What the Budget means for the National Living Wage?

The National Living Wage – the rate applicable to workers aged 23 or over - will increase by 6.6% from £8.91 to £9.50 an hour, while the NMW for workers aged 21 to 22 will increase from £8.36 to £9.18 an hour – a 9.8% increase. Employers want to see a high wage, high skilled economy but increases must be underpinned by productivity gains otherwise they risk being unaffordable.

What’s LPC’s evidence behind their recommendations?

The Low Pay Commission’s assessment of the economy is in positive territory. They recognise that the recovery has been multi-speed with some sectors well behind others, but overall output in several key low-paying sectors is now above or close to pre-pandemic levels. In terms of debt, both SMEs and larger businesses took significant amount of debt to cope with the crisis but for larger businesses this has declined rapidly. Encouragingly, just 4.2% of businesses have no or low confidence they will meet their debt obligations. It’s yet unknown the impact that the withdrawn of supportive policy measures will have on insolvencies.

The labour market has been strengthening since April 2021 with employment increasing, unemployment decreasing and vacancies at a record high of 1.2m in September. The jobs recovery is being felt across the UK, with almost all nations and regions of the UK seeing employment levels back above pre-crisis levels.

What’s happening with pay growth?

The LPC’s main source of data to monitor the NLW is the ONS’s Annual Survey of Hours and Earnings (ASHE) – which in both 2020 and 2021 was affected by the furlough scheme. The key issue is the treatment of furloughed workers. Excluding them from the data leads to an overestimate of average pay as a large proportion of those were low-paid workers. Because of this the LPC produced a range of estimates of the median in order to be able to calculate the bite of the NLW and the path towards the 2024 target.

The path to 2024: what does it mean in pence and pounds?

LPC’s projections suggest that the NLW would need to be £9.58 in 2022 and £10.70 in 2024 to reach two-thirds of median wages. But due to uncertainty in some of the data, the LPC has recommended a lower rate for next year - £9.50 an hour – which the government accepted. When the new target for the NLW was announced in March 2020, 66% of median earnings represented £10.50 an hour. Under current projections this is now £10.70.

If you would like to discuss how the increase will impact your business, please contact Eugenia Migliori.