U.K. Chancellor’s Gift of a Pay Hike Is Less Generous Than It Looks

(Bloomberg) --

U.K. Chancellor Sajid Javid made his pay rise for low earners the centerpiece of his policy plans last week. In reality, the increase might not be as glitzy as it seems and small firms warn it could lead to job losses.

Under the proposal, the National Living Wage will rise to match two thirds of median earnings by 2024, the equivalent of 10.50 pounds ($12.93) an hour compared with 8.21 pounds now. The rate will also be extended to all workers age 21 and over.

The calculations start to look less generous, however, compared with where the Living Wage may have been heading anyway. If the government instead chose to raise the mandatory pay floor by 4.5% a year, the average since 2016, it would reach 10.22 pounds in the same period.

The plan still offers Britain’s lowest paid a boost at a time when the resilience of the consumer will likely become even more vital to the post-Brexit economy. Javid’s pledge represents an extra 1,400 pounds a year for a full-time worker over the age of 25, according to the Resolution Foundation.

What Bloomberg’s Economists Say:

“The evidence to date suggests that both the minimum wage and living wage have had a limited impact on employment outcomes in the U.K. The worry is that this latest push leaves firms with little choice but to shed labor as the higher wage floor prices workers out of a job.”
-- Dan Hanson

For those age 21-24, whose minimum is currently 6% below the Living Wage, it means as much as 2,400 pounds more. That’s a more significant jump, but it won’t apply to many, as about 90% are already paid in line with the Living Wage or higher.

The move won’t only garnish the pay checks of those at the very bottom. As those on the lowest wages have them bolstered, employers seeking to maintain differentials will likely raise those of higher-paid workers.

Think tanks like Resolution have welcomed the move, but also sounded a note of caution over the pace of implementation, due to the risk of job losses as firms are forced to cut working hours to compensate. Though limited evidence has been found of this happening in the past, economists say it’s hard to judge where the tipping point would be in advance of reaching it.

Introduced 20 years ago, the U.K. minimum wage is now one of the highest among developed economies -- only France and New Zealand pay more as a share of median earnings -- and no country has done more to hike the rate since the financial crisis. An increase to 10.50 pounds an hour would deliver the biggest boost since Tony Blair was prime minister more than a decade ago.

For smaller employers especially, the increase could prove challenging, according to the Federation of Small Businesses. Heavily labor dependent firms, such as those in the care sector, retail and hospitality, will need additional support to remain viable, National Chairman Mike Cherry said.

“By ending low pay and building a stronger economy, we are backing hardworking families in every part of this country,” a spokesman for the Treasury said.

Javid will have the opportunity to address any concerns when he gives further details, including the role of the independent Low Pay Commission, at his next budget.

The Treasury chief has also left himself room for maneuver should Britain’s departure from the European Union create a rockier growth outlook -- something that could prove key for a government flirting with no-deal Brexit ahead of the Oct. 31 deadline. The online announcement includes the caveat “provided economic conditions allow.”

--With assistance from Jessica Shankleman.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net;Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint

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