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What’s the future for the National Living Wage?

Part of the remit of the Low Pay Commission (LPC) is to advise the Government on suitable rates for the National Living Wage (NLW) and the National Minimum Wage (NMW). The NLW sets a higher hourly rate than the NMW, but only applies to workers aged 21 and over.

The LPC has published a report examining the future of the NLW, which considers whether the NLW should increase beyond the Government’s current objective - that eligible workers should be paid at least two-thirds of median hourly earnings. 

While no changes to the NLW had been announced at the time of writing, the report outlines the LPC’s findings on the impact of increasing the NLW and the key factors the Government should consider before setting any higher target. 

The NLW has raised living standards, but employers are feeling the pressure

According to the LPC, the NLW has successfully increased pay and living standards for low-paid workers, with little evidence of significant job losses. 

However, many employers reported that rising wage costs have reduced profits, limited investment and increased pressure on prices. Increases in the rates of employers’ National Insurance Contributions have exacerbated the impact on employers of a higher NLW.

The LPC also observes that narrowing pay differentials can make it harder to reward experience, skills and increased responsibility. Increasing wages at the lower end of the pay scale in order to comply with a higher NLW can therefore create cost pressures at more senior grades too. 

Is a higher target appropriate?

The LPC says any decision to increase the NLW target should take account of:

  • The impact on jobs, businesses and inflation.
  • Current and future economic conditions.
  • A clear policy objective that both employers and workers understand.

The report emphasises that there is no single economic threshold that would automatically justify a higher target. Policymakers must balance the benefits for workers against potential risks for employers. This is particularly challenging given the inherent difficulties in forecasting future economic conditions. 

Looking ahead

While the LPC does not recommend a specific new NLW target, its report serves as a reminder that further NLW increases remain an ongoing policy consideration. The report stresses that any decisions on NLW rates should recognise economic conditions, and that policy changes need to provide sufficient time for employers to plan ahead. 

Practical actions for employers

Although there is no immediate change, employers may wish to:

  • Review wage cost budgets and consider whether sufficient headroom exists for future increases.
  • Consider their ability to adjust pay structures to maintain progression and reward additional responsibilities.
  • Keep track of developments on NLW and NMW policy. 

With the Budget just around the corner, employers may not have long to wait to find out what plans the Government has for the NMW and NLW in future.

 

This article reflects the position at the date of publication. If you are reading this at a later date you are advised to check that that position has not changed in the time since.    

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