What’s going to happen to the lowest paid in our society?

When I was at school (a long time ago) I remember writing an essay about how we would use all our extra leisure time in the year 2000 when robots would be doing all the work for us. Well, the year 2000 came and went and we have now reached the year 2022.

People are still working long hours, but something we didn’t predict was that we would have an increasingly divided society. The top 1% have vast and increasing wealth while people on the lowest incomes are struggling to survive without benefits.

The unions are currently fighting for pay rises, but their wins so far have tended to be at lower rates than that of inflation. Of all the pay rates though, it is the lowest paid who have some sort of protected level of pay. They are at the bottom of the ladder with regards to pay, and the annual date on which it is decided what they are to be paid is approaching.

Minimum rates of pay

The lowest-paid workers must legally be paid either the national living wage (NLW) or the national minimum wage (NMW), dependent upon their age. Or they can be paid what is called the ‘real living wage’ (RLW) which is a slightly higher (and voluntary) hourly rate of pay.

Set in April 2022,the current rates are:

At the end of August, the Trades Union Congress (TUC) stated that the minimum wage should rise to £15 an hour “as soon as possible”, and by 2030 at the latest. It recommends that the economy should transition towards high-skilled and secure jobs, ending the reliance on low-paid and insecure work. This also sounds like a promise made recently by the government.

What’s the impact?

Clearly, with any recommended pay increases, there are issues of affordability for employers, and the current inflationary and cost-of-living pressures are affecting employers too. The concerns about affordability of the minimum wage for employers has been around since its introduction by Tony Blair’s government in 1999. The level of the NLW and NMW will have an impact on the hours that people work, benefits, productivity, prices and profits.

One concern is that a rising minimum wage could cause wage compression at the bottom of the labour market and the loss of pay differentials between entry-level and more senior jobs. There could even be a negative effect on workers’ incentive to advance out of minimum wage jobs.

The government changes the NMW and NLW pay rates on 1 April each year. With such huge pressures this year due to inflation and the increasing cost of living, it is more important than ever to scrutinise what increases are recommended for April 2023. Workers have already endured an 8.8% rise in the Consumer Prices Index (a marker of inflation) in the 12 months to July 2022. Figures for the year to Aug 2022 will be released on 14 September.

So, who recommends the latest NLW, NMW and RLW pay rates, and what are the issues involved?

The Low Pay Commission

The Low Pay Commission is an independent body of nine low pay commissioners who are selected by the Department of Business, Energy and Industrial Strategy (BEIS). It brings together academics, employers and trade unions who will advise the UK Government on the levels of the NLW and the NMW. The recommendation has normally been accepted by the government. The commission had an online consultation this year to seek evidence to inform its recommendations for the 2023 rates of pay.

The NLW rate has not yet been set for April 2023 but their current projection is that it is likely to be around £10.32 (an 8.6% increase) with the final rate likely to be between £10.14 and £10.50 once the various impacts have been considered. The age threshold for the NLW is due to come down to 21 by 2024 at the latest. Another aim is also that the NLW will reach two-thirds of median earnings by 2024. Median weekly earnings are currently sitting at around £600.

The Resolution Foundation

The Resolution Foundation calculates the real living wage (RLW). The Resolution Foundation is an independent British thinktank established in 2005 whose stated aim is to improve the standard of living of those on low to middle incomes. The RLW is an hourly pay rate calculated based on the cost of living, with regards to housing, childcare, transport and heating costs. It is paid voluntarily by employers. In Scotland, there are 2,700 RLW accredited employers, with 55,000 workers gaining an increased level of pay. These employers commit to pay all employees and contractors in their supply chain at the RLW hourly rate. The RLW is recalculated every year, normally in November.

This year the announcement has been brought forward to 22 September to deal with the rapidly increasing cost of living, with inflation currently running at 9.9%. If the economy remains volatile surely this recalculation should happen on a more responsive basis? In fact, in 2014, the Resolution Foundation suggested that the Low Pay Commission should indicate recommended pay levels a year in advance.

Pros and cons of a real living wage

There are benefits for employers and employees in signing up to the RLW initiative. Employers who have signed up are listed on the website (www.livingwage.org.uk) and job seekers may well prioritise these employers in their job hunt. In addition, employers may well benefit from having higher retention rates for experienced staff. Living Wage Scotland have proposals to extend employment rights with the ‘living hours’ initiative.

However, on the negative side, can we really say that the RLW of £9.90 an hour is enough to live on without claiming benefits? If it is really a misnomer, is it truly a real living wage? And with some of the largest and best performing companies now signing up, this has led some to accuse the RLW of not serving its purpose.

In 2014, the Resolution Foundation recommended that the Low Pay Commission investigate which sectors of the economy could afford to pay more, to encourage wage rises. In addition, by calling the £9.90 an hour a real living wage, it could perhaps even be accused of driving some wages down.

Keeping Up

With over 5% of workers in Scotland in jobs with low levels of pay, and with high inflation and increased cost of living, can the lowest paid keep up with the louder voices of those in workplaces that have higher levels of Union membership?

It is essential that people can earn a decent wage for their work and not need to claim benefits or visit food banks. Towards the end of 2021, Simon Clarke, chief secretary to the Treasury, stated that a core objective of this current UK Government was to make sure that “work always pays”.

The recommendations from the Low Pay Commission regarding 2023 levels of NLW and NMW, and this month’s announcement from the Resolution Foundation about the RLW, will be important for many hard-working Scottish and UK workers. There will also be a wider impact on all UK workers and businesses and on the economy in general.

Will we, in Scotland and more widely in the UK, manage the transition to a higher wage economy? Let’s hope that we can all get involved in this important national conversation.

For more on calculating the real living wage, have a look here.