Labour Market Outlook Q2 2024 - Happy 25th Birthday To The Minimum Wage

28th March 2024

This year's minimum wage uprating is large: roughly 1.6 million workers stand to benefit directly on 1 April when the adult rate rises to £11.44 - giving a cash increase of 9.8 per cent and a real-terms increase of 7.8 per cent. These are the third largest annual increases in the minimum wage's history. 1 April is also a landmark day, as the minimum wage turns 25 years old. Initially introduced at a conservative £3.60 per hour - a low-to-middling level compared to the minimum wage in other countries - the UK's minimum wage is now one of the highest in the world.

Over successive governments, this policy ambition has transformed the shape of pay growth (since 1998, real-terms growth in hourly pay has been five-times faster at the 10th percentile than at the 90th) and has boosted pay in the UK's lowest-paid jobs (median hourly pay among bar staff and cleaners in 2023 was 66 and 52 per cent higher than in 1998 in real terms, respectively, compared to 19 per cent real-terms growth in median hourly pay across the economy as a whole). In total, a full-time minimum wage earner today earns £6,000 more per year compared to a world in which the minimum wage had only risen in line with typical wages.

There is now a question about what comes next, as neither main political party has a clear policy for the minimum wage after 2025. Whoever wins the next election, it is important that long-neglected areas of employment policy in the UK (such as the generosity of Statutory Sick Pay) start to receive more attention.

Happy 25th birthday to the minimum wage
On 1 April the National Living Wage (the adult-rate minimum wage, which from this year includes everyone aged 21 and older) will be uprated to £11.44. This will be a cash uprating of 9.8 per cent - the third highest annual percentage cash increase in the history of the minimum wage.

Roughly 1.6 million workers paid the minimum wage will benefit directly, and other workers above but close to the minimum wage will also see their pay rise. Thanks to falling inflation (the OBR expects CPI inflation to reach 2.0 per cent in Q2 2024), this will also be a very healthy real-terms increase of 7.8 per cent - also the third highest in the minimum wage's history, and about four-times the current rate of real-terms average weekly pay growth. Figure 1 shows the history of minimum wage rises.

But as well as bringing a hefty pay rise for low earners, 1 April is also a landmark day for the minimum wage - the 25th anniversary of its introduction back in 1999. As such, in this edition of the Labour Market Outlook we reflect on what the minimum wage has achieved over the past quarter century.

The minimum wage has grown up – into a much more radical policy
The UK's minimum wage was introduced in April 1999 at a rate of £3.60, equivalent to 47 per cent of median hourly pay among adult workers (aged 21 or over). This ‘bite’ was low-to-middling compared to the minimum wages in the 19 OECD countries which already had minimums at that point (see Figure 2, which plots the ‘bite’ of the minimum wage across OECD countries relative to full-time workers’ median pay).

What started life as a cautious policy has grown into something much more radical. The turning point was the minimum wage’s 17th birthday in 2016, which saw the creation of the ‘National Living Wage’ (NLW) (a higher rate for adults aged 25 and over, now extended to adults aged 21 and over), and the introduction of a target to substantially raise its bite over the coming years. The Low Pay Commission (LPC) now expects the 2024 minimum wage to reach a bite of two-thirds of typical hourly pay, reaching the updated target set back in 2020. This will see the minimum wage become one of the highest in the world relative to typical wages; behind New Zealand still, but level with France and Korea’s 2022 minimum wages (2022 is currently the most recent year for which the OECD has published data on minimum wages).

The creation of the NLW and the use of an uprating target wasn’t universally popular: many economists preferred the previous institutional set up, where the LPC wasn’t set a target by the government. But it has made a big difference. From 1999 to 2015, the adult-rate minimum wage rose by 1.7 per cent per year in real terms, but it has risen by a much faster 3.2 per cent per year in real terms from 2015 to 2024.[1] If the bite of the minimum wage had continued rising at its 1999-2015 pace (at 0.4 percentage points per year, which is a reasonable counterfactual of what would have happened in the absence of a bite target from 2015), the 2024 adult-rate minimum wage would be £10.05 rather than £11.44. This 12 per cent difference is significant – it amounts to £2,500 additional gross earnings per year for a full-time (35 hours per week) worker on the minimum wage.

The minimum wage has had a big impact on low earners
The impact of the minimum wage is clear to see in the changing shape of wage growth over the past several decades. From 1980 to 1998 – when the UK had no minimum wage – hourly pay growth was twice as fast at the top of the distribution (3.1 per cent per year at the 90th percentile of the hourly pay distribution, in real terms) than at the bottom (1.4 per cent per year at the 10th percentile). In the minimum wage era the opposite has happened: growth in real hourly pay has been five times faster at the bottom (1.6 per cent per year at the 10th percentile, in real-terms) than at the top (0.3 per cent per year at the 90th percentile) – see Figure 3.

Authors
Nye Cominetti - Principal Economist
Hannah Slaughter - Senior Economist

Read the full report HERE