, arguing that the current disparity had grown too large in recent years.
International Comparisons
The Trades Union Congress has cited international examples to support the changes. In the UK, the youth rate is 75% of the adult rate, whereas in countries like Australia, Belgium, and Ireland, it ranges from 83% to 90%.
In nations like Germany, New Zealand, and France, young workers receive the same minimum wage as their older counterparts, providing a compelling argument for similar adjustments in the UK.
These international benchmarks indicate that aligning the youth wage with the adult rate is not unprecedented and may foster a more equitable labour market.
Bank of England’s Perspective
The Bank of England’s monetary policy committee is also closely monitoring these developments. At its last meeting, it noted that the near 10% rise in the national living wage in April had significantly impacted wage settlements in consumer-facing businesses.
Contacts from these sectors reported higher wage settlements, emphasizing the economic ripple effects of wage increases.
Gradually abolishing age bands is seen as a strategy to mitigate the risk of inflation spikes that could arise from sudden wage increases.
Future Prospects
While the changes aim to benefit younger workers, the transition needs careful handling to avoid unintended negative consequences for both businesses and young employees.
Unions are expected to continue pressing the government to ensure progress, keeping a close watch on the implementation of these policies.
In conclusion, these changes to the LPC’s remit signify a shift towards a more equitable wage system. However, while aiming to benefit younger workers, these adjustments may pose challenges for businesses and young job seekers alike.
The balancing act between fair wages and business sustainability will be crucial in the coming years.